September 26, 2022

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Pre-market stock: the war in Ukraine made Russian assets toxic

Pre-market stock: the war in Ukraine made Russian assets toxic

A version of this story first appeared in the CNN Business “Before the Bell” newsletter. Not a subscriber? You can register here.


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in less than a week, Russian origins They have become virtually untouchable for Western investors, who see no reason to expose themselves to a pariah economy that could be crushed by sanctions. Financial transactions also look increasingly difficult to implement and run the risk of putting regulators at risk.

“It is very difficult to see any scenario right now where buying Russian assets would make sense,” David Coombs, head of multi-asset investments at Rathbones told me. All bets, he added, would be “pure gambling”.

Over the weekend, Western governments dramatically escalated the pressure on Russia in the wake of its invasion of Ukraine. The United States, the European Union, the United Kingdom and Canada have said they will expel some Russian banks from the country Swiftthe global financial messaging service, and “shell” the assets of the Russian Central Bank.

Following the news, BP announced on Sunday that it would exit its 20% stake in Russia’s state oil company Rosneft, describing Moscow’s decision to attack its neighbor as “an act of aggression with tragic consequences across the region”.

Shares of BP

(BB)
It fell 7% in London on Monday. Jason Kenny, an analyst at Santander, believes the company could earn more than $26 billion as it moves away from its business in the country.

The move may force other companies with similar investments to follow suit. Shares of France’s Total Energy, which owns a large stake in Russian gas producer Novatek, fell 5 percent in early trading.

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“BP clearly imposed this case,” Combs said.

Norway’s prime minister said on Sunday that Norway’s $1.3 trillion sovereign wealth fund, the world’s largest, will also spend on its Russian assets. Norwegian energy company Equinor said on Monday it would halt new investments in Russia and begin the process of abandoning its joint ventures in the country.

Finding buyers for Russian stocks and bonds can be a daunting task in the current climate.

The financial argument for investing in the country is poor. Standard & Poor’s cut Russia’s credit rating to “junk” on Friday. Economic conditions have deteriorated since then. The latest round of financial sanctions “would be devastating,” tweeted Sonny Kapoor, CEO of the Nordic Institute of Finance, Technology and Sustainability.

Firms that act as plumbers for the global financial system are also racing to ensure they comply with the new sanctions, erecting barriers to execution and settlement of Russian asset deals in the near term.

“It would be very difficult to sell your Russian shares today, convert them into your base currency and bring them home,” Combs said.

In addition, there have been increasing demands on asset managers to consider the ethics of their investments, and to ensure that their portfolios are in line with environmental, social and governance standards, or ESG standards.

It would be difficult to claim that Russian assets meet ESG standards, Timothy Ash, chief sovereign strategist at BlueBay Asset Management told me.

“[Russian President Vladimir] Asch said Putin has made it very, very difficult to invest in Russia now for a long time to come.

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Russia was struggling to prevent a financial meltdown on Monday as its economy came under broad criticism from crushing Western sanctions imposed over the weekend in response to the invasion of Ukraine.

The latest: Putin was scheduled to hold crisis talks with his top economic advisers after the ruble plunged to a record low against the US dollar. The central bank more than doubled interest rates, and the Moscow Stock Exchange was closed for the day.

The European branch of Russia’s largest bank was on the verge of collapse as savers rushed to withdraw their deposits. Economists have warned that the Russian economy could contract by 5%.

“The escalation of Western sanctions over the weekend has brought Russian banks to the brink of crisis,” Liam Beach, emerging markets economist at Capital Economics, said in a note to clients on Monday.

Putin’s government has spent the past eight years preparing Russia for tough sanctions by creating $630 billion in international reserves including currencies and gold, but its “fortified” economy is now under unprecedented attack and at least some of that financial power is frozen.

“We will ban … the transactions of the Russian Central Bank and freeze all its assets, to prevent it from financing Putin’s war,” European Commission President Ursula von der Leyen said in a statement on Sunday.

The ruble lost about 13% of its value to trade at 94 against the dollar at 7:50 AM ET after earlier dropping 40%. The start of trading on the Russian stock exchange was delayed, and then completely canceled, according to a statement from the country’s central bank.

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The currency collapse prompted the Russian Central Bank to implement emergency measures on Monday, including raising interest rates to 20% from 9.5%.

“The external conditions of the Russian economy have fundamentally changed,” the bank said in the statement.

Lordstown Motors announces results before the US markets open. Groupon, HP, Lucid Motors, Novavax, SmileDirectClub and Zoom Video followed after the shutdown.

Available tomorrow: Domino’s Pizza earnings, Hostess Brands, JM Smucker, Kohl’s, Target, AMC Entertainment, Salesforce.