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Russia ETFs Could Be Pressured Amid Rising Sanction Threats

This article was originally published on ETFTrends.com.

Russia ETFs have strengthened in recent weeks, but the threat of potential sanctions could drag on the emerging market.

Over the past month, the VanEck Vectors Russia ETF (RSX) gained 6.6% and iShares MSCI Russia Capped ETF (ERUS) rose 7.2%.

Despite its recent rebound, Russian markets still face hurdles. Russia's largest lenders, state-owned Sberbank and VTB, saw outflows of foreign currency deposits in August on a depreciating rouble currency and rising concerns over new U.S. sanctions, Reuters reports.

“Moderate funding outflows from larger state banks were presumably driven by concerns over potential new sanctions,” Fitch ratings said in a note.

Anxiety over an extension of U.S. sanctions on Moscow has sent the rouble to its lowest levels since 2016. Traders may be concerned that the sanctions would possibly target Russian state banks and holdings of Russian government bonds.

The rouble has depreciated 13.4% against the U.S. dollar and was trading around RUB66.59 against the USD after hitting RUB69 compared to RUB62 in early August.

The amount of foreign currency that retail clients held in Sberbank slipped by $1.1 billion in August to $33 billion while the bank’s corporate forex deposits diminished by $2.2 billion to $55 billion.

Sberbank’s Deputy Chief Executive Alexander Morozov stated last month that concerns over fresh U.S. penalties, fueled volatility in the foreign exchange market. Meanwhile, the seasonal demand for foreign currency over summer holidays had driven outflows from households’ foreign currency deposits.

Investors who are wary of the potential negative effects U.S. sanctions may have on the Russian economy could look to an inverse or bearish ETF bet to hedge downside risks. Specifically, the Direxion Daily Russia Bear 3x Shares (RUSS) looks to deliver triple the daily inverse returns of the same index tracked by RSX.

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