Reflections on the Russian sell-off

The recent dramatic fall of Russian stocks combined with the missile attacks in Syria by the US and allies is creating a lot of discussion regarding the future of Russia investments. 

As Russian stocks have seen one of their biggest sell-offs in two years (and the tensions between Russia, the US and the rest of the international community grow) it’s important to reflect on this, why it happened and what the implications are for emerging markets investors.  

Sanctions bite

What kicked this situation off was OFAC (the US Treasury Department’s Office of Foreign Assets Control) listing various Russian individuals close to President Putin, and involved in Russian public companies listed on major stock exchanges in London and Hong Kong, as Specially Designated Nationals, or SDNs. This means that their assets are blocked and US persons are generally prohibited from dealing with them.

Included in the list are Oleg Deripaska – owner of major aluminum company RUSAL, Alexey Miller - CEO of Gazprom, Andrey Kostin - President of the VTB Bank, Suleiman Kerimov - a major shareholders of Polyus Gold.

Markets react

The immediate reaction to sanctions, in addition to a fall in the ruble against the USD and the crash of the share prices of the companies related to those individuals, has been the need for the companies to immediately revise their global operations in order to avoid confiscation of payments made in USD. 

For example, RUSAL apparently requested their international buyers (80% of the firm’s sales are outside of Russia) to stop sending payments in USD. They probably are asking firms to make payments in EURO or other currencies. The ruble came down by 10%. Shareholders of Russian companies with only GDR or ADR listings are particularly vulnerable since any inclusion in a sanctions list would result in them holding illiquid assets.

 The impact of these developments from a long-term point of view is probably a gradual move away from the USD as a payment method in favor of the Euro and even the Chinese RMB as China continues to internationalize its currency. In addition, Russian firms will also think twice about investing in the US in view of the possible risks.

Reverberations

Across emerging markets, the effects of this was felt more widely too, with the Turkish Lira reaching a record low, the Polish Zloty down and MSCI’s emerging markets benchmark was dragged lower.

Late last week in Asia, while stocks held out initially and remained buoyant, investor confidence dragged them down to lows to match their European markets.

Uncertainty in geopolitics is breeding concern among investors, however it also helps to present the opportunities. As investors, we need to be aware of these developments not only from a negative point of view but also a positive view.

Stock price drops could open up investment opportunities in firms not involved in nefarious activities or relationships but just caught up in the general negative Russian view.

Importantly, they also help us to spot opportunities further afield in other markets.