In response to the atrocities taking place by the Russian government and army, there is an overwhelming call for governments of free and open democracies to implement punitive sanctions on Russia. To date, there has been an almost united front amongst most of these governments to implement sanctions aimed at halting Russia’s invasion into Ukraine. Some of these include:
· Sanctions on Russia’s main development bank and its military bank, and enacting comprehensive curbs on Russia’s sovereign debt, a move intended to cut off the country from Western financing.
· Removal of large Russian banks from Western financial markets and removing some Russian banks from the SWIFT financial messaging system, essentially barring them from international transactions.
· Sweeping restrictions on technological imports.
· Freezing trillions of dollars in Russian assets, enacting a crackdown on the Russian elite and their families.
· Sanctions aimed at Sergey Lavrov and Vladimir Putin personally freezing their assets.
· Imposing new restrictions on Russia’s central bank to prevent it from using its large international reserves to undermine sanctions agreed bilaterally by the European Commission, Britain, Canada, France, Germany, Italy and the United States.
· Sanctions on the Russian Direct Investment Fund, a sovereign wealth fund that is run by a close ally of Vladimir Putin.
The underlying strategy is to make Russia’s invasion of the Ukraine as expensive as possible whilst avoiding a direct military confrontation with a nuclear armed enemy.
It’s unclear if these types of sanctions will be effective. The Russian share market, as measured by the MSCI Russia Index (gross div.), is down 60% from its most recent high in October 2021, including being down 53% in February alone. The sanctions are some of the harshest ever seen, and are endeavouring to avoid the mistake of assuming that Russia will stop its offensive, given its recent history in Crimea, Syria and Georgia.
On 24 February 2022, the Moscow Stock Exchange suspended trading until further notice. At the time of publication, the exchange had yet to reopen. There are also several depositary receipts traded around the world that enable foreign investors to gain exposure to foreign entities. This exposure is through securities listed on the investor's local exchange (for example New York or London). Again, at time of publication, these large Russian depositary receipts have seen their price decimated (eg.Sberbank -90%, Gazprom -75%) at 20-50x normal trade volumes, as foreign investors have sought to unwind their positions.
The question for many of our clients is,what are the investment fund managers we use doing about their exposure to assets in Russia?
Consilium portfolios (including Synergy) contain four managers with strategies that potentially take exposure to Russian companies in their funds.
Through these funds, Consilium’s portfolios’ overall exposure to Russia is minimal, between 0.02% and 0.32%. In other words, a current exposure of just 2 cents to 32 cents for every $100 invested. Russian exposure across the different suites is currently as follows:
However, the Russian invasion has led fund managers to quickly review their investment approach. Below we summarise each manager’s response to this unfolding situation. Bear in mind that this is still a very fluid situation, and we expect each approach to be subject to further change as more information emerges.
Summary
This is a very dynamic situation with new sanctions, index and fund manager policy changes coming out daily. Consilium have no doubt that as the direct result of Russia’s actions, should they remain on their current course, Russia will be forced to exit the Western financial system. And with that exit, our exposure to Russian securities will reduce to zero. Our position as the Consilium Investment Committee with oversight over the asset allocation has been, and will continue to be, to advocate for this outcome in our calls and interactions with the various fund managers discussed above.
