The Russian gold market: an analysis of the dynamics since 1998
The ratio of the RTS index (RTSI) to the gold price is an important indicator that helps assess the relative strength of the Russian stock market in comparison with the “safe asset” — gold. This ratio is especially relevant in conditions of instability, when investors are looking for protective assets such as gold.
Growth of the Russian gold market: 1998-2007
From September 1998 to January 2007, there was a steady increase in the RSI/GOLD ratio. This period can be called the “golden age” for the Russian stock market. The main factors contributing to the growth:
1.Economic recovery after the 1998 crisis
After the default in August 1998, the Russian economy began to recover rapidly. The cheap ruble contributed to the growth of exports, especially of energy resources, which ensured a stable inflow of foreign exchange earnings into the country.
2.Oil and commodity prices boom
Since the early 2000s, the prices of oil and other commodities, which are key to the Russian economy, have begun to rise rapidly. This led to a significant increase in the revenues of the companies included in the RTS index and the strengthening of the stock market.
3.Inflow of foreign investments
Russia became an attractive market for international investors due to its high return on invested capital and relative political stability at that time. Stock indexes, including RTS, grew rapidly, overtaking gold in relative profitability.
Drop in the RTSI/GOLD ratio: 2007–present
Since January 2007, a steady decline in the RTSI/GOLD ratio has begun, which continues to this day. The main reasons for this drop include:
1.The global financial crisis of 2008
The crisis hit the Russian market hard, as it depended on oil prices and the influx of foreign capital. Gold, on the contrary, has strengthened its position as a defensive asset.
2.Geopolitical instability
The sanctions against Russia that began in 2014 after the annexation of Crimea and the subsequent economic isolation have significantly reduced the attractiveness of the Russian market for foreign investors. This increased the outflow of capital from the Russian stock market.
3.Ruble weakness
The devaluation of the ruble in 2014 and subsequent waves of inflation increased pressure on the RTS, as its components are priced in dollars. Gold, on the other hand, rose in price, acting as protection against inflationary risks.
4.Lack of structural reforms
The Russian economy has faced a lack of significant structural reforms over the past 15 years. This limited the growth of shares of Russian companies, especially in a stagnant economy.
What does the fall of RTSI/GOLD mean for investors?
The decrease in RTSI/GOLD indicates that the Russian stock market is inferior to gold in terms of attractiveness to investors. This indicates global risk aversion trends and a preference for “defensive assets.” For the Russian domestic market, this is also a signal of the need to diversify and find new sources of growth.
Prospects
1.Factors for possible growth
• Rising prices for oil and commodities, which remain the backbone of the economy.
• Inflow of investments in case of geopolitical detente.
2.Factors for continued decline
• Continued sanctions pressure.
• Declining interest in emerging markets in the context of the global transition to green energy.
Conclusion
RTSI/GOLD remains an important indicator reflecting the state of the Russian economy in comparison with the global “safe asset". The drop in the ratio since 2007 indicates systemic problems of the Russian market, such as high dependence on raw materials and the absence of significant structural changes. Nevertheless, if the geopolitical situation stabilizes and macroeconomic conditions improve, the Russian market may once again show growth relative to gold.
It is important for investors considering the Russian market to take into account this long-term trend and keep in mind the significant risks associated with the current economic and political situation.
