U.S. Funds Nervous About U.S. Sanctions On Russia

Several U.S. funds are concerned about the investment risk posed by potentially broad economic U.S. sanctions on Russia in response to Moscow’s actions in Ukraine.

According to Reuters, securities filings submitted by major funds show that fund managers believe that there is a major downside risk to investments in Russian assets. If the U.S. and Europe issue biting sanctions, they could cut into the Russian stock market, contribute to a devaluation of Russian currency, lead to a credit downgrade, or cause asset freezes.

These cautionary notes were found in filings submitted to the SEC by, among others, ING Russia Fund ($124.6 million) and SSgA Emerging Markets ($841.1 million). The filings were in response to U.S. securities regulators who inquired about exposure to Russian assets. The funds involved and the Securities and Exchange Commission all declined to comment.

Over the weekend, members of the U.S. Senate Foreign Relations Committee — one of them ranking Republican Bob Corker (Tennessee) — called for strong U.S. sanctions on Russia’s banking and energy sectors. Committee member Chris Murphy (Democrat-Connecticut) told NBC’s Meet the Press on April 20, “I think the time is now to rapidly ratchet up our sanctions, whether it’s on Russian petrochemical companies or on Russian banks.”

The markets have experienced a roller coaster ride in terms of the geopolitical risk over the last several weeks, as diplomatic moves that seemingly reduce tension give way to renewed tension on the ground in Ukraine.

The latest whipsaw occurred as an international agreementreached in Geneva on April 17 appeared to ease tension. But over the weekend, violence was reported in eastern Ukraine, where three people died in a shootout. Russia has nowaccused Ukraine of violating the accord. “Steps are being taken – above all by those who seized power in Kiev – not only that do not fulfill, but that crudely violate the Geneva agreement,” Russian Foreign Minister Sergei Lavrov said on April 21.

For its part, the Ukrainian government blamed the incident on outside forces backed by Russia. Two more bodies were found in a river in Donetsk on April 21 and appeared to be pro-Russian militants, according to the New York Times.

There are fears that the violence could lead to further confrontations between Russia and the West, which would raise the likelihood of economic sanctions and increase the investment risk to any funds exposed to the Russian economy.

This piece is cross-posted from OilPrice.com with permission.