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Russian Market Sees Significant Decline in Foreign Companies’ Identifiers and Subsidiaries Following Sanctions

The Russian financial market has witnessed a significant decline in the presence of foreign companies’ identifiers and subsidiaries following the imposition of sanctions by Western countries.

According to data from the Bank of Russia, the value of these identifiers and subsidiaries decreased by:

  • 3.8% between April 6-12, 2018, following the introduction of US sanctions
  • 1.9% between August 7-17, 2018, amidst concerns over draft laws and outflows from Emerging Markets
  • 10.6% between February 20-28, 2020, due to the COVID-19 pandemic
  • 18.3% in March 2020, following the oil shock and coronavirus outbreak

More recently, the Russian market has experienced further declines due to:

  • Security negotiations
  • Non-resident exits
  • Crisis response measures

Between January 13-25, 2022, the value of foreign companies’ identifiers and subsidiaries decreased by 14.9%. This trend continued between February 21-25, 2022, with a decline of 27.2%.

Interest Rate Channel

The exit of non-residents from the Russian market and increased uncertainty led to higher volatility and an increase in yields on the Russian market before the introduction of sanctions.

  • The banking sector faced massive deposit withdrawals in late February and early March, resulting in a temporary hike in the key interest rate by the Bank of Russia to 20%.
  • This move helped reduce risks to financial stability, ease inflationary pressure, and ensure the safety of households’ savings.
  • However, it also led to increased interest expenses for companies with floating-rate liabilities.

Income Channel

The sanctions introduced against Russian real sector companies restricted access to Western financial and commodity markets, disrupted logistic chains, and prohibited the supply of certain goods in Russia.

  • This led to a decline in revenue for many Russian businesses.
  • To mitigate this effect, the Government of Russia and the Bank of Russia have modified existing and launched new concessional lending programs to support lending and introduced regulatory support measures to reduce credit risk.

Insurance Channel

The limitations on international reinsurance in case of large insurance events could affect the financial standing of Russian insurance companies.

  • In response, the Russian insurance market is decreasing its dependence on reinsurance companies from unfriendly countries and will switch to internal extended reinsurance capacities.
  • The OSAGO (compulsory motor third-party liability) insurers may face a certain increase in loss ratios due to higher prices on car parts and interruptions in their supply. However, no significant problems are expected in this segment, as the insurance market has a sufficient capital buffer.

Conclusion

The Russian financial market has experienced significant declines following the imposition of sanctions by Western countries.

  • The Bank of Russia has taken measures to reduce risks to financial stability, ease inflationary pressure, and ensure the safety of households’ savings.
  • However, the situation remains challenging for many Russian businesses, and it is essential for the government and central bank to continue implementing policies to support lending and mitigate credit risk.

Sources

  • Bank of Russia
  • Government of Russia
  • Russian Insurance Association