14th of April. After the fall of the Russian stock market at the beginning of the week, investors rushed to buy up the cheaper blue chips. However, Oleg Deripaska's experience shows that optimism about the assets of Russian companies should be restrained.
The trading session on the Moscow stock exchange on April 9 was already nicknamed "Black Monday". According to the world standards, a 10% correction in the market for one or several days is considered an avalanche. It all began with the fall in UC Rusal shares on the Hong Kong stock exchange: the shares collapsed by 50%. On the Moscow stock exchange, the price of these shares fell by 27%. Following the fall of the share market, the ruble rate fell, in two days the rate sank 10%. April 6, there was news of new US sanctions against Russia. Under the sanctions were Russian citizens and several companies. The main shock for all was the spread of sanctions against Oleg Deripaska and UC Rusal.
The tragedy of UC Rusal
Investors extremely negatively reacted to the company's entry into the sanctions list for several reasons. First, about 18% of all aluminum exports of the company falls on the US, and this is a huge figure. For investors assessing fundamental factors, this news means that the company's revenue will fall sharply (by about 18%). This is a fiasco. So, if American companies declare a decrease in revenue by at least a few percent, their shares instantly apply for tens of percent per day. The stock market, as you know, lives in the future.
Having learned about the possible loss of a part of the proceeds, the company decided to warn investors about a possible technical default on its approaching debt obligations. In this situation, this is absolutely normal. If the company received loans from foreign banks, because of the sanctions, banks can refuse further extension of loans. In addition, loss of revenue leads to a reduction in free cash flow, which leads to a violation of debt obligations.
Secondly, the fall in the share price of UC Rusal was facilitated by the forced exit of foreign investors. This is understandable. When a company enters the list of Specially Designated Nationals and Blocked Persons List (SDN) Human Readable Lists, the company loses not only foreign customers, but also foreign investors, because they are also prohibited from investing in such a company. Here it is worth noting that most foreign investors investing in Russian companies are the same Russians who own shares in investment funds that invest in shares of Russian companies. Could the sale of shares "by foreigners" lead to a drop in quotations? Of course. But most likely it was a combination of the above two factors.
During the fall in the stock price of UC Rusal, one could observe an interesting picture: after them, Sberbank shares fell 20%. The media explains this fact by the fact that Sberbank is a major creditor of UC Rusal. Even if Sberbank is the largest creditor of RUSAL, but the company's debts to the bank can not be 20% of the bank's capital. Theoretically, some large investor RUSAL or a group of investors to avoid margin call or because of the desire to purchase shares cheaper could liquidate their most liquid assets, one of which was shares of Sberbank.
How to save RUSAL from the collapse? The simplest way is state support. Russia can start buying up those volumes of aluminum that the US had, and store them in warehouses for better times. The US will have to look for a new supplier, the largest supplier of aluminum at the moment is China. And, as you know, the US declared a trade war to China, raising tariffs for the same metals.
China in response raised tariffs for a number of positions from the United States. Therefore, it is not yet known whether to turn to the USA for purchasing aluminum in China, but it is possible to predict that the prices for this metal will grow. After all, almost 20% of RUSAL leaves the market. It is possible that aluminum from RUSAL will come to the US, but through an intermediary. Nevertheless, until management companies are determined with the direction of the company's development, we will not see any positive trends in the shares and bonds of the company.
The Russian stock market lost its value as a platform for raising capital by corporations and exchanging securities. Most Russian companies become public in order to use their shares to secure debt. In this regard, a sharp drop in stock prices leads to negative trends in the market of corporate debt instruments, which leads to a drop in the stock market. The most terrible threat for the Russian stock market at the moment is the expansion of sanctions against certain issuers.
The inclusion of companies in the SDN list is an extreme measure, but at the moment no Russian company is immune from this. The companies of the primary sector are in greatest danger.
In general, the mood of experts is rather pessimistic. A large-scale collapse of the market is not expected, but at the same time, experts advise to closely monitor the behavior of corporate bonds and OFZ. Foreign investors will most likely first sell debt instruments, only then shares of public companies. A good indicator of potential problems with bonds will be a depreciation of the Russian currency. The situation is, of course, quite serious, but, in principle, predictable. After all, in fact, nothing has changed since 2014. From the point of view of investing in the Russian stock market, experts are not yet advised to hurry to go cheaper than a week ago, believing that the fall is only just beginning.