Russian equities brace for selling pressure as fraction of foreign investors return

 Russian stocks are expected to decline in August as investors from so-called "friendly" countries, a fraction of foreign investment power, return to the unchartered waters of an equity market now offering huge risks and insufficient transparency.

Foreign investors have not had access to the Russian stock market since Feb. 25, the day after President Vladimir Putin sent troops into Ukraine, triggering sweeping Western sanctions aimed at isolating Russia and countermeasures from Moscow.

On Aug. 8, Moscow Exchange (MOEX.MM) will let clients from "friendly" jurisdictions, those which have not deployed sanctions against Russia, and investors whose ultimate benficiaries are Russian trade on its stock and derivatives markets.

Banks and brokerages will need to identify their clients' home country when registering them with Russia's largest bourse.

A spokeswoman for Moscow Exchange said the number of "friendly" investors was unknown as they have yet to be registered first, but their admission should gradually increase market liquidity. There is no timeline for opening the door to investors from "unfriendly" countries, she said.

"The stock market is likely to take a bearish trend on Monday due to the high probability of non-residents ditching the blue chips," said Andrey Eshkinin, an analyst at Alor Brokerage.

Their return "will create a supply overhang in the short term and could lead to a decline in share prices," said Natalya Malykh, head of equities research at Finam brokerage.

But the depth of the highly volatile market decline could be limited as the share of non-residents from "friendly" jurisdictions was just 1% of the Russian stock market compared with the 74% share now controlled by Russian retail investors.

The rouble-based benchmark MOEX (.IMOEX) has lost 44% of its value so far this year and is 15% below levels when foreigners last traded on Moscow Exchange in February.

Foreign investors' return is a sign of market normalisation and will boost liquidity, experts say. But the timing is alarming: August is known in Russia for "black swans", or unexpected events, such as the 1998 domestic debt default or a war with Georgia in 2008. There is even a Wikipedia page called "August Curse".

"August is a traditional time of upheaval for Russian assets," said Iskander Lutsko, chief investment strategist at ITI Capital, who expects the MOEX index to fall by around 15% in the coming weeks, also pressured by the conversion of depositary receipts.

Depositary receipts (GDRs) of Russian-companies that were traded on foreign exchanges and held in Russian depositories will be automatically converted into shares on Moscow Exchange from Aug. 15 in a bid to reduce foreigners' control over these companies amid Western sanctions.

This can "create an additional overhang of the supply of such securities on the market," said Aleksei Potapov, investment director at UFG Wealth Management in Moscow.

The conversion could lead to selling of up to $18 billion worth of converted shares in August but a 5% daily limit set for selling of such shares by the central bank will smooth out the impact of the sell-off, ITI's Lutsko said.

Once the dust from the sell-off settles, the Russian stock market can return to gains, analysts said.

Foreigners who bet on Russia's economic recovery could be interested in holding its stocks, analysts at Moscow Credit Bank said.

"In the longer term, the Russian stock market looks extremely cheap and attractive for purchases, with all the risks associated with it," said Potapov.

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