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Russia ETFs After S&P Revises Outlook, Warns of Junk Rating


Shares of the Market Vectors Russia ETF (RSX) are off 3% in midday trading after Standard & Poor’s placed Russia’s sovereign debt on CreditWatch with negative implications, indicating Russia could lost its already tenuous grasp on its investment-grade credit rating.

In April, Standard & Poor’s lowered its rating on Russian sovereign debt to BBB-, the lowest investment grade. It was the first time the ratings agency has downgraded Russia since 2008. Russia’s BBB- rating is the same as fellow BRIC members Brazil and India, but it looks like Russia is the most vulnerable to being lowered to junk status. [Russia ETFs Slide After S&P Downgrade]

S&P’s move to put Russia on CreditWatch negative reflects the ratings agency’s “view that there is at least a one-in-two likelihood of a negative rating action within 90 days,” according to S&P.

“The CreditWatch placement stems from what we view as a rapid deterioration of Russia’s monetary flexibility and the impact of the weakening economy on its financial system,” said S&P.

In late July, S&P Dow Jones Indices, one of the largest providers of indices for use by exchange traded funds, consulted with clients regarding the inclusion of Russian securities in S&P indices in the wake of broadening economic sanctions against Russia.

In August, S&P announced it would ot remove Russian stocks from the firm’s various benchmarks following the aforementioned consultation. [S&P Keeps Russian Stocks in its Indices]

However, it was recently reported that MSCI (MSCI), another major index provider to ETF issuers, is mulling the removal of Russian stocks from its MSCI Emerging Markets Index, one of the most widely followed benchmark’s of emerging markets equities in the world.

Last week, in an effort stem ruble declines, Russia’s Central bank boosted its benchmark interest rate to 17% from 10.5%. The rate hike was the second since the previous Thursday and in the span of less than a week Russian borrowing costs more than doubled from 8%. The drastic move by Russia’s central bank spurred speculation it was not done moving to save the flailing ruble and that future moves could include capital controls.

It won’t be long before investors know the results of S&P CreditWatch placement of Russian debt as the ratings agency expect to resolve that placement by mid-January.

Bond ETFs with exposure to Russian debt include the ProShares Short Term USD Emerging Market Bond ETF (EMSH) and the Vanguard Emerging Markets Government Bond ETF (VWOB) .

Market Vectors Russia ETF