The consequences of the financial isolation of Russia are perhaps being underestimated by markets.
Sanctions imposed on Russia have been designed to cripple its economy and financial systems—and they have worked as intended. Russia’s central bank closed the country’s stock market and more than doubled its key interest rate to 20% to protect the tumbling ruble, which fell more than 20%.
Western companies, including
Shell, and many more, have joined countries in turning their backs on Russia in light of its invasion of Ukraine.
It isn’t just sanctions on Russia. Russian President Vladimir Putin has banned residents from sending money abroad. Corporate foreign debt of banks and nonfinancial companies stood at $394 billion in the second quarter of 2021,
ING reported, citing Bank of Russia data.
MSCI, the equity index compiler, is also considering removing Russia from many of its indexes and could potentially reclassify it as a stand-alone market from an emerging market.
While stock markets have actually seen only minor hiccups, Bitcoin has climbed more than 12% in the past 24 hours to above $43,000. With financial sanctions prohibiting transactions both to and from Russia, cryptocurrencies could come into their own.
“To unilaterally decide to ban people’s access to their crypto would fly in the face of the reason why crypto exists,” Binance said, succinctly explaining why exchanges may not impose sanctions of their own.
The isolation of Russia may finally have decoupled Bitcoin from the falling stock market.
*** Join Barron’s associate editor for technology Eric J. Savitz today at noon as he speaks with Daniel Ives, technology analyst at Wedbush Securities, on the outlook for large cap tech stocks. Sign up here.
Inflation, Russia Will Be State of the Union’s Focus
President Joe Biden’s first State of the Union address to a joint session of Congress Tuesday evening comes as tensions with Russia escalate and his approval rating lags. Inflation, which came in at an annual rate of 7.5% in February, will be one of Biden’s main issues.
- With inflation rates reaching 40-year highs, an average 40.7% job approval rating, and looming midterm elections, Biden will work to reframe some of the sticking points that have emerged since he took office last year, while emphasizing the administration’s accomplishments, said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.
- Biden may also try to revive sections of the Build Back Better Act, the cornerstone of his economic agenda, which fell apart in December when Democrats failed to garner the support of some moderates in the Senate.
- Geopolitical tensions, which escalated after Russia invaded Ukraine last week, also will take center stage.
What’s Next: Markets will be looking at the way a divided Congress reacts to Biden’s speech to determine whether the president will be able to push through aspects of his economic agenda. The reaction of swing voters, such as Democratic Sen. Joe Manchin of West Virginia, will be a focus.
More Companies Seek Separation From Russia; Ruble Tumbles
Shell said it would exit its joint ventures with Russian energy company
Gazprom, and end its involvement with the natural-gas pipeline Nord Stream 2, after Russia’s invasion of Ukraine. The announcement comes a day after BP said it would exit its nearly 20% stake in Russia’s
Other companies announced plans to separate from their Russian investments. Norway’s
Equinor said it would start exiting its joint ventures in Russia, and
Uber said it would try to speed up its divestment from Russia’s
Yandex, which runs a ride-hailing service there.
Google’s maps unit stopped showing traffic information inside Ukraine,
Meta Platforms’ Facebook said it removed a pro-Kremlin influence campaign from the platform, and
Twitter started labeling tweets containing links to Russian state-affiliated media outlets.
- Ukrainian President Volodymyr Zelensky applied for Ukrainian membership of the European Union, asking it be fast-tracked. European Council President Charles Michel told French TV station BFM that the EU will debate adding Ukraine to the bloc, Reuters reported.
- After Western sanctions, the Russian ruble fell as low as 111 to the U.S. dollar on Monday, a more than 20% drop before recovering slightly. On Tuesday it was down to 101. The Bank of Russia raised benchmark interest rates to 20% from 9.5% and prevented the nation’s stock market from opening.
What’s Next: Secretary of State Antony Blinken welcomed new economic sanctions against Russia from Switzerland, South Korea, and Singapore, and the State Department announced nearly $54 million more in humanitarian assistance to those affected by the Russian invasion.
—Janet H. Cho
Citigroup Has Nearly $10 Billion in Russia Exposure
Citigroup said it had nearly $10 billion in total exposure to Russia at the end of 2021, some of it at a consumer bank operation it has been trying to sell, though sanctions by Western countries on Russia’s financial system might make that sale difficult.
- Citi is the most exposed U.S. bank to Russia. It has branches there and in Ukraine along with lending and consumer banking. The size of its exposure is a sliver of its $2.3 trillion of assets, according to The Wall Street Journal.
- The bank said in a regulatory filing that its exposures include $2.2 billion in corporate loans, $700 million in consumer loans, and $1.5 billion in investment securities. Citigroup units outside Russia have $1.6 billion in exposures to Russia.
- Citi also said it has $1 billion in cash at financial institutions including the Russian Central Bank and $1.8 billion in reverse repurchase agreements with other entities. Citi cut its Russia exposure in half after the country annexed Crimea in 2014, the Journal reported.
Citigroup had planned to sell its Russian consumer bank, including three branches in Moscow and two in St. Petersburg, but the sanctions will make it harder to find a foreign buyer. Russian state bank
VTB was interested in buying it last year, but is now under sanctions.
What’s Next: While executives are likely to face questions about operations in the region, investors will be listening for clues about Citigroup’s broader strategic direction during a specially scheduled virtual investor day on Wednesday. It is the bank’s first investor day in nearly five years.
—Janet H. Cho and Carleton English
Already Slow IPO Pace Expected to Stay Cool in 2022
Initial public offerings were already running behind last year’s pace because of inflation and the Omicron variant of coronavirus, but then the volatility hit, and that has put everything on hold for the rest of the first quarter. Wall Street’s fear gauge, the
Cboe Volatility Index,
hit 33.51 on Monday before closing at 30.15.
- “Volatility can shut down the IPO market,” said Matthew Kennedy, senior IPO strategist at Renaissance Capital. A VIX level above 30 makes it much harder to set a price for IPOs, and the VIX has traded higher than 30 several times since December.
- As of Feb. 23, the day before Russia invaded Ukraine, only 21 companies had listed shares using traditional IPOs, according to Dealogic. The $2.3 billion they raised was far less than the $24.8 billion raised by 59 companies by the same date in 2021.
- Akanda, a medical cannabis company, had been the only company expected to list its shares this past week, but it has postponed its offering, according to IPOScoop.com. Akanda didn’t reply to messages from Barron’s seeking comment.
- IPOs could return to the market in mid-April, but if Russia’s aggressions in Ukraine continue and uncertainty persists, that could be pushed back to the third quarter or later, said Greg Martin, co-founder of Rainmaker Securities.
What’s Next: There is a list of 200 private companies that are showing signs they are preparing to go public, Renaissance’s Kennedy said. Another 150 companies have already filed for a traditional offering but have yet to price their deals, including 36 filed in 2022.
—Luisa Beltran and Janet H. Cho
Lordstown, Lucid Spark Investor Worries Over Sales Pace
Lordstown Motors beat profit expectations and
Lucid fell short on sales estimates. Shares of both electric-vehicle startups fell as investors feared they weren’t getting enough vehicles to the market quickly enough amid rising competition in the EV market.
- Lordstown lost 42 cents a share in the quarter and didn’t have any sales, but it beat expectations for a loss of 77 cents a share. It ended the year with $244 million in cash, also beating expectations.
Production of its all-electric pickup truck, the Endurance, is supposed to begin in the third quarter, allowing it to ship 500 trucks this year. But competition is fierce.
Ford Motor and
Rivian Automotive are already selling EV pickups, and
General Motors will start sales of its electric Silverado in 2023.
- For Lucid, sales came in lighter than expected and 2022 guidance disappointed. Wall Street was looking for Lucid to ship roughly 250 cars in the fourth quarter 2021. The company did about half that.
- Analysts expect Lucid to deliver roughly 20,000 cars this year, which would generate sales of more than $2 billion. Lucid said production of 12,000 to 14,000 cars is more likely.
What’s Next: It was Lucid’s second quarter as a publicly traded company, and it just started delivering its Air sedan late last year. Customer reservations are now at about 25,000, up from the 13,000 it reported last November.
—Al Root and Liz Moyer
Congrats to the winner of the February virtual stock exchange game! Be sure to join this month’s Barron’s Daily virtual stock exchange challenge and show us your stuff.
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Everyone will start with the same amount and can trade as often or as little as they choose. We’ll track the leaders and, at the end of the challenge, the winner whose portfolio has the most value will be announced in The Barron’s Daily newsletter.
Are you ready to compete? Join the challenge and pick your stocks here.
—Newsletter edited by Liz Moyer, Camilla Imperiali, Steve Goldstein, Rupert Steiner