Index provider MSCI said it would pull Russian stocks out of its widely monitored emerging market indices, warning that the country’s stock market had become “non-investment” after its invasion of Ukraine led to crippling sanctions.
Traders were awaiting the decision, which was announced on Wednesday night after two days of consultations with asset managers, stock exchanges and other market participants.
Trading in Russian stocks stopped this week, with Russia’s central bank stopping trading in stocks and derivatives. Moscow has also temporarily banned foreign investors from selling their Russian assets.
The MSCI Emerging Markets Index is one of the most important benchmarks for traders and is another big blow for registered Russian companies. If or when markets reopen, the index provider’s decision makes it even more likely that fund managers will throw out their Russian stocks.
MSCI has said it will remove Russian securities from its indices after markets close next Wednesday at a “virtually zero” price. Minutes after MSCI warned traders of its decision, FTSE index provider Russell said it would remove Russian stocks from its benchmarks before markets open on Monday.
The moves follow similar decisions from other index providers, cumulatively affecting a huge number of investment funds that base their portfolios on such indices. MSCI estimates that more than $ 16 trillion has been compared to its indices.
MSCI said that the “vast majority” of participants in the two-day consultation said that the Russian stock market is currently non-investment and that [the country’s] the securities must be removed from the “indices.
Russian stock prices registered in other countries fell sharply, leading to temporary suspensions by the New York Stock Exchange and Nasdaq. Traders warned of difficulties in liquidating their Russian assets as sanctions ricocheted through markets.
On Monday, ICE Data Services said that the debt of all entities blocked under UK, US or EU sanctions would be removed from the indices at the end of March.
JPMorgan Chase, another major index provider, is still reviewing its indexes. On Tuesday, he said the new debt from sanctioned Russian entities would not be included in this month’s updated indices.
The move late Wednesday by MSCI came after a statement from rating agencies Fitch, which joined rival S&P Global in lowering Russia’s sovereign debt rating to rubbish.
Fitch downgraded Russia from a triple B rating to a single, deep garbage area, highlighting the high risks of investing in the country’s debt. Analysts from the rating agency have signaled that they may lower the rating further.
Fitch said the severity of the sanctions imposed on Russia in response to its invasion of Ukraine “represents a huge shock to Russia’s credit base” and could “undermine its willingness to service public debt”.
“Development will weaken Russia’s foreign and public finances, severely limit its financial flexibility, significantly reduce its GDP growth trend and increase domestic and geopolitical risk and uncertainty,” Fitch said.
Moody’s, another rating agency, followed suit by lowering Russia’s rating from Baa3, one notch above junk, to B3, well below the investment rating threshold, and put it under review for further downgrading. Among other factors, he cited “the likelihood of lasting disruption to the economy and the financial sector from sanctions that restrict access to Russia’s international reserves designed to protect Russia from adverse shocks.”
Additional reports from Kate Duguid in New York