Russian stocks are plunging. Here’s how you might be at risk

Posted: 2 March 2022 3:19 pm
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With sanctions hurting Russia’s equities, investors may want to see if any of their investments are exposed to Russian stocks. Some impacts are obvious but others need a closer look.

Russia’s equity markets have plunged in the past week, following Russia’s invasion of Ukraine and after the United States and Europe imposed even tougher sanctions on the country.
The risks to investors in Russian stocks or Russian-focused funds are obvious: sanctions are focused to hit those equities. But other funds and ETFs may be invested in Russia as well, and a wide range of public companies are cutting ties to Russia.
Mastercard and Visa, for example, blocked access for Russian financial institutions yesterday. That’s about 4% of Mastercard’s revenues, reports say.
Investors in the US may be wondering if they have any exposure to Russia in their portfolios, and considering making a move. Here’s a look.

Sanctions and impact

Western sanctions and the agreement of several Western countries to remove some Russian banks from the global payments system known as SWIFT are meant to strangle Russia’s economy. The ruble has tanked in value and Russian stocks have crashed.
The benchmark MOEX Russia Index fell by as much as 45% last Thursday when Russia invaded Ukraine, erasing tens of billions in shareholder wealth and returning to a level not seen since 2017. Russia’s central bank has kept the Moscow Exchange closed so far this week.
Even though ​​the stock market in Moscow is closed, US-listed Russian companies and Russia-focused exchange-traded funds (ETFs) and mutual funds are still plunging. Emerging market funds with part of their portfolios in Russia have also been hit.
With no timeline on how long sanctions will last, investors should examine their portfolios to see what percentage, if any, of their investments are linked to Russian stocks. US investors holding individual Russian stocks or ETFs will see the most obvious effects, while investors with holdings in emerging market funds should expect only a small percentage of their portfolios to be exposed to Russian markets.

Russian ETFs in deep plunge

The iShares MSCI Russia ETF (ERUS) has tumbled 59.53% since last Thursday to its lowest level since the fund’s inception in 2010. Its top three holdings include natural gas company Gazprom (OGZPY), oil company Lukoil (LUKOY) and banking and financial services company Sberbank (SBRCY). The US-listed shares of Gazprom and Lukoil have fallen 46.77% and 78.95% respectively since last week, while shares of Sberbank have fallen a staggering 88.85%.
BlackRock, which runs the iShares family of ETFs, said in a notice issued Tuesday that it temporarily suspended the creation of new shares in the fund, effectively stopping inflows to the product.
“The liquidity of Russian securities and its currency have experienced significant declines. In light of these circumstances, the iShares MSCI Russia ETF has temporarily suspended the creation of new shares until further notice,” the notice said.
Meanwhile, shares of VanEck Russia ETF (RSX) are down 56.57% over the last week and 75.26% from their October high of $33.39. The fund is also trading at its lowest level since its inception in 2007.
The Franklin FTSE Russia ETF (FLRU), which provides investors with targeted exposure to large- and mid-sized companies in Russia, has fallen 38.85% since last week.

Global funds and ETFs may be partially in Russian holdings

While many popular emerging market mutual funds and ETFs are heavily weighted toward developing economies like China, Taiwan, India and Brazil, many allocate a small portion of their funds in stocks and bonds in Russia.
For example, the Vanguard FTSE Emerging Markets Index Fund ETF (VWO) had a 2.9% stake in Russia at the end of January. The fund holds $112 billion in assets, which puts its total stake in Russian equity at around $3.25 billion.
Likewise, the Schwab Emerging Markets Equity ETF (SCHE), iShares Core MSCI Emerging Markets ETF (IEMG) and the SPDR Portfolio Emerging Markets ETF (SPEM) have a 3.43%, 1.47% and 1.37% stake, respectively, in Russia.
Though it will depend on your overall portfolio, having between 1% and 3% of your fund’s assets exposed to Russia may not create a huge financial hit. But if you’re trying to steer clear of Russia, you’ll need to check those holdings.

US companies cutting ties with Russia

Investors may also be affected by the events in Ukraine if they’re holding stock in companies with business dealings in Russia.
For instance, British oil and gas company BP plc (BP) announced Sunday that it will be unloading its 20% stake in Russian oil giant Rosneft. According to BP, it will no longer report reserves, production or profit for Rosneft and these changes are expected to lead to a material non-cash charge with its first quarter 2022 results. Exactly how much this affects BP’s top and bottom lines remains to be seen, but BP shareholders could be negatively affected.
President Joe Biden announced last Thursday sanctions that cut off Russia from access to vital electronic components like semiconductors. Reports have emerged that Intel (INTC), Advanced Micro Devices (AMD) and other companies have since halted processor sales to Russia. That, of course, could cut into companies’ bottom lines.
Semiconductor stocks traded mixed on Monday. And while these bans likely won’t harm most chip makers — the Semiconductor Industry Association estimates that Russia consumes less than 0.1% of global chip purchases — semiconductor stocks could remain volatile.
Likewise, Apple (AAPL) has halted sales in Russia, while Ford (F) suspended its joint venture in the country. These companies are just two of a growing list of companies to cut ties with Russia in response to the country’s invasion of Ukraine last week.
Investors should be aware that these actions could impact their investments. The hit may be minimal, but there’s really no way to be sure.

Final thoughts

It’s uncertain whether the Ukraine crisis will have a prolonged impact on US stocks, but US investors should review their portfolios to see how much, if any, exposure they have to Russian equity markets. Specific stocks and funds are simply overexposed to Russia and the Ukraine crisis, and that could continue to negatively impact investors.
Investors may even decide to protest the war with their portfolios, divesting from Russia-linked stocks and ETFs altogether.

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At the time of publication, Matt Miczulski did not own shares of any equity mentioned in this story.

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