Why Russia's Fake Stock Market Is Collapsing Fundraiser - Econ Lessons

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Hey folks! Mark Biernat with more Economic analysis about the Russian Economy. In classical financial theory, stock markets in open economies serve as forward-looking mechanisms: equity prices embed expectations of future earnings, discount rates, and macro trends. For example, in the United States, indices like the S&P 500 or Russell 2000 are commonly interpreted as aggregate signals of expected corporate profits, adjusted for risk premia and macro liquidity conditions.

In contrast, the Russian stock market today bears little resemblance to that canonical model. Since the onset of heightened sanctions following Russia’s 2022 invasion of Ukraine, the structure of the Moscow Exchange (MOEX) and the behavior of its participants have been fundamentally altered.

1. Collapse of foreign participation & shift to domestic liquidity

Before sanctions, foreign investors held roughly US$86 billion in Russian equities (end 2021).
Financial Times

After the sanctions regime, capital flight and legal constraints have severely limited foreign inflows and outflows; Russia has imposed countersanctions restricting conversion and the repatriation of proceeds.
Compass Lexecon
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The Bank of Russia reports that by the end of 2024, only 18% of investor portfolios consisted of foreign assets, down from 26% the prior year.
TASS

Domestic retail investors and state-affiliated institutions now dominate trading. One Russian bank executive observed:

“Foreign investors have left, most of the turnover on the Moscow Stock Exchange is generated by retail investors.”
forumspb.com

This shift means that liquidity rather than valuation fundamentals now drives much of the price movements.

2. Liquidity injections as the primary driver

In a well-functioning market, P/E multiples reflect expectations of future profitability and discount rates. But in Russia’s case, equity prices often respond more directly to state fiscal flows, banking liquidity injections, or temporary capital infusions.

When the state or state banks pump liquidity—whether to support the exchange, buffer distressed banks, or channel funds into SOEs—market valuations rise. When liquidity is withdrawn or budget transfers lag, the market drops, regardless of firm-level earnings.

In effect, the MOEX has become a managed liquidity system (a circuit for internal capital rotation) rather than a price discovery venue.

3. State ownership and structural opacity

Approximately 40 % of the Russian listed market capitalization is estimated to be under state control or influence, especially in strategic sectors like energy, banking, and natural resources. (This figure is widely cited in analytical commentary; direct regulatory data is limited.)

State-owned enterprises (SOEs) often receive preferential funding and support, insulating them from actual competitive pressure and skewing incentives.

When the state seizes or nationalizes assets (e.g., gold miner UGC), markets do not collapse in a classical panic — instead, they pause or retract modestly, as investors expect state intervention. Indeed, Russia’s central bank recently criticized some state asset seizures publicly, signaling internal friction.
Reuters
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4. Ruble, commodity links, and real erosion

On a nominal basis, the ruble has appreciated dramatically in 2025 — up ~45 % versus the US dollar, making it one of the world’s strongest performing currencies.
Reuters
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However, this strength is deceptive: it stems mainly from capital controls, high interest rates on ruble deposits, and limited demand for foreign currency, rather than genuine competitiveness.
The Week
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Reuters
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In real terms, when measured against hard commodities like gold, the ruble continues to weaken. Russia’s reported gold reserves also fell: in 2024, the central bank’s holdings declined ~23.6 % in monetary terms, and physical gold holdings fell ~46.4 % (most significant drop since 2020).
Newsweek

Moreover, Russia’s National Wealth Fund (NWF) — partly backed by foreign currency and gold — saw its liquid portion decline 36% in recent years.
Coface

Thus, even as the ruble gains in nominal USD terms, its purchasing power and real value in commodity or cross-border terms continue to erode.

5. Consequences and implied risks

Decoupling of equity valuations from fundamentals: MOEX index behavior no longer reliably reflects productivity, profitability, or innovation.

Fragile, liquidity-dependent stability: The market is vulnerable to sudden reversals if government liquidity tightens.

Monetary and fiscal constraints: The state must juggle inflation, defense spending, social programs, and liquidity support under the pressure of squeezed real resources.

Exchange rate illusions: Ruble strength conceals structural weakness; when controls ease or external shocks hit, real currency devaluation could be sudden.

Opacity and political risk: State actions (nationalizations, seizures, regulatory overrides) can override market logic at any moment.