Russia to be expelled from MSCI Emerging Index?
Yesterday, after Russia blocked foreigners from selling Russian shares and exchanges around the world started to announce that they would suspend dealing in Russian shares, a thought occurred to us: did this break MSCI’s liquidity rules that govern the inclusion of stocks in their indices? We emailed MSCI for an answer to this question – not really expecting that they would deign to answer us, but on the off chance that they might.
It turns out that someone from Reuters also posed the question. This is the response – “It would not make a lot of sense for us to continue to include Russian securities if our clients and investors cannot transact in the market,” Dimitris Melas, MSCI’s head of index research and chair of the Index Policy Committee, told Reuters. You can read the full Reuters article here.
MSCI seems to be talking about removing Russia from all of its indices, but Russian stocks do not have much of a weight in the global MSCI All Countries World Index. The greater impact would be on the MSCI Emerging Markets Index. All ETFs tracking the index would be forced sellers (although unable to trade which makes that moot). Many emerging market trusts and open-ended funds have only limited freedom to invest in countries outside of the emerging markets index. They would be sellers too. Russian stocks made up 3.3% of the index at the end of January, but would be a lot less than that now.
If we look forward to a time when the Russian government abandons the war and MSCI is thinking about reintroducing Russian stocks to its indices, would they come back as constituents of the emerging markets index or the frontier markets index? Without regime change in Russia, would investors want to have any exposure to the country?
It seems reasonable to assume that the damage Russia has brought on its economy would not be fixed easily. Sberbank, one of the most commonly held Russian stocks ahead of the war, looks unlikely to survive it, for example. Exclusion from emerging market indices, if it comes, might be a long-term thing.