Russia ETFs Crumble on New Sanctions, What Lies Ahead? - ETF News And Commentary

While the ceasefire deal signed between Russia and Ukraine early in the month cooled off the five-month long bloody conflict, Russian woes are likely to continue spiraling, at least for the short term.

This is especially true as the U.S. and European Union once again imposed a new round of sanctions to punish Russia given the latter's direct military intervention and continued efforts to destabilize Ukraine. The new sanctions target Russia's largest bank as well as the financial, energy and defense sectors (read:

).

The U.S. tightened the maximum credit duration from 90 days to 30 days for Russia's biggest bank – Sberbank – as well as five other banks – Bank of Moscow, Gazprombank, Russian Agricultural Bank, VEB, and VTB Bank. The U.S. also blocked the assets of five Russian defense firms, in particular those which develop anti-aircraft systems.

Further, the U.S. restricted exports of American goods, services and technologies to five Russian energy companies – Gazprom, Gazprom Neft, Lukoil, Surgutneftegas, and Rosneft and forbade the offering of finances to Rostec, which deals in industrial technology products (read:

).

On the other hand, the EU put a ban on the three major oil firms – Rosneft, Transneft and Gazprom – and defense enterprises – Uralvagonzavod, Oboronprom and the United Aircraft Corporation – to raise long-term debt from the European capital markets. It has also penalized Moscow by freezing personal assets and banning travels for more Putin's allies. Additionally, the EU has forbidden future EU-Russia arms deals and exports of dual-use equipment for military use in Russia.

Canada also joined the anti-Russia league this week, targeting four individuals, five organizations and one financial institution.

The latest round of sanctions pushed Russian stocks down and sent its currency to an all-time low against the greenback. Notably, the ruble has fallen as much as 14% since the start of the year (read:

).  

The terrible trading in the stock market sent the Russia ETFs space into deep red over the past week. In particular,

stole the show falling 5.1%, followed by losses of 4.3% for

, 3.8% for

and 3.7% for

. Also, these products have been the worst performers in the international space from a year-to-date look.

The stepped-up Western sanctions, no doubt, are prompting capital outflows at an accelerated pace and further weakening of the currency. As per economist Alexei Kudrin, who served as finance minister under president Vladimir Putin for 11 years until 2011, investors will likely pull out $110 billion capital this year, almost twice the outflow of $61 billion last year (read:

).

The penalties also raised concerns about the long-term economic slowdown. This is because the sanctions could send Russia into a recession for a year or two due to limited opportunities for investment, declining oil prices, rising inflation, dropping deposit growth, weak earnings, falling consumer confidence and lack of growth drivers.

Moreover, the market is speculating that new sanctions have increased the chance of stronger retaliatory bans from Russia that could hurt domestic economic spending and weighs on economic growth. A similar situation was seen a month ago when Russia imposed a tit-for-tat ban on food imports of dairy products, meat and vegetables from the EU and the U.S., causing price raises for some items (read:

).

Given the bout of volatility and anxieties, it seems that Russia wouldn't return to growth unless it implements new reforms or Russia agrees to deescalate tensions in Ukraine. Further, all the four non-leveraged funds mentioned above have a Zacks ETF Rank of 4 or ‘Sell' rating, suggesting that more pain is in store and that their underperformance will continue in the months ahead.  

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