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Russia's Insider Traders Know Putin's Plans

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website
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At first glance, President Vladimir Putin's Russia may seem like a traditional rogue dictatorship whose actions are impossible to predict. In reality, it's a crony capitalist state with relatively open markets. That means you can always know what's going to happen slightly in advance by following the financial dealings of insiders.

Two Ph.D. students at Cornell, Felipe Silva and Ekaterina Volkova, recently confirmed that after analyzing Russian stock trades ahead of Russia's annexation of Crimea. In a yet unpublished paper, they show that insiders began selling stocks while outside observers, even sophisticated ones, were still struggling to accept the possibility of an armed Russian attack on Ukraine.

Silva and Volkova's research is based on the concept of probability of informed trading, originally developed in the mid-1990s by David Easley and Maureen O'Hara, also of Cornell. The researchers developed a way to track something they call Volume-Synchronized Probability of Informed Trading (VPIN). Essentially, it's the share of trading orders that are likely made by informed participants or insiders, based on their ability to correctly anticipate a move in prices. If the VPIN value for a stock or index rises sharply compared to an historical benchmark, it means insiders have become a lot more active. That suggests a momentous event is probably coming. The VPIN model predicted the Flash Crash of 2010 two hours before it took place. 

Silva and Volkova applied the model to trading in 161 Russian stocks and the RTS index futures between Jan. 6 and April 4, 2014. For the RTS futures, the typical VPIN is 34 percent, compared with 22.5 percent for the E-Mini S&P 500 futures. (That doesn't mean a third of the orders are usually placed by criminals using illegal insider information; VPIN broadly defines "insiders" as people with better information than others.)

On Feb. 26, four days after Ukrainian President Viktor Yanukovych fled Kiev to escape a revolution against his corrupt rule and two days after Ukrainian authorities attempted to apprehend him in Crimea, Putin put troops in western Russia on high alert. At 6 a.m. on Feb. 27, men in unmarked uniforms quietly took control of the local parliament and government buildings in Simferopol, Crimea. No one in Simferopol, including the local government, immediately made the connection: Putin's war methods weren't yet widely understood. 

The mysterious "green men" would only say they were "with the people." Rallies for and against the revolution in Kiev continued in Crimea. The situation was perhaps a little more volatile than in the rest of Ukraine, but it still seemed improbable to many, myself included, that Russia would intervene directly, much less wrest the peninsula from Ukraine. I consider myself a rather informed individual, with decent sources both in Moscow and in Kiev, but I remember finding it difficult to believe at that point that Putin would make such a move.

In retrospect, there were clues if you knew where to look -- and had the right access. For weeks prior to the assault on Crimea, conservative Moscow think tanks had been laying groundwork, peppering the Kremlin with reports calling for intervention in Ukraine if Yanukovych was overthrown. One such "analytical paper" from February 2014, was published yesterday in the anti-Putin weekly Novaya Gazeta. It's not clear where exactly it originated, but any of a dozen research groups close to the military and intelligence hawks in Putin's entourage could have produced it. 

"Under the current conditions it appears correct to play on the centrifugal tendencies of the country's various regions," the document said, referring to the weakened, strife-torn Ukraine, "with the purpose of, in some form, initiating the absorption of its eastern regions into Russia. Crimea and the Kharkiv region must become the dominant areas for this effort because they already have rather strong support groups for the idea of maximum integration with Russia."

One would have need to be plugged into the secretive, anti-Western, ultraconservative wing of Putin's team -- which has since come to dominate the agenda in Moscow -- to know about these reports, much less that serious consideration was being given to them. But apparently, some investors had the requisite access. On Feb. 27 the VPIN for the RTS index spiked, reaching 52.5 percent -- way above the norm. Here's a chart from Silva and Volkova's paper that shows it happening:

Silva and Volkova, 2014

In an article in the daily Vedomosti, Volkova pointed out that the VPIN spiked on Feb. 27 for certain specific stocks, too. "Apparently, there were people in the market who traded on macro, or political, information before it became widely known," Volkova wrote, pointing out that natural gas giant Gazprom's board chairman, Viktor Zubkov, sold a stake in the company as early as Feb. 11, 2014 -- only a few weeks before Gazprom stock plunged 14 percent on March 3.

March 3 was the first trading day after Saturday, March 1 -- the day Crimea's new, pro-Russian local government asked Russia for help in "securing peace" and Putin asked his rubber-stamp Parliament for permission to send troops to Ukraine. The RTS index dropped 12 percent as the rest of the market caught up with the insiders, anticipating Western sanctions against Russia and perhaps even a protracted war. Subsequent events have proved the sellers right: today, the RTS Index stands 21 percent lower than on March 3.

Even though many insiders have already dumped their Russian assets, the VPIN may still have predictive power where the Putin empire is concerned. If combined with some basic knowledge of regional news, VPIN could be useful in predicting Putin's next moves in the Ukraine conflict. If it increases during a round of peace talks, for example, it could mean Russia is serious about making an eastern Ukraine ceasefire stick.

Ideally, of course, Putin would be a man of his word, willing to explain truthfully what he was after and his intentions under different scenarios. Failing that, however, the Easley-O'Hara model may provide the best available approximation.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at

To contact the editor on this story:
Cameron Abadi at