MSCI Russia reclassification to stand-alone market comes into force

Mar 09, 2022
Country’s ESG rating also downgraded as result of ‘increasing financial isolation,’ says index provider

Effective today, Russia has been reclassified by MSCI from emerging markets status to stand-alone markets status. The global index provider took the action following a consultation with international institutional investors on ‘the accessibility and investability of the Russian equity market’ following Russia’s invasion of Ukraine on February 24.

As MSCI announced its plans last week, FTSE Russell also said it would remove Russian stocks from its indexes, with the London Stock Exchange suspending trading in dozens of companies.

Yesterday the US announced a ban on Russian crude oil, while the UK announced that it would phase out Russian oil by the end of the year. The latest measures come on top of mounting sanctions as well as steps by global companies operating in Russia to at least temporarily shut down operations. Giants McDonald’s, Coca-Cola and Starbucks are the latest to halt sales in the country.

MSCI launched a consultation with global market participants, including asset owners, asset managers, broker dealers and exchanges following the invasion. It says the ‘overwhelming majority’ confirmed that the Russian equity market is currently uninvestable and that Russian securities should be removed from the MSCI Emerging Markets Indexes.

It adds that it already calculates more than 100 global and regional indexes that exclude Russia, including MSCI Emerging Markets ex Russia, MSCI EM EMEA ex Russia and MSCI EM Eastern Europe ex Russia.

In a press release announcing the decision, MSCI took the opportunity to ‘remind users of its indexes… that they are responsible for ensuring compliance with all applicable sanctions and any other rules, regulations, prohibitions, laws and other restrictions.’

ESG country score

MSCI has also downgraded both Russia and Belarus’ ESG country ratings to CCC – the lowest rating possible. Both had a BB rating prior to Russia’s invasion of Ukraine, and MSCI downgraded Russia’s ESG country score from BB to B on February 28.

‘Since the downgrade to B on February 28, we have observed further heightening of Russia’s ‘economic environment’ and ‘financial governance’ risks based on the widening domestic impact of international sanctions and financial isolation on Russia’s economy,’ says MSCI.

It adds that these include but are not limited to ‘the decision by the US, the UK, Canada, France, Germany, Italy and the European Commission to prevent the Russian central bank from using its international reserves (valued at $630 bn in January 2022)…; sanctions placed on Russian individuals and companies by the US, the EU and other countries; the barring of seven major Russian banks from the SWIFT payments system and the withdrawal of major international companies, including Visa, Mastercard, BP, KPMG, PwC and HSBC.’

There are also concerns some of the historic quantitative data used in MSCI’s ESG methodology is now inaccurate, creating a higher degree of uncertainty – and therefore risk – for these metrics.

MSCI ESG Government Ratings reflect how a country’s exposure to and management of ESG risk factors may affect the long-term sustainability and competitiveness of its economy, says the firm, with its methodology applying a 50 percent, 25 percent and 25 percent weight for the governance, social and environmental pillars, respectively, for all countries.

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