A Moscow broker explains what's happening in Russia's chaotic markets, where vultures are scavenging for profit and the Kremlin is propping up stocks and the ruble

• A strange calm seems to have settled over Russian markets. But scratch under the surface, and almost everything has changed.
• The government is propping up the ruble and holding together Moscow's stock market, with foreign investors all but barred.

Almost two months after Russia's invasion of Ukraine, a strange calm appears to have descended on the country's financial markets.

Russia's ruble has now fully recovered from its dramatic crash in the days following the attack. The country's stocks remain deep in negative territory for the year, but the dramatic sell-offs seen in late February are a thing of the past.

Yet take a look under the surface, and you'll see the strong arm of the Russian state strenuously holding the markets together. The government has introduced strict capital controls that have boosted the ruble, and it has banned foreign investors from ditching domestic assets.

Iskander Lutsko is chief investment strategist at ITI Capital, a major financial broker in Russia. He's worked in financial markets for 15 years, including at Sberbank, Russia's biggest lender. He spoke to Insider this week about what's really going on in Russia's "completely artificial" markets right now.

Stocks don't reflect the 'unfortunate reality'

Moscow's Moex stock index has tumbled roughly 40% so far this year, but it has risen around 9% since bottoming in late February.

Lutsko believes its level should be considerably lower. "The Russian equity market doesn't reflect the unfortunate, true reality," he said. "Simply because non-residents are restricted from selling."

In 2021, foreigners owned about 80% of the tradable stocks on the Moscow exchange, worth about $200 billion.

"According to our estimates, at least $50 billion of equity exposure is still on funds' balances," Lutsko said. "Mostly US dedicated funds or European funds."

A recent ruling by Moscow that instructed Russian companies to revoke any share listings they have abroad could trigger a wave of selling, he said, once those so-called depositary receipts are repatriated.

"According to our estimates, there is at least 900 billion rubles [$11 billion] worth of depositary receipts abroad of Russian stocks that could be sold by local investors on Moex," he said.

A lack of foreign players in the market has caused liquidity to dry up, making it harder to buy and sell assets. Retail investors — who have "little understanding and idea how to play the market" — now dominate trading, according to the Moscow broker.

Vultures are coming to play

Over in the bond market, the situation is even worse. Russia's government and many of its biggest companies are on the verge of default on their foreign debts, after US sanctions stymied their access to the global financial system. Bonds in many big companies, such as Gazprom, have plunged.

But Lutsko said the crash in prices has attracted bargain hunters, hoping to profit from a rebound in prices if the Ukraine picture clears. Although he avoids the term, such investors are typically referred to as "vultures".

"I know that many moderate sized hedge funds, and even many local brokers, are looking for opportunities to buy Russian eurobonds," he said.

ITI's Guernsey entity has been facilitating these trades, buying bonds at 20-30% of their face value. "There's been a very great interest," Lutsko noted.

The ruble is 'completely artificial'

The rapid rebound in the Russian ruble caused some analysts to ask whether Western sanctions were having the desired effect.

But Lutsko said it's not a reflection of the strength of the economy. The government has imposed tight capital controls that prevent rubles leaving the country, and has instructed exporters to convert 80% of their foreign earnings into the currency.

"The ruble is in a complete artificial environment, regulated by the central bank which makes sure that volatility remains limited," he said. "We have a bit of dissonance or dislocation in the assets."