MSCI consultations on Russia treatment that we would like share.
MSCI was flagging for a while that it would downgrade Russian shares into FM universe. Yesterday it announced that it will be launching MSCI GEM ex Russia and MSCI ACWI ex-Russia indexes. Which is slightly better outcome than to outright downgrade of Russia to FM index. But still pretty negative as Russia is singled out from investment universe in the ex-Russian indexes.
Yesterday it also announced consultation to remove VTB bank as soon as practical as VTB votes to approve issue of new equity, the development that will be quite unfortunate for VTB if investors communicate to MSCI that they want to take the path of deletion of VTB from Russia universe.
While MSCI said that Rosneft and Novatek are safe so far.
Here is the release. THIS IS AN ANNOUNCEMENT FOR THE MSCI GLOBAL STANDARD INDEXES
CONSULTATION REGARDING THE TREATMENT OF THE MSCI RUSSIA INDEX IN THE CONTEXT OF NEW US ECONOMIC SANCTIONS
On July 29, 2014, the US Department of the Treasury imposed sanctions on additional entities in connection with events in the Ukraine and Russia. VTB Bank OAO, which is currently a constituent of the MSCI Russia Index, is among the entities included in the July 29, 2014 sanctions. According to the announcement made by the US Department of the Treasury, the measures "prohibit US persons and persons within the United States from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity for VTB Bank OAO, their property, or their interests in property".
Under the July 29, 2014 restrictions, in the event that VTB issues new equity, the possible comingling of existing equity and new equity in the secondary market and potential difficulty in the identification of newly issued VTB Bank (Rub) shares traded on the secondary market may pose challenges for some market participants to remain in compliance with the above mentioned restrictions. Given this potential impact on the trading of VTB Bank (Rub) on the secondary market for some international equity investors, one proposal being considered by MSCI is to delete VTB Bank (Rub) from the MSCI Russia Index as soon as practicable.
Another proposal is to maintain VTB Bank (Rub) in the MSCI Russia Index until the first issuance of new shares. However, this may result in insufficient time to implement the deletion of VTB Bank (Rub) from the MSCI Russia Index, following the announcement of the potential offering of new shares.
MSCI will seek feedback from the investment community on this matter by August 7, 2014. MSCI will announce its decision on the treatment of VTB Bank (Rub) on August 8, 2014.
MSCI also announced today the launch of new composite indexes that exclude Russia, such as MSCI ACWI ex Russia and MSCI Emerging Markets ex Russia, for clients desiring to avoid exposure to Russian securities. These indexes are available upon request for subscribing clients through Integrated Client Files (ICF).
As a reminder, on July 16, 2014 the US Department of the Treasury announced sanctions on selected entities. The official release stated that the US Department of the Treasury "imposed a broad-based package of sanctions on entities in the financial services, energy, and arms or related materiel sectors of Russia, and on those undermining Ukraine's sovereignty or misappropriating Ukrainian property".
Rosneft (Rub) and Novatek GDR (USD), which are current constituents of the MSCI Russia Index, are among the entities included in the July 16, 2014 sanctions. According to the announcement made by the US Department of the Treasury, the measures "prohibit transacting in, providing financing for, or otherwise dealing in new debt - issued on or after July 16, 2014 of greater than 90 days maturity", however the measures do not impose restrictions on new or existing equity of these companies.
After consultation with market participants, MSCI will maintain Rosneft (Rub) and Novatek GDR (USD) in the MSCI Russia Index as the investability of these two companies is not currently impacted. Source: msci.com
Good luck! And don’t stay out of the market for too long. As the policy of being too cautious is the greatest risk of all.
Ovanes Oganisyan research@midlincoln.com
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