(updated with correction)
Recent U.S. sanctions against certain companies and individuals in Russia are prompting investors to question whether the country is a sensible investment opportunity.
This month, President Donald Trump's administration levied sanctions targeting a number of Russian oligarchs, companies and government officials. Despite the specific targets, the impact resonated within Russia's currency and equity market. The ruble fell about 10% against the dollar in the days following the announcement on April 6, while the Russian equity market fell around 8%, although it recovered somewhat in the following days.
The market capitalization of Russian equities listed on the Moscow Exchange was $33.5 trillion as of March 31. Russia is 3% of the MSCI Emerging Markets index.
While sources said a move in markets like this — particularly one that already was cheap in terms of valuations and remains supported by higher oil prices — would usually encourage active investors to pick through opportunities, they are split as to whether the time is right to add Russian exposure to portfolios, given the sanctions and more potential targets.
Ilmarinen Mutual Pension Insurance Co., Helsinki, has an almost non-existent allocation to Russia, but the country is in its emerging markets investment universe. Executives at the firm — which manages €39.6 billion ($48.8 billion) in pension assets — are watching the market closely.
"At this moment we think that from the global investor's perspective there are, more than usually, big open questions about Russia. ... Currently we are very cautious" regarding investment in Russia, said Mikko Mursula, chief investment officer at Ilmarinen.
Managers across the globe also are cautious, despite potential opportunities afforded by a dip in the ruble, equity and debt markets.
"We had limited exposure to Russian companies and have further reduced it post the sanctions," said Shamaila Khan, director, emerging markets debt at AllianceBernstein in New York. "The sanctions that have been introduced by the U.S. government recently are far more serious in scope than the ones used in the past, and therefore we are cautious on Russian exposure and in particular on the corporate sector." Ms. Khan added geopolitical risk will be "the key factor to monitor going forward" when it comes to considering opportunities in Russia.
BlueBay Asset Management LLP's emerging market debt team is also taking a careful look at Russia and the potential spillover of sanctions into other companies in the market. The team was broadly neutral to underweight Russia across emerging market strategies ahead of the sanctions, and was overweight Russian banks in its corporate debt strategies and underweight metals and mining, "the sector where the bulk of the negative price action has been," said Polina Kurdyavko, London-based co-head of emerging market debt.
"Even though the recent sell-off has cheapened Russian assets, we believe a higher risk premium is required to compensate investors from the heightened political risk," she said. "From our understanding, the main concern from the U.S. Treasury about the potential market impact of these sanctions had been not to create broader, systemic risk-off sentiment across other markets. So far there has been limited contagion across the wider asset class and this might embolden them to carry out additional sanctions in this way."