By Dow Jones Business News,
August 01, 2014, 11:49:00 AM EDT
By Ben Edwards and Tommy Stubbington
Two of the world's largest index providers are considering stripping out certain Russian companies from their
indexes after the latest round of Western sanctions, potentially handing investors another reason to avoid the country.
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
MSCI said it was deliberating the move on concerns that if VTB issues new equity, that could potentially lead to
some market participants trading the shares in the secondary market, breaking those sanctions. MSCI also said it was
launching a new series of composite indexes that will exclude Russia, for investors that want to avoid exposure to
The firm's move follows a similar call from S&P Dow Jones Indices, which Thursday said it was asking clients
whether it should remove sanctioned firms from its indexes.
"This is very bad news for the Russian market," said Maarten-Jan Bakkum, senior emerging-market strategist at ING
Investment Management. "There could be some big players that decide to no longer invest in Russia, so it's natural they
now have benchmarks to reflect that. There will be outflows."
Mr. Bakkum says his firm has held a smaller slice of its investments in Russia than benchmarks would suggest since
before the crisis began, but still holds some Russian stocks.
Many investors benchmark themselves against indexes, or follow them faithfully, buying assets in proportion to
their makeup, though they can often hold a smaller or larger share of certain securities, depending on their views. With
fund managers around the world tracking benchmarks, at least in part, inclusion brings billions of dollars of investment
Some think the potential moves signaled this week will send a message to Russia.
"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 said.
Still, while index firms discussing dropping Russian companies is negative for general sentiment, some investors
doubt the moves will change peoples' investment outlooks.
"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 investors," said Pavel Laberko, a
fund manager at Union Bancaire Privée.
Introduced last month, the latest 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. Earlier this week, the European Union confirmed it also was
imposing similar sanctions on five Russian state-owned banks.
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 August 8.
VTB's Russian peers Rosneft and Novatek, which were also subject to sanctions, will not be removed from the index,
S&P is considering whether sanctioned firms' shares should be removed from its indexes, or if a specific country
adopts sanctions on a firm, whether the index provider should treat that firm as sanctioned in all jurisdictions. Russia
makes up 5.4% of S&P's global emerging-markets equity index.
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 and Tommy Stubbington at firstname.lastname@example.org
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