By Dow Jones Business News,
August 01, 2014, 07:28:00 AM EDT
By Ben Edwards
Index providers are mulling stripping out some Russian companies, potentially undermining a key structural support
for the country's markets.
In a statement late Thursday, MSCI Inc. said it is considering removing VTB Bank's ruble shares from its Russian
index after the U.S. Treasury Department slapped the bank with sanctions restricting its access to U.S. financial
markets. MSCI said it was mulling the move on concerns that if VTB issues new equity, it could potentially lead to some
market participants trading the shares in the secondary market, breaking those sanctions.
It also said it was launching a new series of composite indexes that will exclude Russia for investors that want to
avoid exposure to Russian securities.
"This is about signaling," said Tim Ash, an emerging-markets analyst at Standard Bank in London. "A lot of
investors are forced to hold debt or equity because they're part of an index. So when they're out of the indices then
investors have less reason to buy them. It could have a large market impact as it could encourage people to sell
existing positions they have," he added.
"It's negative for general sentiment that MSCI is beginning these discussions," said Pavel Laberko, a fund manager
at Union Bancaire Privée. "But if investors didn't want to invest in Russia they could have made that choice
already--no one is forcing them to own Russian stocks. An Ex-Russia index is just an additional convenience for those
The sanctions prohibit U.S. investors from providing certain firms with financing through new equity or new debt
that matures in longer than 90 days. The measures came as Western leaders ramped up pressure on Russia amid the turmoil
in eastern Ukraine.
MSCI said another proposal is to maintain VTB Bank in the MSCI Russia index until the first issuance of new shares.
The index provider is seeking feedback from market participants and will announce its decision on Aug. 8.
VTB's Russian peers Rosneft and Novatek GDR, which were also subject to sanctions, won't be removed from the index,
MSCI's move follows a similar call from S&P Dow Jones Indices, which said Thursday it was asking clients whether it
should remove sanctioned firms from its indexes.
S&P is mulling whether sanctioned firms' shares should be removed from its indexes, or if a specific country adopts
sanctions on a firm if the index provider should treat that firm as sanctioned in all jurisdictions.
Earlier in July, J.P. Morgan Chase & Co. said the current composition of its widely followed emerging-market bond
index won't change, but it won't include any new bonds issued by sanctioned Russian firms.
Write to Ben Edwards at email@example.com
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