Russia Invasion Of Ukraine Hits Related ETFs

March 03, 2014

Equities and commodity ETFs jump on geopolitical tensions.

Russia invaded the Ukraine beginning on Friday, sending troops to the economically troubled country. While it remains unclear whether this will prove to be a temporary invasion or the beginning of a war, the move prompted a sell-off in global risk-assets Monday, and a surge in commodities prices, from gold to oil to grains. A roster of ETFs reflects that geopolitical tension.

Funds serving up exposure to the broad Russian equities market such as the $13 million SPDR S&P Russia ETF (RBL | D-65), the $262 million iShares MSCI Russia Capped ETF (ERUS | C-92) and the $811 million Market Vectors Russia ETF (RSX | C-62) remained under pressure.

RBL plunged 7.45 percent Monday, while ERUS, a pureplay on Russian companies, and RSX, a broader portfolio including companies listed outside of Russia, slipped 7.7 and 6.8 percent, respectively, on the day. These funds had already declined more than 15 percent since the beginning of the year before the invasion took place. They are each now more than 21 percent lower year-to-date.

Investors have been so negative on Russian equities as tensions mounted between that country and Ukraine that a fund like the Direxion Daily Russia Bear 3x ETF (RUSS) now finds itself among the year’s top 10 best-performing strategies. Coming into Monday, RUSS, which serves up a triple leveraged bet against Russian stocks, had seen gains of roughly 44 percent since the beginning of the year, making it the fifth-best-performing ETF of 2014. On Monday, RUSS rallied another 21.2 percent.

The latest blow to these funds came as the Russian stock market slipped more than 12 percent coming into Monday, following a plunging local currency, and a sudden hike in interest rates there. The weakness was tainting other stock markets around the globe.

RSX_YTD_Performance

Chart courtesy of StockCharts.com

Russia’s military invaded and took control of the Crimean Peninsula over the weekend, a region in Ukraine that used to be part of Russia’s territory until the mid-1950s. The Ukraine is nearly bankrupt, and the now-Western-leaning country is torn between its heavy dependence on Russia and on Europe economically.

It seems Russian leader Vladimir Putin is determined to keep Ukraine dependent on Russia’s influence, although Tuesday morning Putin seemed to be backing down to ease markets, according to media reports. Either way, in a book published in 2009, "The Next 100 Years," Stratfor's George Friedman was already forecasting trouble in the region.

"Russia will not become a global power in the next decade, but it has no choice but to become a major regional power," Friedman said in the book, and in the excerpt Stratfor is circulating today. "And that means it will clash with Europe."

As Friedman sees it, the Russian-European frontier remains a "fault line," and Russia will continue to work towards recovering the influence it once had over the former Soviet Union.

“As Russia conducts direct military intervention in Ukraine, the U.S. and Europe condemn it, and the Ukrainian army goes on high alert, we’re witnessing the most seismic geopolitical events since 9/11,” Eurasia Group’s Founder Ian Bremmer said in a statement published on Business Insider today.

“A big part of the problem is that Russia is a declining power, and it’s in the West's best interest to let that slowly play out over time,” he continued. “But the recent response on Ukraine pushed too hard, prompting President Vladimir Putin to retaliate with a decisive response. To say the U.S.-Russia relationship is presently broken is an understatement.”

Bremmer echoed concerns also expressed by U.S. Secretary of State John Kerry, who was quoted as saying that foreign ministers of the G-8 and others are unified on this issue, and are going to “isolate Russia.”

Beyond equities, commodities-focused strategies tapping into everything from oil to gold to grains such as corn and wheat—Ukraine is a large wheat producer—were also reacting on the news. The SPDR Gold ETF (GLD | A-100) gained 2 percent on Monday, while the United States Oil Fund (USO | A-99) was up 2.1 percent.

Grains markets such as corn and wheat futures were also posting solid gains. Ukraine is a major producer of corn and wheat. The broad PowerShares DB Agriculture Fund (DBA | B-39) ended Monday 2.5 percent higher. The fund is now up 15.7 percent year-to-date.

 

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