Russian Markets Start to Look Uninvestable as Sanctions Bite

“The calamity of Russia’s war in Ukraine has put an end to international financial investing in Russia,” said Christopher Granville, managing director for EMEA and global political research at TS Lombard in London. 

The last few weeks have seen a dramatic U-turn from earlier in the year when Russia’s economy was benefiting from surging oil prices, with stocks hitting record highs and the ruble a popular carry-trade target. Now the blizzard of sanctions placed on the country in response to President Vladimir Putin’s invasion of Ukraine is causing money managers to fear that the financial damage will last for years.

Index providers are assessing the country’s accessibility with MSCI Inc. seeking feedback on whether to remove Russia from its stock and bond indexes. Intercontinental Exchange Inc. said it will remove debt issued by sanctioned Russian entities from its fixed-income indexes at a rebalancing exercise on March 31. 

“Russia has become not just uninvestable for new capital, but will trap legacy foreign capital parked in Russia,” said Hasnain Malik, a strategist at Tellimer in Dubai.

Read More: Anyone Selling Russian Assets Faces Few Options, Big Losses 

Overseas investors owned about $86 billion of Russian equities at the end of last year, according to data from the Moscow Exchange. Most are now unable to liquidate or properly trade their holdings after Moscow banned brokers from selling securities held by these funds. Almost $13 billion of Russian stocks owned by U.S.- and Europe-based funds is now in sanctioned companies, Bloomberg Intelligence estimates. 

Top Holders
In fixed income, BlackRock Inc., Capital Group Companies and Legal & General Group Plc are the top holders of Russia’s dollar debt and investors have about $250 billion tied up in bonds issued by companies, according to data compiled by Bloomberg.

U.S.-listed VanEck Russia ETF, among the largest passive funds with exposure to Russia, and the iShares MSCI Russia Capped ETF both slumped close to 30% on Monday alone. Meanwhile, JPMorgan Chase & Co. and Danske Bank A/S are among asset managers that have frozen funds with exposure to Russian equities.

The ruble slumped 12% against the dollar on Monday in local trading, and although gaining about 2% early on Tuesday, it is still down more than 20% this year, the worst-performing currency globally.

Ruble ‘Run’
Russia’s central bank may be “preparing for a run on the ruble now that their ability to resort to their FX reserves has been eroded by the international sanctions,” said Valentin Marinov, strategist at Credit Agricole in London.

Russia’s stock markets will be closed for a second day on Tuesday and an announcement on whether trading will go ahead on Wednesday is expected later. The ruble session will run from 10 a.m. to 7 p.m. local time, the central bank said Monday.

“Capital controls are now in place, so why invest if you can’t get your money out?” said Jonathan Cavenagh, senior markets strategist at Informa Global Markets in Sydney. “There’s way too many unknowns.”