The Impact of Russia’s Invasion on Bond Indices

March 17, 2022 | Frank Valle, CFA, CAIA, Senior Research Analyst

Five-line chart showing JPMorgan index weights of various Russian and Ukrainian bond indices. Chart subtitle: Russia’s weight in JPMorgan’s bond indices has fallen sharply ahead of removal at month-end. Chart visual description: Y-axis shows Index Weight in percentage, ranging from 0% to 10%. X-axis shows dates by six-month interval, from December 2016 to December 2021 (data through March 4, 2022). Russia EMBI Global line in blue; Russia CEMBI BD line in light blue; Russia GBI-EM line in very dark blue; Ukraine EMBI Global line in brown; Ukraine CEMBI BD line in tan. Chart data description: At chart data start in 2016, Russia indices weights' were between 5-7% for all three indices displayed, and Ukraine's were 0.5% and 2%. As of March 4, 2022, Russia EMBI Global was at 0.6%, Russia GBI-EM was at 0.5%, Russia CEMBI BD was at 1.0%, Ukraine EMBI Global was at 0.3%, and Ukraine CEMBI BD was at 0.3%. Source: JPMorgan.

Russia’s invasion of Ukraine has meaningfully altered the emerging market landscape. At the start of the year, Russia and Ukraine combined had comprised almost 5% of the hard-dollar index, JPMorgan EMBI Global, and the hard-dollar emerging market corporate index, JPMorgan CEMBI, with 3–4% in Russia and roughly 1% in Ukraine. In local markets, represented by the JPMorgan GBI-EM, Russia was approximately 7% of the index, while Ukrainian local bonds were scheduled for index inclusion at the end of March.

Since the invasion in February, Ukrainian debt, already stressed, has fallen further, and now represents less than 0.5% of the hard-dollar indices. Its inclusion in the local index is on hold until further review due to market disruptions. Foreign sanctions and self-imposed capital restrictions have pushed Russian dollar debt to distressed levels, with Russia unlikely to pay external debts in hard dollars. Local bonds are still trading near par, though a weakening currency has reduced the value to international investors. At present, Russia represents no more than 1% in the hard-dollar or local indices and will be removed by JPMorgan entirely at month-end as sanctions have made the debt illiquid and uninvestable. Belarus is also facing removal from JPMorgan’s ESG indices for its role in the conflict.

Managers face a tough decision regarding holdings in Russia. The local bond market is frozen for international trading. Although local bonds are trading near par in the domestic market, many managers are pricing holdings at zero. External debt is distressed but the market continues to function and there have been bright spots, with Russian energy giant Gazprom redeeming a bond, priced down to 50 cents on the dollar, at par on March 7th. With the write-down already taken and the removal from indices, Russian debt could be a source of upside in a recovery scenario, though uncertainties and risks certainly remain. Prudent risk management and process consistency remain key factors for Marquette as we analyze and recommend funds to clients.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Frank Valle, CFA, CAIA
Senior Research Analyst

Get to Know Frank

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

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