The historic decision to wipe the Russian stock market off the map

Historic decision to wipe the Russian stock market

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Russia has become an uninvestable market, impossible to invest in. The war launched by Russian President Vladimir Putin against neighboring Ukraine has provoked a cascade of reactions from the Western investment industry that means, de facto, completely wiping Russian assets off the map.

For starters, the world’s major stock providers have decided to remove Russian stocks from their indices.

Specifically, MSCI, FTSE Russell and Stoxx have already taken the step in this direction, while S&P Dow Jones and JP Morgan Chase are analyzing the possibility of following in their footsteps.

Difficulties for ETFs due to the blocking of Russian assets

This unprecedented decision, taken in line with the economic sanctions adopted by the West to curb Putin’s imperialist desires, in practice makes it even more difficult for Russian asset ETFs, already affected by the suspension of stock market trading. from Moscow (at least until next Wednesday).

In reality, the structure of ETFs allows them to be traded even if the underlying is locked.

But, as the trading of Russian assets is suspended, the managers of these vehicles cannot sell the assets they have in their portfolio to face the disbursements caused by the flight of investors (Russian shares listed in London had lost 90 percent of its value before its listing was suspended).

They also cannot sell them to accommodate changes in the indices they track that no longer contain Russian assets.

Replication errors in passive funds with exposure to Russia

So it looks like ETFs will be forced to hold Russian stocks even if they have a value of zero, which could cause a benchmark index tracking error.

In this context, the ETF industry is taking extreme decisions, such as stopping the inflow of liquidity in the funds that invest in Russia. This is the case of the largest Russian stock ETF in the world, the VanEck Russia ETF and also the iShares MSCI Russia ETF, from the Blackrock house.

The first, the VanEck ETF, has lost 60 percent of its value in the last week due to economic sanctions that have affected its portfolio assets.

Also in Spain, a dozen managers (all of them international) have informed the CNMV of their decision to suspend trading in their funds with exposure to Russia.

Among them are giants such as Blackrock, JP Morgan AM, HSBC AM or DWS.

The blocking of Russian assets, a test of resilience for the market

For all these reasons, this liquidity shock is a real test of resilience for the market as a whole, according to some experts. Especially if we take into account that the flight of investors does not only affect Russian stocks.

European companies with exposure to Russia have also lost $100 billion in capitalization, according to data from Bloomberg.

Fear of contagion in fixed income

Likewise, the complications not only affect equities but the fear of contagion also reaches fixed income.

And it is that finance is a kind of complex supply chain in which, if one component of the chain breaks, the consequences can reach the rest of the chain in unpredictable ways.

For this reason, it is feared that the expulsion of Russia from the payment system will cause disruptions that will affect the rest of the planet.

To solve all this, Russia has promised to support Russian assets with purchases of 10,000 million dollars when the stock market reopens, but many investors believe that it will be insufficient.

The only reassuring news is that Russian equities represent a relatively small part of the global market. For example, they make up about 3-4 percent of emerging market ETFs, according to Bloomberg Intelligence.