Stock indices are a crucial feature of the global financial landscape, says Sydney Maki on Bloomberg. They are “followed on autopilot by trillions of dollars in passive investments, and used as a benchmark for trillions more in active strategies”. More than $16trn globally is thought to be benchmarked to indexes compiled by MSCI, and inclusion in these is “an important symbol of acceptance in the mainstream global financial community”.
So the news that Russian stocks will be removed from MSCI’s main emerging markets index at a price that is effectively zero., in the firm’s own words, is highly significant: it shows how Russia has been “cut off from large swathes of the investing world”, says Maki. Sanctions, the closure of the Moscow stock exchange and a ban on foreigners selling assets locally mean that the market is essentially uninvestable, says the Financial Times. Other index providers, such as FTSE Russell and S&P Dow Jones, plus investment bank JPMorgan, which produces several key emerging-market bond benchmarks, are also removing Russian assets from their indices.
Unless investors have taken specific bets on Russia they are unlikely to notice big losses from the index writedowns. Russian stocks made up less than 4% of the MSCI Emerging Markets index at the start of the year, a sharp drop from 2008 – when it accounted for 10%. The Universities Superannuation Scheme, Britain’s biggest private pension plan, has just 0.5% or so of its portfolio in Russian-connected assets.
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Still, as Hermitage Capital Management’s co-founder Bill Browder says, the sudden dash to sell near-worthless Russian securities is “a reminder that if you do business in countries without a rule of law, you could lose everything”.
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