Russia Faces Specter of Index Demotion...Again

For the second time this year, Russian stocks are facing the possibility of being dumped from major emerging markets indexes.

Last week, MSCI (NYSE: MSCI) said the possibility of capital controls being introduced in Russia could prompt the index provider to drop Russian shares from the MSCI Emerging Markets Index, the benchmark for the iShares MSCI Emerging Markets ETF (NYSEArca: EEM). EEM is the second-largest emerging markets ETF by assets.

“The introduction of restrictive measures, such as capital or foreign-exchange controls, which may lead to a material deterioration of Russian equity market accessibility, may lead to the exclusion of the MSCI Russia Index from the MSCI Emerging Markets Index,” MSCI said in a statement, reports Chiara Albanese for the Wall Street Journal.

Last Tuesday, 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. [An Interesting Day for Russia ETFs]

Russia currently accounts for 3.32% of EEM, or 28 basis points less than the ETF allocates to Malaysia, according to iShares data. Eight countries have larger weights within EEM than does Russia.

MSCI is not the first major index provider to mull excluding Russian stocks from marquee international benchmarks. 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.