A Market Cut Off from the World—and Reengineered from Within

In a world where global investors constantly hunt for bargains, Russia’s capital markets stand as an extreme anomaly. Since February 2022, the Moscow Exchange has operated in financial isolation. This is not just a matter of sentiment—it’s structural. Following Russia’s invasion of Ukraine, major Russian equities were removed from global indices like MSCI, and strict capital controls were imposed, turning the exchange into a closed economic laboratory.

Under this “war economy” regime, massive government spending on defense fuels artificial growth in certain sectors, while the central bank maintains high interest rates to tame inflation and stabilize the ruble—policies that suppress consumer demand. While the MOEX Index has rebounded more than 40% from its 2022 lows, it still trades about 30% below its all-time highs.

From Foreign Funds to Domestic Sentiment

The exodus of foreign capital has left a vacuum quickly filled by millions of retail investors. For many Russian citizens, domestic equities are among the few remaining ways to preserve the value of their savings amid capital restrictions. This has created a market driven by internal sentiment, local media coverage, and the pursuit of high dividend yields—providing a floor for prices but also exposing the market to volatility fueled by relatively inexperienced participants.

Infrastructure Giants: Stability Under the Shadow of the State

To understand the perceived resilience of Russian equities, look no further than its infrastructure titans. Transneft, for example, controls the world’s largest oil pipeline network and is majority-owned by the Russian state. It operates as a geopolitical tool, not just a company. Yet even such energy-export-based models face long-term risks. The global shift toward renewable energy—including in Russia’s key markets like China and India—raises questions about the sustainability of fossil fuel demand over the next two decades.

Similarly, Rostelecom, valued at around $2.6 billion, plays a central role in Russia’s development of a “sovereign internet”—complete with surveillance infrastructure. This poses significant ESG risks and threatens international partnerships.

Dividends vs. Innovation: The Tech Sector’s Unique Challenge

Economic isolation has created a unique environment for Russia’s tech firms. VK (Russia’s version of Facebook and YouTube) and MTS (a major telecom player serving over 80 million mobile customers) have thrived locally. But both face brain drain, limited access to global software communities, and restrictions on attending international academic conferences. These conditions stifle long-term innovation and growth.

Corporate governance risk is also extreme, with leadership at many firms operating under the shadow of political pressure. For international investors, that translates into serious doubts about transparency, long-term strategy, and exit opportunities.

Sanctions Divide: Gold Rises, Airlines Grounded

Sanctions have created sharply divergent fates within the market. Take Polyus, Russia’s gold mining giant, which produces over 2.7 million ounces annually and is worth roughly $30.8 billion. Despite restrictions, it has found ways to reroute exports via Dubai and Hong Kong. Yet this work-around comes with exposure to secondary U.S. sanctions—a growing risk to trade partners.

Aeroflot, on the other hand, is grounded by severe parts shortages. Dependent on gray-market imports, the national airline faces reliability issues and long-term safety concerns for its fleet—a costly, fragile workaround that underscores the limits of autarky.

Currency Stability—Engineered, Not Earned

Perhaps the most fundamental risk lies in the currency. The ruble’s current “stability” is a product of financial engineering: strict capital controls, mandatory foreign currency conversion for exporters, and managed FX rates. For foreign investors, this creates a severe liquidity and convertibility challenge. Any easing of capital restrictions in the future could trigger a sharp devaluation, wiping out paper gains in ruble-denominated assets when converted to dollars or euros.

Global Lesson: Cheap Doesn’t Mean Opportunity

At its core, Russia’s stock market is a flashing caution sign for the global investment community. It shows how traditional valuation models break down when geopolitical variables dominate. Unlike other emerging markets with political risk that still function within the global system, Russia represents a rare case of forced de-globalization.

The universal takeaway is this: accurately pricing political risk may be the single greatest challenge in global investing. And while valuations on paper may look attractive, investing in such a market is no longer a financial calculation—it’s a geopolitical gamble.

Because in the end, not everything that’s cheap is a real opportunity.