The conflict in Ukraine is raging on Europe's doorstep, forcing millions of people to flee the fighting. In order to push Russia to end the conflict, the West is paralyzing its economy with sanctions. Curiously, the markets are resisting this major geopolitical crisis rather well. Let us look at Russia's place on the world financial chessboard to better understand the rather soft reaction to such a terrible conflict.
The Moscow Stock Exchange, closed since February 25, as just announced its reopening. All international investors are looking to get rid of their Russian assets, at any price. Rating agencies downgraded Russian debt to speculative grade. The big providers of index funds are taking Russian positions out of their funds... In other words: the Russian financial market is no longer worth much. In reality, despite its geopolitical and military power, Russia has always been a market minnow.
The largest country in the world is far from being the largest economy in the world. In terms of GDP, Russia ranked "only" 11th in the world in 2020, between South Korea and Brazil. The finding is even clearer if we look at GDP per capita: $10.000 per year for a Russian, compared to $45.000 for a Belgian and $65.000 for an American.
When a country's economy is reduced in size, its stock market usually is too. This is true in Russia: the main index of the Moscow market, the MOEX, includes only 41 stocks. They represent about 90% of the market capitalization of all stocks listed in Moscow. As of December 31, 2021, the MOEX only showed a valuation of €765 billion – four times less than the market capitalization of Apple alone! For further comparison, the Bel 20 has a cumulative market capitalization of €288 billion, and its largest value, AB InBev, €92 billion.
Looking at the MOEX a little closer, three companies enjoy a combined weighting above 40% within the index. These are the gas and oil giant Gazprom (16%), the oil producer Lukoil (13%) and the bank Sberbank (13%). None of them, on the other hand, exceeds the €100 billion valuation threshold, even Gazprom, which was already benefiting from the surge in gas and oil prices.
For the rest – and this is typical of emerging economies – there is a very strong dependence of Russia on raw materials and the few technology stocks represented in the MOEX have a relatively low valuation.
Beyond the size of the economy, it is obviously also the risk associated with Russia that weighs on the market capitalization of listed companies. By definition, so-called emerging economies often have a higher country risk than developed economies. For Russia, this risk reflects the many challenges the country faces: weak governance, insufficient infrastructure, and of course, strong geopolitical tensions.
Given the small size of the Russian financial market and the limited extent of its intricacies with the rest of the world, the impact of a fall in the Moscow stock exchange and the banishment of its economy has only slight consequences on international financial markets. For its part, the Ukrainian economy is even more modest and poorly connected. These elements explain the moderate reaction of the world stock exchanges to the conflict which rages in Ukraine, in spite of its scale and the tragedy which its people are confronted with.
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