Russian Strategy - Trading to Resume Tomorrow - But Not for Nonresidents

The CBR today announced that limited equity trading will resume over a shortened session (9:50-14:00 Moscow time) tomorrow. Only 33 Russian-domiciled stocks in the RTS and MOEX indexes will be available for trading. Short sales will be banned, and Moscow market participants will only be able to log new transactions for nonresident investors from countries that have placed sanctions on Russia to the extent necessary to reduce liabilities or complete previously ordered trades. More simply put, nonresident investors holding the bulk of Russia's free float (65-70% of the float is held by nonresidents, on our estimates) will be unable to make new discretionary trades. The funds from any executed sales for such nonresidents will not be available for repatriation and will have to be held in "type C" escrow accounts.All the current restrictions in place are likely to place temporary, technical upward pressure on the market, in our view. These restrictions include not only the ban on shorts and nonresident transactions, but also the capital controls that are limiting retail investors' ability to place their savings offshore or in non-ruble instruments. On paper, the market still shows a 16% dividend yield reliant mostly upon FX revenues, which may be taken as an attractive diversification option for retail investors versus the 12-17% ruble yields on major debt instruments and circa 20% average short-term deposit yields from banks. In reality, consensus dividend yields and other valuation metrics do not yet reflect any adjustment for the capital controls and other macro and political developments of the last month, but retail investors may not be as wary as institutional investors of potential changes to dividend streams or earnings. That all said, the equity market will first have to weather the fact that the ruble declined an additional 20% since the last time the RTS was quoted.In this fragile environment with technically limited market access, we continue to prefer stocks with FX revenues and robust balance sheets. We add another criterion to our preferences: a lack of exposure to new sanctions or speculation about new sanctions in the international or Russian press. Our preferred picks in such an environment include Lukoil, Gazprom and Nornickel. We would also look at Segezha and PhosAgro for additional exporter exposure, though they are not as obvious picks in all scenarios and would merit company-specific considerations.