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What Happens to Indexes and Funds That Need to Dump Russia?

The Russian ruble at an exchange bureau in Moscow, Russia, on Feb. 28.

The Russian ruble at an exchange bureau in Moscow, Russia, on Feb. 28.

Photographer: Andrey Rudakov/Bloomberg
Updated on

Russia’s expulsion from much of the world’s financial system presents a vexing problem for the global index business -- and for the funds that track them. Providers of these closely watched collections of stocks or bonds -- followed on autopilot by trillions of dollars in passive investments, and used as a benchmark for trillions more in active strategies -- are grappling with whether and how to extract the country’s securities. As some begin stripping out these practically untradeable assets, it’s causing big problems.

Indexes are replicated, tracked and competed against by investment vehicles ranging from U.S.-based exchange-traded funds (ETFs) to Middle Eastern sovereign wealth funds to Asian pension funds. Even though Russian assets account for a small percentage of broad emerging-market indexes, it’s a huge amount of money. An estimated $842 billion in assets tracks JPMorgan Chase & Co.’s bond indexes -- gauges that are now set to cut Russian bonds. Index provider MSCI Inc. -- which is ditching Russian equities from its emerging-market gauge -- has more than $16 trillion in assets benchmarked to its products overall. Beyond dollars, the indexes are also an important symbol of acceptance in the mainstream global financial community.