By Ben Edwards and Tommy Stubbington
Two of the world's largest index providers are considering
stripping out certain Russian companies from their indexes after
the latest round of Western sanctions, potentially handing
investors another reason to avoid the country.
In a statement late Thursday, MSCI Inc. said it is considering
removing VTB Bank's ruble shares from its Russian index after the
U.S. Treasury Department slapped the bank with sanctions
restricting its access to U.S. financial markets.
MSCI said it was deliberating the move on concerns that if VTB
issues new equity, that could potentially lead to some market
participants trading the shares in the secondary market, breaking
those sanctions. MSCI also said it was launching a new series of
composite indexes that will exclude Russia, for investors that want
to avoid exposure to Russian assets.
The firm's move follows a similar call from S&P Dow Jones
Indices, which Thursday said it was asking clients whether it
should remove sanctioned firms from its indexes.
"This is very bad news for the Russian market," said Maarten-Jan
Bakkum, senior emerging-market strategist at ING Investment
Management. "There could be some big players that decide to no
longer invest in Russia, so it's natural they now have benchmarks
to reflect that. There will be outflows."
Mr. Bakkum says his firm has held a smaller slice of its
investments in Russia than benchmarks would suggest since before
the crisis began, but still holds some Russian stocks.
Many investors benchmark themselves against indexes, or follow
them faithfully, buying assets in proportion to their makeup,
though they can often hold a smaller or larger share of certain
securities, depending on their views. With fund managers around the
world tracking benchmarks, at least in part, inclusion brings
billions of dollars of investment flows.
Some think the potential moves signaled this week will send a
message to Russia.
"This is about signaling," said Tim Ash, an emerging-markets
analyst at Standard Bank in London. "A lot of investors are forced
to hold debt or equity because they're part of an index. So when
they're out of the indices then investors have less reason to buy
them. It could have a large market impact as it could encourage
people to sell existing positions they have," he said.
Still, while index firms discussing dropping Russian companies
is negative for general sentiment, some investors doubt the moves
will change peoples' investment outlooks.
"If investors didn't want to invest in Russia they could have
made that choice already--no one is forcing them to own Russian
stocks. An Ex-Russia index is just an additional convenience for
those investors," said Pavel Laberko, a fund manager at Union
Bancaire Privée.
Introduced last month, the latest sanctions prohibit U.S.
investors from providing certain firms with financing through new
equity or new debt that matures in longer than 90 days. The
measures came as Western leaders ramped up pressure on Russia amid
the turmoil in eastern Ukraine. Earlier this week, the European
Union confirmed it also was imposing similar sanctions on five
Russian state-owned banks.
MSCI said another proposal is to maintain VTB Bank in the MSCI
Russia index until the first issuance of new shares. The index
provider is seeking feedback from market participants and will
announce its decision on August 8.
VTB's Russian peers Rosneft and Novatek, which were also subject
to sanctions, will not be removed from the index, MSCI said.
S&P is considering whether sanctioned firms' shares should
be removed from its indexes, or if a specific country adopts
sanctions on a firm, whether the index provider should treat that
firm as sanctioned in all jurisdictions. Russia makes up 5.4% of
S&P's global emerging-markets equity index.
Earlier in July, J.P. Morgan Chase & Co said the current
composition of its widely followed emerging-market bond index won't
change, but it won't include any new bonds issued by sanctioned
Russian firms.
Write to Ben Edwards at ben.edwards@wsj.com and Tommy
Stubbington at tommy.stubbington@wsj.com