Russia's markets are booming despite Putin's political crackdown

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The Kremlin took no chances before the elections to ensure that Putin's United Russia party maintains a veto-proof majority in parliament.
The Kremlin took no chances before the elections to ensure that Putin's United Russia party maintains a veto-proof majority in parliament.
  • After being battered by political risks for almost a decade, Russian markets are enjoying a period of resilience.
  • This is thanks to the central bank's drive to curb inflation, a conservative fiscal policy, rebounding commodity prices and the easing threat of US sanctions.
  • The ruble is the best performer this year among emerging-market peers.

The appeal of Russian markets is eclipsing risks from President Vladimir Putin's crackdown on political rivals as the nation goes to the polls in parliamentary elections. 

The stock market is at a record, the ruble is on a tear, foreign ownership of local bonds has surged to a five-month high and measures of credit risk have eased back to pre-pandemic levels. Money is flowing into markets even as many opposition leaders have been forced to choose between jail and exile.

After being battered by political risks for almost a decade, Russian markets are enjoying a period of resilience thanks to the central bank's drive to curb inflation, a conservative fiscal policy, rebounding commodity prices and the easing threat of US sanctions. With so many reasons to be bullish, investors are looking past the political situation, even risking a blind spot in their environmental, social and governance considerations. 

"Markets like the technocratic orientation of the Russian government," Timothy Ash, an emerging-market strategist from BlueBay Asset Management, said. "It encourages them to look the other way when it comes to ESG."

The Kremlin took no chances before the elections to ensure that Putin's United Russia party maintains a veto-proof majority in parliament, even blocking popular politicians from the so-called systemic opposition from the ballot. Tensions rose with the near fatal poisoning of opposition leader Alexey Navalny last year and his arrest in January when he returned to Russia after receiving treatment abroad.

Credibility factor

But the developments have had little material impact on Russia’s markets. Given investors' desire for certainty, Russia has shown itself to be a predictable environment with little risk of a sudden regime change or policy U-turns as often is the case with emerging markets.

A main factor behind this reputation is the central-bank governor, Elvira Nabiullina. The hawkish policy maker has raised rates at five meetings in a row in the face of stubbornly high inflation.

Traders have liked her assurance that more hikes may be coming. The ruble is the best performer this year among emerging-market peers. Foreign ownership of bonds has risen above 20% for the first time since April. Investors now demand a mere 148 basis points over Treasury yields to own Russia’s dollar bonds, near the lowest premium since March 2020.

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