Russia's 'uninvestable' stocks cut by MSCI, FTSE Russell

[DUBAI] MSCI and FTSE Russell are cutting Russian equities from widely-tracked indexes, while the London Stock Exchange (LSE) suspends dozens of Russian depositary receipts from trading, isolating the stocks from a large segment of the investment-fund industry.

An overwhelming majority of market participants see the Russian market as "uninvestable" and its securities will be removed from emerging markets indexes effective Mar 9, MSCI said.

FTSE Russell will delete Russia constituents listed on the Moscow Exchange at a zero value on Mar 7.

Meanwhile, trading in 28 depositary receipts for Russian companies have been suspended on the LSE, chief executive officer David Schwimmer said in an interview with Bloomberg Television on Thursday (Mar 3).

Russia's links with global markets are getting cut with its foreign reserves frozen after it invaded Ukraine, while Moscow's capital controls and a ban on foreigners selling securities locally have shut the exit for international investors.

The latest blow comes as buyers shun Russian oil exports, while its bonds get cut to junk status and companies including Shell pull out.

"We can't sell our Russian stocks," said Russel Chesler, head of investments and capital markets at fund manager VanEck Associates in Sydney. "Even last week our brokers wouldn't sell them when the markets were open, and this will just deteriorate things further for investors".

The London Stock Exchange's move to suspend Russian depositary receipts is "in connection with events in Ukraine, in light of market conditions, and in order to maintain orderly markets," LSE said in a statement. It also noted that less than 1 per cent of its total income comes from operations in Russia and Ukraine.

The Dow Jones Russia GDR Index, which tracks companies like Gazprom and Sberbank of Russia, has plunged 98 per cent in 2 weeks.

Bloomberg is also seeking feedback on the investability of Russian index members in global equity gauges by Mar 3. Bloomberg, the parent of Bloomberg News, is the parent company of Bloomberg Index Services, which administers these indexes.

Meanwhile, Stoxx said it will delete Russian companies from its indexes following the sanctions from the European Union, the UK and the US More than 60 constituents will be deleted from its index universe at the close on Mar 18. Also, S&P Dow Jones Indices "is conducting a consultation with market participants on the potential removal of stocks listed and/or domiciled in Russia," including those that trade on exchanges abroad.

While Moscow has kept its stock market closed since Monday, foreign-listed shares in Russian companies plunged this week. To support its market, the country announced on Tuesday that it will deploy up to US$10 billion from its sovereign wealth fund to buy up equities.

"Russian assets have become toxic, for a lack of better expression," said Marek Drimal, a strategist covering Europe, the Middle East and Africa at Societe Generale SA in London. "Onshore markets are barricaded and basically uninvestable, while offshore markets have been hammered. The speed of events as they are happening is just mind-boggling."

The expulsion of Russian bonds from indexes could be next, with billions of dollars left in limbo less than 1 week after the invasion. FTSE Russell said it's evaluating the impact of sanctions on the nation's bonds. JPMorgan Chase is reviewing the inclusion of some debt from Russia, Belarus and Ukraine in its indexes while Intercontinental Exchange will remove those issued by sanctioned Russian entities.

"Some funds may end up marking their book value for Russian assets as zero," said Hiroshi Matsumoto, senior client portfolio manager at Pictet Asset Management (Japan).

Once investors try to sell Russian bonds they will "probably have close to no value and it'll probably be the same for stocks." Russia has a weighting of 1.85 per cent in the Bloomberg Emerging-Market Local Currency Index, and makes up 2.22 per cent in JPMorgan's Emerging-Market Bond Index Plus. India and China Russia's removal from key equity gauges means other emerging markets may benefit from fresh inflows.

India and China could be beneficiaries, according to Vishnu Varathan, head of economics and strategy Mizuho Bank in Singapore.

Alan Richardson, a portfolio manager at Samsung Asset Management, said capital flows may pivot to Indonesia and Malaysia, which share similarities to Russia in terms of their commodity-based economies.

Russia had a 1.5 per cent weighting in the MSCI Emerging Markets Index, and 1.3 per cent for FTSE Russell's comparable gauge, according to data compiled by Bloomberg.

"The removal of Russia from key indexes will be a positive thing for investors given the uncertainty surrounding the economy and potential settlement risks," said Naoki Fujiwara, chief fund manager at Shinkin Asset Management. BLOOMBERG