The escalating events in the Crimea peninsula off Ukraine sent Russian equities and related exchange traded funds reeling, and things could get worse as the standoff continues.
Over the past week, the Market Vectors Russia ETF (NYSEArca: RSX) has declined 6.4%, the iShares MSCI Russia Capped ETF (NYSEArca: ERUS) decreased 8.4% and the SPDR S&P Russia ETF (NYSEArca: RBL) fell 7.0%. [From Russia With No Love: Russia ETFs Tumble Following Ukraine Invasion]
“The biggest economic loser from a protracted standoff between Russia and the west would almost certainly be Russia itself,” according to J.P. Morgan analysts Stephanie Flanders and Alexander Dryden.
The political crisis erased $58 billion from Russian equities in three days, and the ruble currency has depreciated almost 10% against the U.S. dollar since the start of the year.
In response to the quickly depreciating currency, the Central Bank of Russia has hiked rates by 150 basis points to 7%. While the rate change helps relieve pressure in the short-term, the economy could feel the pain in the longer term.
“Both Ukraine and Russia could see lasting economic and financial damage from a prolonged standoff,” J.P. Morgan analysts added. “If not quickly resolved, the crisis could also have long-term implications for Russia’s relations with the west.”
For instance, President Barack Obama has authorized financial sanctions against Russia and Eurozone officials have halted trade and visa talks, reports Chan Tien Hin for Bloomberg.
On Thursday, the bank downgraded its view of Russia to underweight from overweight. That despite the fact that Russian stocks are among the cheapest in the emerging world and are discounted relative to their history.
Fitch ratings agency also warns that the rising inflation, higher interest rates and capital flight out of Russia is increasing risks of a major slowdown, reports Mark Thompson for CNN Money.
“Capital flight could accelerate, particularly if the threat of economic and financial sanctions increased,” Fitch said. “While not our base case, were such sanctions to materialize, the potential impact on growth and investment could lead us to review our sovereign rating on Russia.”
Meanwhile, the increased geopolitical volatility has been a boon for the Direxion Daily Russia Bear 3x Shares (NYSEArca: RUSS), which takes an inverse three times leveraged, or -300%, daily return of Russian equities. Over the past week, RUSS has surged 16.7%. The ETF is up 69.1% year-to-date. [Putin Pushes Traders to Risky Russia ETFs]
Market Vectors Russia ETF
For more information on Russia, visit our Russia category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.