Stock markets generally go up. Sometimes they go away.

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This week, the stock market closed in Moscow and Russian stocks crashed on other exchanges, including London and New York. Exchange-traded funds specializing in Russian stocks are down 90% or more from their highs shortly before the invasion of Ukraine, but, since Friday, most of them are also frozen.

A fact of financial life that most investors have forgotten is that markets are not always liquid or continuous. They can dry out or even die.

Of course, the Federal Reserve and other central banks have been flooding investors with cheap money for over a decade. It is therefore easy to imagine that government policy will always support the markets. Sometimes it destroys them.

War is usually the culprit.

Trading has been halted in major markets outside the United States for months or years at least 25 times in the 20th century, according to finance professors William Goetzmann of Yale University and Philippe Jorion of the University of California to Irvine. (These shutdowns, often associated with severe losses, do not count the New York Stock Exchange, which closed in July 1914 to avoid the panic of the outbreak of World War I and did not reopen until December.)

Many investors believe that markets are permanent and profit is assured if you only hold stocks long enough. Previous generations in Argentina, Chile, Egypt, Germany, Greece, Japan, Portugal and Spain have learned, however, that governments can close markets and keep them closed for a long time.

This is why diversification is so important. Russia accounted for less than 0.5% of the total global market capitalization and less than 4% of the overall value of emerging markets as of December 31, according to MSCI.

Fall

In exchange-traded funds investing in Russia, stock prices have plummeted. But net asset values ​​- what the underlying assets are worth – fell further.

VanEck Russia Small Cap ETF

Direxion Daily Russia Bull 2X Shares

VanEck Russia Small Cap ETF

Direxion Daily Russia Bull 2X Shares

VanEck Russia Small Cap ETF

Direxion Daily Russia Bull 2X Shares

If you went all-in on Russian ETFs, you were still able to get out – at a price – at least for a while. On Friday morning, however, the NYSE Arca exchange halted trading in iShares MSCI Russia, Franklin FTSE Russia and Direxion Daily Russia Bull 2X stocks. The Direxion fund has already announced its liquidation on March 18. Trading of the other two ETFs available, VanEck Russia and VanEck Russia Small-Cap, may also be halted by CBOE Global Markets..

“With governments imposing sanctions and the market value close to zero, retail investors really have nowhere to turn to trade Russian securities,” says Reginald Browne, head of ETF trading at GTS, a firm market making in New York.

“You can’t sell, because you can’t trade,” says ETF Trends analyst Dave Nadig. “For all intents and purposes, those titles no longer exist.”

In theory, Russian ETFs could resist a reopening of trading in Moscow. It would be a two-part bet: Russia would have to honor its property rights and Russian stocks would have to retain some value at this point. Rather than roll those dice, funds are likely to liquidate and return whatever money they have left to investors, industry analysts say.

Is there a chance betting on Russian stocks will ever pay off?

Well, the odds aren’t precisely zero, but history can have a habit of hurting people when it repeats itself.

In 1911, Alfred Neymarck, a French economist, estimated that Russia was the fifth largest investment center in the world, encompassing 5% of the global stock and bond market.

Over 200 Russian companies were listed on the St. Petersburg Stock Exchange in 1914. Amid the ravages of World War I, it closed that year, reopening for two months in 1917. It closed again after the Tsar was overthrown by the Bolsheviks.

Trade did not resume for three quarters of a century.

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Inside Russia, the market is again frozen.

Some Russian companies are listed on other markets. US Stock Rights on Gazprom PJSC,

the Russian energy titan, closed at $1.10 OTC in New York on Thursday, down from $8.97 on Feb. 16. That price was 0.51 times its reported earnings per share over the past four quarters, according to FactSet. Sberbank Russia PJSC closed in the U.S. at 52 cents on Thursday, down from $14.76 on Feb. 16. That’s less than 0.2 times its earnings over the past 12 months.

These are not typos: these are P/E ratios below 1.0. Shares of companies normally trade at prices that are a multiple of their earnings. The profits of Russian companies are now a multiple of their share price.

All of this puts Russian President Vladimir Putin in a position, if he chooses, to make one of the largest and most brutal transactions in the history of investing: with the Russian stock market frozen, he could nationalize all the big companies in the country for kopecks. on the ruble.

The president of what was then known as the Leningrad Stock Exchange told the Wall Street Journal in 1991 that he could forecast two futures contracts for the new Russian stock market.


Photo:

The Wall Street Journal

In May 1991, around the time it officially opened for trading, the president of what was then known as the Leningrad Stock Exchange told the Wall Street Journal that he could foresee two futures contracts for trading shares in Russia.

One, said Igor Kliutchnikov, was that the Russian market would become one of the largest in the world.

The other? “I also have a pessimistic view: that we will go back to the old distribution system – maybe they will call it a market system, but it will be the old one – and in that case, I don’t see the necessity of our scholarship.”

Years later, his first vision comes true. Now the second could.

Write to Jason Zweig at [email protected]

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