07 Mar 2022
As of 3rd March 2022
Ulle Adamson, T. Rowe Price Portfolio Manager Emerging Europe
What has happened?
MSCI announced that it would remove Russian securities from its indices after markets close Wednesday March 9 at a price “that is effectively zero”.
This followed consultation with a number of market participants and was made in direct response to the difficulties of market accessibility.
The action has implications for investments that track several MSCI indices including the MSCI Emerging Markets index.
Why has Russia been removed from the indices?
Since the invasion of Ukraine, the Russian equity market had become largely uninvestable following a range of Western sanctions and Russian Central Bank’s curbs on foreign exchange movements abroad.
Russia’s links with global financial markets were effectively cut with its foreign reserves frozen, while Russian capital controls and a ban on foreigners selling securities locally prevented international investors exiting the market.
Market accessibility criteria is no longer being met because of the closure of the local market and the trading halt on ADR/GDR securities (stock equivalents traded in foreign currencies). It is also due to clearing and settlement issues, accessibility of the foreign exchange market, and issues with capital inflows and outflows resulting from Russia’s capital controls on foreign investors.
What does it mean for strategies that track the index?
The move will not create any immediate further pressure on Russian equities because trading remains frozen on the local market and for trading in GDR/ADR securities.
Even if the local market did reopen, foreign investors are likely to remain banned from trading as long as Russia maintains capital controls.
T. Rowe Price has several global and regional emerging market strategies that have MSCI Index benchmarks. We are currently evaluating the longer-term impact on valuations of the securities held in the portfolios and our ability to trade those positions.
Has this type of country removal happened before?
Local markets in Egypt and Nigeria have also seen local markets closed for an extended period in the past. However, MSCI maintained the countries in its indexes. There are two key differences compared with the current scenario with Russia:
What are the potential next steps?
Any decision to reclassify Russia again in future will be based on future developments around the conflict and market participants’ feedback.
Even if the local market opens, it is only likely to be for local investors as Russia seeks to avoid foreign exchange outflows and protect the ruble. Tradability for foreign investors will remain constrained.
What matters most in the longer term is any timetable for capital controls being lifted by Russia. This will likely be dependent on any negotiations to deescalate the conflict that could lead to the unfreezing of central bank reserves, alongside any action on sanctions on the central bank and access to the Swift payments system.
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