In the midst of Russia Ukraine Crisis MSCI (Morgan Stanley Capital International- Investment Research Firm that provides stock Indices, Portfolio Risk and Performance Analytics to Institutional Investors and Hedge Funds) and FTSE Russell (Subsidiary of London Stock Exchange Group that produces, maintains, licenses, and markets stock market indices) decided removal of Russian Equities from all the Index.
FTSE Russell decision will be effective from March 7th, 2022, whereas MSCI decision will be effective from 9th March 2022. The prodigious market participants see the Russian market as Uninvestable. FTSE Russell will delete Russia Constituents listed on the Moscow Exchange at a zero value. The decision was made as the market became Uninvestable after the Central Bank of Russia halted trading on the Moscow Exchange and blocked foreign investors from selling. The Central Bank also restricted its lenders from processing fund withdrawals in all currencies held by foreign clients in retaliation to Western Sanctions.
The Russia Ukraine Crisis
The Russian Invasion on Ukraine is unlike the many ongoing conflicts in various parts of the world. A military Superpower Russia invaded Ukraine which is backed by US and NATO. While the later have repeatedly stated they will not send troops to defend Ukraine , they are imposing tough Sanctions against Russia and its rulers. This war has many consequences for global trade, capital flows, financial markets and access to technology. Sanctions imposed on Russia by Rich countries will not stop the war and nothing much will change immediate but it will have real impact over period of time in political and economic relations in both sides. It is almost like a Cold war between Russia and China on one side and the Western powers and their allies on the other side. Since the world is more globalized the impact will be greater.
Impact of War in Short Run
- Global Trade will be immediately impacted by sanctions.
- Exports and Imports will be highly impacted and existing bottlenecks due to pandemic will aggravate.
- Western Nations can threat the Nations who are trading with Russia and force to discontinue Imports through Russia.
- US can increase supply of Petroleum Products and ask OPEC countries to do so to prevent prices shooting up and disrupting World Economy.
- Ukraine being major exporter of Agricultural products, their supply will get effected. Commodity prices will shoot up. Consequently, inflation will rise up.
- Global Capital flows will decline since many countries would want their capital to invested in home rather than abroad.
Impact of War in Long Run
- The current moves to freeze the assets of Russians in Western banks and to cut off credit to their companies, would force them to devise alternative international payments system independent of the dollar. Those companies like, the Chinese, which defy Western sanctions will also need such a payment system.
- So, two trading and financial blocs will emerge. The Chinese and the Russians have large foreign exchange reserves and the surplus in trade that they can successfully create a bloc. All this will have uncertain consequences.
- China and Russia will get pushed closer to each other and given the strength of the Chinese economy and the technology available with Russia, the cold war will not be between very unequal blocs as was the case in the 1950s.
- So, potentially it could be more dangerous. Globally, the rich nation’s bloc will not be seen as a reliable ally since recently, the US deserted its allies in Afghanistan and now it has left Ukraine to fend for itself.
Russian Stock Market and Indices after War.
- Russia was scrambling to prevent its financial meltdown after its economy was slammed by Western Sanctions imposed in the Weekend in response to invasion of Ukraine.
- The latest barrage of sanctions imposed by the United States, the European Union, the United Kingdom and Canada said they would expel some Russian banks from SWIFT, a global financial messaging service, and paralyze the assets of Russia’s central bank.
- The United States also banned US dollar transactions with the Russian central bank in a move designed to prevent it accessing its rainy day fund.
- President Vladimir Putin held crisis talks with his top economic advisers after the Ruble crashed to a record low against the US dollar, the Russian central bank more than doubled interest rates to 20%, and the Moscow stock exchange was shuttered.
- The European subsidiary of Russia’s biggest bank was on the brink of collapse as savers rushed to withdraw their deposits. Economists warned that the Russian economy could shrink by 5 %.
- Russia is a leading exporter of oil and gas, but many other sectors of its economy rely on imports. As the value of the ruble falls, they will become much more expensive to buy, pushing up inflation.
MSCI And FTSE Russell Decided Removal Of Russian Equities From All The Index.
- MSCI Inc and FTSE Russell have announced that they will be removing Uninvestable Russian equities at zero value from all the global and regional indices. MSCI will now call Russia a standalone market. MSCI Standalone Market Indexes are not included in any of the widely followed passive indices like the MSCI Emerging Markets Index or the MSCI Frontier Markets Index, missing out on foreign passive flows. For instance, in MSCI Emerging Markets Index, Russian equities weighed somewhere around 2 per cent and now the passive trackers will value the holding at zero in the books which effectively means despite weight reduction of Russian indices there won’t be any flow benefit in other countries of the EM Index.
- After the adjustments, Russia’s weight should get redistributed among all the countries in the indices. The possible weight increase for India will be very minuscule (~15-20 bps) thus, there will be no benefit in terms of flows. The top 4 heavyweights in MSCI EM Index are China, Taiwan, India (current weight is somewhere near to 12.29 per cent) and Korea.
Experts Opinion On Whether India Will Get Benefited By Removing Russian Stocks
- Removing Russian stocks from the MSCI index will lead to $600 million in foreign inflows into Indian equities,
- These inflows will get distributed in index heavyweights like Reliance Industries Ltd, Infosys Ltd, HDFC Ltd, ICICI Bank Ltd and TCS.
- If MSCI finalizes to remove Russian stocks from EM Index and at the same time FIIs are not restricted to sell the constituents then it could lead to 25 basis points increase of India in MSCI Emerging Markets.
- The decision comes a day after rival British Petroleum (BP) abandoned its stake in Russian oil giant Rosneft. Norway’s Equinor also plans to exit Russia.
- The research, however, underlines that it would be difficult for Index providers to remove Russian stocks as media reports claim that Russia’s central bank has ordered brokers not to execute sell orders from foreign shareholders.