Another day, another collapse in Russia ETFs. The VanEck Russia ETF (RSX) and the iShares MSCI Russia ETF (ERUS) were down 26% and 22%, respectively, in early Monday trading as the U.S. and its allies ratcheted up sanctions on the Russian economy over the weekend. Both ETFs have lost more than half their value just over the past seven trading sessions.
RSX
The latest blow to the funds came after the U.S. and its allies restricted Russia’s central bank from using much of its $630 billion of foreign exchange reserves. About one-fifth of Russia’s forex reserves are held in dollars, while one-third are held in euros, according to the Central Bank of Russia.
The latest restrictions mean that the Russian central bank can’t use most of its massive haul of foreign currencies to prop up its own currency, the ruble. The ruble tumbled 25% on Monday alone, an indication of deep stress in the Russian economy and a precursor to rapid inflation in the country.
USD/RUB
Without access to its foreign reserves, and with the stringent sanctions already imposed on its banks, Russia may have trouble paying for imports (though with the country’s energy sector so far untouched by penalties, Russia retains at least one major source of hard currency).
With little room to provide support itself, the Russian central bank ordered the country’s exporters to sell 80% of their forex reserves for rubles, angering some of Russia’s oligarchs, such as aluminum tycoon Oleg Deripaska.
The Implications
Russia’s financial troubles call into question how long the country can maintain its war against Ukraine, especially with the latter putting up a much-fiercer-than-expected resistance to the invasion. The longer the conflict goes on, the greater the economic costs that will be imposed on Russia, boding extremely poorly for investors in Russia ETFs.
Over the weekend, at the same time it doubled its benchmark interest rate from 9.5% to 20%, Russia’s central bank banned foreign investors from selling local securities. Trading in local Russian stocks was also halted on Monday.
As U.S.-listed ETFs, RSX and ERUS were freely trading on Monday, providing price discovery for Russian stocks even in the face of shuttered markets in Russia. There was also price discovery for the many Russian stocks that are listed in London and the U.S.
Much of RSX’s portfolio is made up of London-listed shares. On the other hand, ERUS is more exposed to stocks listed in Russia.
It remains to be seen how long Russia’s ban on foreign security sales will last and what the implications will be for investors in Russia ETFs. There is also the prospect of the U.S. banning U.S. investors from owning Russian stocks or ETFs in future rounds of sanctions. Last week, the government prohibited investors from trading Russian sovereign debt issued after March 1 in secondary markets.
U.S. investors have already been banned from participating in primary sales of Russian sovereign debt since Russia annexed Crimea in 2014.
Follow Sumit Roy on Twitter @sumitroy2
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