Shutting Down Stock Markets Tends to Only Delay the Declines

(Bloomberg) -- Russia's stock market closure is only postponing what's likely to be a plunge when trading resumes.

From World War I to 9/11 and the Arab Spring, exchanges have often closed for days, weeks or months in times of turmoil. When markets reopened in those cases, equities slumped.

The sanctions imposed over Russia's invasion of Ukraine are effectively cutting the nation's economy off from the global financial system. Compilers of global equity indexes are removing the country's stocks from benchmarks, saying the market is uninvestable. A gauge of London-traded Russian stocks has plunged 96% in the past two weeks.

That all points to a significant price collapse when the local market reopens.

“If they were to open the Russian market today, before there was any type of resolution, I think you'd see another 20%-25% down move, at least,” said Thomas Hayes, chairman of Great Hill Capital LLC, a New York-based investment manager.

Russian stocks last traded on Friday, Feb. 25, with the benchmark MOEX Index down 35% year to date, including a crash the previous day that was the fifth-biggest in market history. The exchange will remain closed at least until Wednesday in its longest-ever shutdown.

Russia will try to blunt the decline: Moscow said it will deploy as much as $10 billion from its sovereign wealth fund to buy up battered local stocks when the market opens. Policy makers also have banned brokers from selling securities held by foreigners.

Circuit Breaker

One of the longer war-related closures occurred at the outbreak of World War I in Europe. The New York Stock Exchange shut on July 31, 1914, with officials saying that sales by European investors justified the suspension as a circuit breaker, according to a 2004 paper by William Silber in the Journal of Financial Economics. The closure, which lasted until Dec. 12, was the longest in the history of American markets, he wrote. The Dow Jones Industrial Average fell by more than 20% when trading resumed.

All of the world's financial markets followed suit and closed their doors by Aug. 1, with some remaining shut for years.

Market closures around the world caused by war have been rare since 1945. More often, they result from civil unrest or terrorism.

U.S. stock trading was halted for four days after the Sept. 11, 2001, terrorist attacks that destroyed the World Trade Center. The S&P 500 plunged 5% when trading resumed and ended the year down 13%. With the internet bubble bursting, the market didn't bottom out until October 2002.

In 2008, Pakistani stocks lost 36% in half a month after regulators scrapped a rule preventing securities from trading below a certain price that had paralyzed the market for more than three months. The trading limits were imposed on the Karachi Stock Exchange after investor protests over a stock market crash.

Egypt's benchmark stock index slumped 8.9% when trading reopened in March 2011 after a two-month shutdown because of protests that ended President Hosni Mubarak's 30-year reign.

It's hard to compare any of those examples to what's happening with Russia. The sanctions imposed by the U.S. and Europe are harsh -- hitting everything from its ability to access foreign reserves to the SWIFT bank-messaging system-- and have largely shut the country out from doing business with rest of the world.

Russian stocks are likely to fall another 40% to 50% before any bounce from state intervention, said Iskander Lutsko, chief investment strategist at ITI Capital in Moscow.

“It is the long term that is more troubling,” said Timothy Graf, head of macro strategy for Europe, the Middle East and Africa at State Street Global Markets. “The longer that sanctions are upheld and especially if they are expanded to include gas and oil exports, the more likely Russia is to become an untouchable capital market for years to come.”