Billions of US dollars in cash are at risk of being trapped, stock funds have plunged and capital controls are choking off money flows. Russia has all the hallmarks of an uninvestable market for global investors.
Russia-focused equity funds have tumbled 23 percent on average in the past week, data compiled by Bloomberg showed.
Bonds have plummeted as default risks intensified and trading the ruble has become a Herculean task, with brokers stepping back from dealing with the currency.
Photo: Bloomberg
“The calamity of Russia’s war in Ukraine has put an end to international financial investing in Russia,” said Christopher Granville, managing director for Europe, the Middle East and Africa, and global political research at TS Lombard in London.
The past 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 Russian 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 indices.
Intercontinental Exchange Inc said it would remove debt issued by sanctioned Russian entities from its fixed-income indices 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.
Overseas investors owned about US$86 billion of Russian equities at the end of last year, Moscow Exchange data showed. Most are now unable to liquidate or properly trade their holdings after Moscow banned brokers from selling securities held by these funds.
Almost US$13 billion of Russian stocks owned by US and Europe-based funds is in sanctioned companies, Bloomberg Intelligence estimates.
In fixed income, BlackRock Inc, Capital Group Cos and Legal & General Group PLC are the top holders of Russia’s US dollar debt and investors have about US$250 billion tied up in bonds issued by companies, according to data compiled by Bloomberg.
US-listed VanEck Russia ETF, among the largest passive funds with exposure to Russia, and the iShares MSCI Russia Capped ETF slumped close to 30 percent 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 percent against the US dollar on Monday in local trading, and although gaining about 2 percent early yesterday, it is still down more than 20 percent this year, the worst-performing currency globally.
Russia’s central bank might 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.
Bank of Russia Governor Elvira Nabiullina acknowledged for the first time that sanctions imposed on the central bank meant she could not intervene to keep the ruble from collapsing on Monday.
However, what she did not say is how much money she still has — in case the bank is called into action.
Wielding the world’s fifth-largest stockpile of foreign exchange only days ago, the central bank lost at least half of its stash with the stroke of a pen last weekend, the EU’s top diplomat said.
In the view of the Institute of International Finance, about 40 to 50 percent of Russia’s reserves — last officially estimated at US$643.2 billion in the middle of last month — are potentially out of reach.
Russia’s stock markets were closed for a second day yesterday and an announcement on whether trading would go ahead on today was expected later.
“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.”
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