Exchange traded funds with exposure to Russian equities have suffered a significant blow from the fresh sanctions imposed on several Russian enterprises by the US government earlier in the month.
Russia stock ETFs have fallen back around 10% after the US Treasury announced on 6 April it is imposing new sanctions on seven Russian oligarchs and 12 companies they own or control, reportedly for their “ongoing and increasingly brazen malign”. The move marks the toughest sanctions against Russia since Donald Trump became US President and affect President Vladimir Putin’s inner circle, including his son-in-law.
The sanctions were partly triggered by escalating tensions between the US and Russia over a suspected chemical attack in Syria, with the American government accusing Putin of supporting Syrian President Bashar Al-Assad.
Since then, the US has also put pressure on UK banks, urging them to refuse to conduct business with the sanctioned companies and individuals if they want to continue their working relationship with the US, in an attempt to deal a fresh blow to the Russian elite.
Russian equity market hit, but begin to rebound
The news caused the biggest daily stop in Russian equity ETFs in several years, while Russia’s RTS index suffered an 11% fall in one day following the news, according to Bloomberg. Some open-ended funds with exposure to Russia were hit even more – for example, the UK’s only fund investing solely in Russian equities, Neptune Russia and Greater Russia, fell 15.6% over two days.
However, since then Russian markets and funds have seen a rebound in performance, as Trump’s threats had an unexpected consequence that played into Russia’s hands, having inadvertently raised the price of oil. The price of Brent crude oil jumped to a three-year high last week on the back of escalating tensions in the Middle East (as of 15 April the price sits at $72.58 per barrel).
For funds that are made up of 40% Russia-focused oil and gas companies, such a rise is extremely beneficial. As a results, 12 April saw Russian Stock ETFs rise some 4.5%, bringing the total return over the year to date to 17.6% – still far higher than developed equities.
Russia ETF flows remain positive year to date
Meanwhile, despite the huge falls in performance, Russian Stock ETFs have continued to see inflows over recent weeks, and over the year to 13 April cumulated flows sit at €243 million.
Even for Russia Large Cap ETFs, which have been more heavily affected by sanctions given their higher exposure to large oil and gas companies and are down 0.3% over the year (see chart below), overall sales have also remained positive over the year and the month to date, sitting at €689 million and €10.7 million, respectively.