The Market Vectors Russia ETF (NYSEArca: RSX), the largest and most heavily traded Russia exchange traded fund, is trading lower by 1.3% during Friday’s after-hours session after Moody’s Investors Service lowered its rating on Russia’s sovereign debt to junk status.
(1) The continuing crisis in Ukraine and the recent oil price and exchange rate shocks will further undermine Russia’s economic strength and medium-term growth prospects, despite the fiscal and monetary policy responses;
(2) The government’s financial strength will diminish materially as a result of fiscal pressures and the continued erosion of Russia’s foreign exchange (FX) reserves in light of ongoing capital outflows and restricted access to international capital markets;
(3) The risk is rising, although still very low, that the international response to the military conflict in Ukraine triggers a decision by the Russian authorities that directly or indirectly undermines timely payments on external debt service.
Moody’s completes the trifecta of major ratings agencies that have assigned junk credit ratings to Russia.
Last month, S&P lowered its rating on Russian debt to BB+, the highest junk rating, from BBB-, the lowest investment grade. That was after Fitch Ratings lowered Russia’s sovereign credit rating to BBB-, the lowest investment grade, with a negative outlook. Fitch previously rated Russian sovereign debt BBB. [Russia ETFs Fall After Fitch Downgrade]
To RSX’s credit, the ETF closed Friday’s traditional trading hours with a slight gaining, extending its 2015 surge to almost 23%. Not only is that a new bull market for RSX, but that performance is good enough to make the fund 2015’s best-performing non-leveraged ETF less than two months after finished 2014 as one of that year’s worst ETFs.
Some traders could be caught off guard by the Moody’s news as highlighted by Thursday inflows of $8.1 million into the Direxion Daily Russia Bull 3x Shares (NYSE: RUSL), the triple-leveraged equivalent to RSX. That was good for the third-best one-day creation activity among all triple-leveraged Direxion ETFs. [To Russia With Leverage]
Heading into Friday, RUSL was Direxion’s leading bullish leveraged ETF this month, but also the most volatile over the past 30 days, according to issuer data.
“The negative outlook on the Ba1 rating reflects Moody’s view that the balance of economic, financial and political risks in Russia is slanted to the downside, with scenarios incorporating either an escalation of the Ukraine crisis and/or damage caused by recent shocks being greater than in Moody’s baseline scenario. Essentially, the probabilities associated with the downside scenarios are higher than those associated with an upside scenario in which the recession is shorter and shallower than Moody’s baseline,” added Moody’s.
Market Vectors Russia ETF