Buying Financial Assets Tied to Russia Isn't Totally Irrational
The returns are potentially huge, but there’s the question of whether it’s the moral thing to do.
Is it smart to buy the dip in Russian assets?
Photographer: Hy Peskin/Archive Photos/Getty Images
After Russia invaded Ukraine and the Russian stock market shut down, U.S. investors piled into the VanEck Russia ETF to “buy the dip.” That turned out to be unwise, as sanctions by western companies effectively isolated Russia from global capital markets, rendering local equities mostly worthless. It was one of the dumber things I’ve seen in a while, but not totally irrational.
When a financial instrument becomes very distressed, volatility increases. For example, if Russia had suddenly halted the invasion and made peace with Ukraine, those who bought shares in the VanEck Russia ETF would have enjoyed some huge gains. Instead, the shares tumbled, faling from around $25 a share to around $5.50 a share. Here’s how professional investors think about it: In times of stress, the underlying distribution becomes very flat, meaning very good or very bad outcomes are equally likely. In other words, optionality increases.