MSCI, FTSE Russell to drop Russian equities from indexes

Benchmark index providers MSCI and FTSE Russell said they'll drop Russian stocks from their equity indexes next week, after Western sanctions in the wake of Russia's Feb. 24 invasion of Ukraine and recent moves by the country's central bank have made trading in that market prohibitively difficult.

In addition, trading in 28 depositary receipts for Russian companies has been suspended on the London Stock Exchange, Chief Executive Officer David Schwimmer said in an interview with Bloomberg Television on Thursday.

MSCI, following consultations with institutional investors, said access to Russia's market no longer meets the minimum requirements needed for the country to retain its emerging markets status in MSCI's indexes.

As of the close of trading on March 9, MSCI Russia indexes will be "reclassified from emerging markets to stand-alone markets status," according to an MSCI news release. Likewise, FTSE Russell announced that effective March 7, "Russia will be deleted from all FTSE Russell Equity Indexes."

The FTSE Russell decision followed meetings with its policy advisory board and equity country classification advisory committee about the impact of escalating sanctions as well as "the decision by the Central Bank of Russia to temporarily suspend trading on the Moscow Exchange and prohibit non-resident investors from executing security sales."

Those moves effectively simplified the way forward for asset owners — such as New Zealand Superannuation Fund, the NZ$58.5 billion ($39.4 billion), Auckland-based sovereign wealth fund — that were looking to respond in nuanced fashion, dropping exposure to stocks and bonds of government-controlled Russian entities while retaining exposure to private firms.

In a joint statement early Thursday, NZ Super, together with the NZ$50 billion Accident Compensation Corp., the NZ$5 billion Government Superannuation Fund and the NZ$1.9 billion National Provident Fund, all in Wellington, announced that they would sell "Russian Federation sovereign debt and the securities of majority Russian state-owned enterprises from their respective funds … as market conditions permit."

A NZ Super spokesman said that would have left his fund with modest exposure of NZ$6 million or NZ$7 million to privately owned Russian companies but MSCI's announcement made that an academic question: exposures to both government-owned and privately owned Russian entities will be sold, he said.

Others have been less nuanced.

Future Fund, the Melbourne, Australia-based, A$203.6 billion ($147 billion) sovereign wealth fund, meanwhile, announced Feb. 28 that it will be looking for opportunities to sell down its portfolio's A$200 million in holdings of Russian equities "as market conditions permit."

Likewise, Ian Patrick, chief investment office of Australian Retirement Trust, a A$230 billion, Brisbane-based super fund, in a news release Thursday said he instructed the fund's investment managers this week "to sell any remaining debt and equity investments" in Russia, Ukraine and Belarus, and not make any new investments in those countries.

Changes in benchmark index weightings could have a bigger impact on Japan's ¥199.3 trillion ($1.72 trillion) Government Pension Investment Fund, Tokyo, with Russian stock holdings of roughly ¥170 billion, or 36 basis points of GPIF's overseas stock portfolio, and ¥50 billion of Russian bonds, or 11 basis points of its overseas bond portfolio.

GPIF, in a statement, said while it is not permitted to allow political considerations to influence stock selection, it is continuing to monitor the situation and will strive to act in the best interests of members.

A subsequent statement, responding to a query about the latest moves by MSCI and FTSE removing Russian stocks from their indexes, said simply that when changes to indexes are made, GPIF's external managers adjust their portfolios based on those changes.

Bloomberg contributed to this story.