Russia's Stock Market Is a Lie As Putin's Economy Is Going Nowhere

The resilience of Russia's stock market and its economy is a complete mirage masking deeper pain, Yale researchers say

Russia's President Vladimir Putin chairs a government meeting at the Novo-Ogaryovo state residence outside Moscow, July 30, 2014. Alexei Nikolskyi/RIA Novosti/Kremlin

• The functioning of Russia's stock market is an illusion, two Yale researchers told Insider.
• It's part of the country's efforts to mask pain in the economy amid costly war and sanctions.
• Investments in the country are likely going nowhere as Moscow's economy spirals.

Russia's economy is on a downward spiral – and so long as President Vladimir Putin remains in charge, any money invested in the country is bound to go nowhere, experts told Insider.

That apparently stellar performance of the Russian stock market this year is ultimately an illusion meant to mask deepening pain in the country's economy. The Moscow Exchange, Russia's largest benchmark equity index, has soared 43% since the start of the year, more than doubling the gains seen in the S&P 500, but those gains are deceptive, according to Yale researchers Jeffrey Sonnenfeld and Steven Tian.

The success of Russian stocks this year is partly due to the fact that Russia has frozen inflows and outflows of foreign assets, meaning those who invested in Russian stocks prior to the invasion of Ukraine haven't been able to cash out. It's a move that was intended to prop up Russia's stock market, the researchers said.

Gains are also attributable to Russia's ruble, which recently plummeted to its lowest level against the dollar since the start of the war — something that's also worked to prop up the stock market. That's because Russia mostly produces commodities that are sold using foreign currencies, Tian said. Higher-value currencies are flowing into the nation, which has helped artificially inflate profits and boost Russian stock levels.

"The stock market gains reflect less genuine wealth creation or foreign investment/confidence in Russian markets (which is non-existent) and more merely exchange rate effects," Tian said.

Beneath those inflated numbers, Russia is actually suffering from a huge loss of confidence in its economy – and it's the main reason why investment in the nation will probably continue to wither, even after war in Ukraine ends. 

"The Russian stock market performance is very misleading, It is a Roach Motel of assets," Sonnenfeld told Insider. "No one will invest in Russia for a long time. Ukraine, Poland, and the Baltic nations will be far better investment opportunities in the region."

Money headed nowhere

In Sonnenfeld's view, that future is already written into the story of the Russian economy, which has been bludgeoned by western sanctions over the past year. Since invading Ukraine, Russia has been cut off from the global financial communication system, frozen out of $300 billion of its of foreign reserves, and seen its energy revenue cut in half, all of which have battered Moscow's finances. 

Russia's struggling economy has also led to a mass exodus of workers, academics, and oligarchs that have fled the country, which could be a death sentence to the nation's long-term economic growth. Money is fleeing and is now flowing into neighboring countries like Armenia, Georgia, and Kyrgyzstan. 

Millions of dollars worth of cash has been transferred from Russia to neighboring countries. Yale School of Management

Fleeing workers and academics are also taking away technical and intellectual capital, which were key components to Russia's commodity-centric economy. 

Russians are fleeing the country and migrating into neighboring countries. Yale School of Management

"[Capital] is going into the neighboring countries, and it's showing a completely disdain for Putin's ruthless tactics and hollowing out the intellectual capital for the country," Sonnenfeld told Insider. "It's been devastating to Russia's future."

But those people (and their money) likely aren't returning to Russia after the war ends either, he added, since many have lost trust in Putin as a leader. The Russian president has doubled-down on Russia's economic strength despite clear signs of economic weakness in the country, from lower car sales to the plunging value of the ruble, which dipped this week to under $0.01 before recovering slightly on signs Moscow could take extreme measures to prop up the currency.

Though Russian officials have claimed the economy will grow about 2% this year, 58% of Russians believe "hard times are yet to come," according to a recent poll from the Levada Center. 

"[Putin] has shown so much deceit, [trust] is irretrievable. Nobody can believe anything he says anymore," Sonnenfeld said "And as you can see in the crumbling value of the ruble, there's no confidence whatsoever.

Other experts have warned of more pain for Russia's economy as its costly war in Ukraine drags on. Russia could even become a failed state in 10 years, according to a recent survey of foreign policy experts.

"Putin is cannibalizing his own economy," Sonnenfeld added. "It's like throwing the living room furniture in the furnace to keep the engines burning."