The Russia-Ukraine crisis had never vanished and the latest
crash of the Malaysian Airlines passenger jets proves that. The
news desks yesterday were kept busy with news that a Malaysian
Airlines passenger jet, MH17, was shot down near the Russia-Ukraine
border. The news came in after the National Security and Defense
Council of Ukraine said a Russian plane shot down a Ukrainian SU-25
Moreover, late Wednesday, President Barack Obama had announced
fresh sanctions targeting Russia's large-cap companies that
included bellwether energy and banking companies.
These events dragged the blue-chip MICEX index down by 2.3% to
1,440.63, its biggest fall in nearly a month. The Russian
Ruble too was under pressure. Micex is down 3.6% so far this month
and has lost 4.2% year to date.
An exclusive Reuters report in March stated that the attorneys with
the U.S. Securities and Exchange Commission were contacting
investment companies including mutual funds that have investments
in Russia. The move is obviously crucial given the Ukraine crisis
that has been affecting the financial scenario. The latest round of
geopolitical tension and sanctions intensifies the concerns and
brings the focus back on the fate of investments in Russia. Funds
with significant exposure in Russia look in threat of losing once
again and investors do need to be watchful.
Sanctions on Russia's Bellwethers
"We have to see concrete actions, and not just words that Russia in
fact is committed to trying to end this conflict along the
Russia-Ukraine border," Obama stated at the White House after
announcing fresh sanctions on Russia's large-caps.
Fresh sanctions were imposed on Russia's two banks, two energy
companies and defense companies. The sanctions now bar Russian
companies including oil giant Rosneft and Russia's third-largest
bank Gazprombank OAO from getting new financing from U.S. capital
These actions are strong signals to US and Western investors about
their decision to keep holding equities or funds that have large
The fresh sanctions are said to be more impactful as 17-25% of
Russia's GDP is estimated to be coming from oil and gas. Moreover,
Russian banks are not too good with raising domestic capital and
have to rely on foreign money. Russian firms are said to be mostly
dependent on foreign countries for long-term money and the nation
faces hurdles with long term domestic capital. The US sanctions
thus targeted to hit Russia hard. An administration official
involved in the sanctions said: "This hurts them…If it doesn't
cripple them, it bleeds them pretty hard".
Vladimir Putin Retaliates
The sanctions were imposed owing to Russia's failure to end the
Ukraine conflict. President Obama said: "What we are expecting is
that the Russian leadership will see once again that its actions in
Ukraine have consequences, including a weakening economy, and
increasing diplomatic isolation".
However, what followed was a warning from Russian President
Vladimir Putin, accusing the US of pushing Ukraine to continued
conflicts. He said Russia wants an immediate termination of the
hostilities and a negotiation including all sides.
On the sanction Putin said: "They generally have a boomerang effect
and, without a doubt, in this case, are driving the Russian-U.S.
relations into a stalemate and seriously damaging them…I am certain
that this is harmful to the U.S. Administration and American
people's long-term strategic national interests".
The Boomerang Effect
If the "boomerang effect" that Putin talks of is true, Texas-based
Exxon Mobil Corporation
(XOM) is one energy firm that may be in a spot of bother. Apart
from sanctions on banking giants Gazprombank and VEB, sanctions
were also imposed on Novatek (largest independent gas producer in
Russia) and state-owned Rosneft. Exxon and Rosneft have a major
deal to develop Arctic and certain US oilfields.
ExxonMobil and Russian state controlled Rosneft had worked together
on an approximately $500 billion deal to explore an oil field in
Western Siberia. Exxon has been planning to construct a LNG
terminal project in the oil field worth $15 billion. In fact, it
also has joint venture projects to explore the Black Sea reserves.
Malaysian MH17 Jet Crashes, Ukraine Accuses Russia of
Shooting Down Warplane
A surface-to-air missile was reported to have shot down a Malaysia
Airlines jet that was carrying about 300 passengers. The MH17 jet
was shot down over separatist-controlled eastern Ukraine, killing
all on board. According to Associated Press, a Ukrainian official
(FB) page said that the Boeing 777 was shot down while flying at an
altitude of 10,000 meters. Malaysian Airlines had stated via its
) account they lost contact with flight MH 17 and "the last known
position was over Ukrainian airspace."
Ukrainian officials have stated that Russia recently delivered
mobile Buk surface-to-air launching system to the separatists. U.S.
intelligence sources confirmed that data from spy satellites and
radar showed that the MH17, flying to Kuala Lumpur from Amsterdam,
was shot in midair. However, the US intelligence could not identify
from where the where the missile was launched.
Both Ukrainian government forces and pro-Russian separatists, who
are fighting against each other in the war-tone eastern Ukraine,
denied shooting down the plane.
The MH17 crash came close on the heels of accusations by Ukrainian
officials that Russian forces had shot down a Ukrainian warplane.
The National Security and Defense Council of Ukraine said a Russian
plane shot down a Ukrainian SU-25 fighter jet, which was on a
military operation over eastern Ukraine.
US Stocks Tank
The geopolitical tensions turned investors jittery and US stocks
suffered their biggest losses in months. The Dow Jones Industrial
Average (DJI) declined 0.9% to close Thursday's trading session at
16,976.81. The Standard & Poor 500 (S&P 500) dropped 1.2%
to finish at 1,958.12. It was the Dow's biggest one-day percentage
decline since May 15. S&P 500 registered its biggest one-day
drop since April 10.
The recent events shift focus back to the Russia-Ukraine crisis
that started early last year. Reportedly, 500 lives have been lost
in eastern Ukraine alone since the fighting commenced. The Crimean
crisis and the Russia-West standoff looked threatening to the
financial stability since early last year. (Read:
Russia-Ukraine Crisis Deepens: Key Stocks in
Beware of These Funds with Russian Exposure
The crisis is indeed far from resolved and volatility cannot be
ruled out. The
Bank of America
Merrill Lynch fund Manager Survey had stated earlier this year that
a lion's share of investors expressed concern over the geopolitical
tensions being a threat to financial stability.
It's best to play a little safe and exit from the following funds
that carry either a
Zacks Mutual Fund Rank #4 (Sell)
Zacks Mutual Fund Rank #5 (Strong Sell)
. According to mutual funds rating agency Lipper, these funds have
decent exposure to Russian stocks.
ING Russia A
(LETRX) invests primarily in equities of Russian companies. A
minimum of 80% of its assets are invested in Russian companies,
while the remaining 20% goes into debt securities that are issued
either by Russian firms or the Russian government. Thus, this fund
has a huge exposure to Russia. The non-diversified fund has
returned a negative 6.33% year to date.
ING Russia A carries a
Zacks Rank #5 (Strong Sell)
Among the top holdings, 14.06% of its assets are invested in OJSC
Magnit (a Russia-based holding company), 11.10% in OAO Lukoil ADR
(Russia-based integrated oil and gas company) and 8.61% in Sberbank
Of Russia (Russia-based commercial bank).
ING Russia Class I
ING Russia W
(IWRFX) carry a
Zacks Rank #5 (Strong Sell)
. They have returned negative 6.28% and 6.25%, respectively, year
US Global Investors Emerging Europe
(EUROX) invests a lion's share of its assets in equities and
related securities of companies in emerging markets of East Europe.
The non-diversified fund has returned a negative 5.90% year to
US Global Investors Emerging Europe currently carries a
Zacks Mutual Fund Rank #4 (Sell)
Among the top holdings, 4.03% of its assets are invested in GMK
Noril'skiy nikel' OAO (Russia-based mining and metallurgical
company), 3.50% in OAO Lukoil ADR and 2.47% in Mobile Telesystems
OJSC ADR (Russia-based firm in telecommunication industry).
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find
funds that not only outpaced the market in the past but are also
expected to outperform going forward. Learn more about the Zacks
Mutual Fund Rank at
View All Zacks #1 Ranked Mutual Funds
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
Get Your Free (LETRX): Fund Analysis Report
Get Your Free (IIRFX): Fund Analysis Report
Get Your Free (IWRFX): Fund Analysis Report
Get Your Free (EUROX): Fund Analysis Report
EXXON MOBIL CRP (XOM): Free Stock Analysis
FACEBOOK INC-A (FB): Free Stock Analysis Report
TWITTER INC (TWTR): Free Stock Analysis Report
BANK OF AMER CP (BAC): Free Stock Analysis
To read this article on Zacks.com click here.