JPMorgan Chase has announced that it will remove Russian debt from its widely used bond indexes as the latest move to exclude the country from the global financial system after Vladimir Putin went to war with Ukraine.
The bank will exclude Russian sovereign and corporate bonds from all of its fixed income indices from March 31 following similar announcements from index providers including MSCI, S&P Dow Jones Indices and FTSE Russell.
The imposition of sanctions on Russia has made its debt illiquid and almost unsuitable for investment, and has also led to the default of many of its bonds.
Crucially, the decision will remove Russian bonds from JPMorgan’s corporate and sovereign hard currency indices, as well as from its emerging market debt index. The JPMorgan Emerging Market Indices are among the most popular among fixed income investors and serve as an industry benchmark.
Russian and Belarusian debt will also be excluded from emerging market indices that comply with environmental, social and governance criteria (ESG).
Pramol Dhawan, head of emerging markets portfolio management at Pimco, said he expected Russia to be excluded because it “does not meet the liquidity or liquidity criteria that the index has.”
Russia makes up 0.83% of the JPMorgan Emerging Markets Bond Index, which tracks about $415 billion in assets. The exception itself is unlikely to affect the value of the index. The PricingDirect service, which evaluates JPMorgan indices, has been steadily reducing the cost of Russian bonds.
Investors were alerted to the possible exception over the weekend when JPMorgan sent out a link to SurveyMonkey to solicit investor feedback as it discusses Russian debt write-offs, people familiar with the process say.
This feedback process is common because index providers don’t want to create unintended shocks for the many investment funds that track their benchmarks directly, but it usually takes months. Earlier this month, JPMorgan placed Russian bonds in its indices under review for a possible exclusion.
Russia is unlikely to be able to return to these indexes anytime soon, even with a ceasefire and lifting of sanctions, people familiar with the process say. When the US government imposed sanctions on Venezuela, JPMorgan reduced the weight of the country in the indices to zero in 2019, but, unlike Russia, did not exclude it completely.
“This is a serious limitation to remove it from the indexes,” Dhawan said. “The road to return is incredibly long and narrow.”