The Equity Risk Premium of Russian Companies: Theory and Practice

Abstract

This paper examines the historical and projected equity risk premium (ERP) for the Russian stock market in view of the narrowing investment horizons of market participants and the increasing reliance on domestic resources. The study aims to substantiate the long-term advantages of equity investments. The methodology employs a comprehensive approach, including ERP calculation based on three risk-free rate proxies, the adaptation of expected return decomposition models, and formalized benchmarking via artificial intelligence (AI) models. The findings reveal that over 10-year horizons, Russian equities maintain a resilient historical advantage over bonds. The forecast for the 2025–2032 period points to an expected risk premium of approximately 7% per annum, driven primarily by dividend yields and the potential for valuation recovery from currently distressed levels (5.5 x CAPE). AI-based analysis confirms a consensus forecast for a positive premium within the 5.9–6.7% range. The analysis concludes that current market undervaluation is largely driven by temporary cyclical factors. Extending the investment horizon to 10 years serves as a strategic tool to mitigate interest rate volatility. To foster a framework grounded in fundamentals for investment analysis and forecasting, it is essential to implement regular CAPE ratio calculations and integrate long-term macroeconomic forecasts into institutional investment strategies. These measures are intended to facilitate the transformation of domestic savings into stable sources of long-term capital and promote the capitalization growth of the Russian stock market.