Russian Markets Are Becoming Uninvestable as Sanctions Bite

(Bloomberg) -- Billions of dollars in cash is at risk of being trapped, stock funds have plunged, and capital controls are choking off money flows. Russia has all the hallmarks of an uninvestable market for global investors.

Russia-focused equity funds have tumbled 23% on average in the past week, according to data compiled by Bloomberg. Bonds have plummeted as default risks intensified, and trading the ruble has become a Herculean task with brokers stepping back from dealing with the currency. 

“The calamity of Russia's war in Ukraine has put an end to international financial investing in Russia,” said Christopher Granville, managing director for EMEA and global political research at TS Lombard in London. 

The last few weeks have seen a dramatic U-turn from earlier in the year when Russia's economy was benefiting from surging oil prices, with stocks hitting record highs and the ruble a popular carry-trade target. Now the blizzard of sanctions placed on the country in response to President Vladimir Putin's invasion of Ukraine is causing money managers to fear that the financial damage will last for years.

Index providers are assessing the country's accessibility with MSCI Inc. seeking feedback on whether to remove Russia from its stock and bond indexes. Intercontinental Exchange Inc. said it will remove debt issued by sanctioned Russian entities from its fixed-income indexes at a rebalancing exercise on March 31. 

“Russia has become not just uninvestable for new capital, but will trap legacy foreign capital parked in Russia,” said Hasnain Malik, a strategist at Tellimer in Dubai.

Anyone Selling Russian Assets Faces Few Options, Big Losses 

Overseas investors owned about $86 billion of Russian equities at the end of last year, according to data from the Moscow Exchange. Most are now unable to liquidate or properly trade their holdings after Moscow banned brokers from selling securities held by these funds. Almost $13 billion of Russian stocks owned by U.S.- and Europe-based funds is now in sanctioned companies, Bloomberg Intelligence estimates. 

Top Holders

In fixed income, BlackRock Inc., Capital Group Companies and Legal & General Group Plc are the top holders of Russia's dollar debt and investors have about $250 billion tied up in bonds issued by companies, according to data compiled by Bloomberg.

U.S.-listed VanEck Russia ETF, among the largest passive funds with exposure to Russia, and the iShares MSCI Russia Capped ETF both slumped close to 30% on Monday alone. Meanwhile, JPMorgan Chase & Co. and Danske Bank A/S are among asset managers that have frozen funds with exposure to Russian equities.

Foreign-listed shares of Russian companies tumbled again on Tuesday amid an escalation of fighting in Ukraine. 

Large Russian Convoy Moving Toward Capital Kyiv: Ukraine Update

“There is no way to safely invest in Russia,” said veteran emerging markets investor Mark Mobius, who exited his last Russian equity investment six months ago. “This is probably the most dramatic investment shutdown of any major country in recent history.”

Bourse Pause

The ruble slumped 12% against the dollar on Monday in local trading, and although the slide paused on Tuesday, the currency is still down more than 20% this year, the worst performer globally. The cost of hedging against losses in the Russian currency rose to an all-time high, according to one-month risk reversals.

While currency trading has continued on the Moscow Exchange, stocks have yet to reopen since the weekend -- the longest pause since 1998. The regulator is due to decide Wednesday morning on whether to restart. 

“Capital controls are now in place, so why invest if you can't get your money out?” said Jonathan Cavenagh, senior markets strategist at Informa Global Markets in Sydney. “There's way too many unknowns.”

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