Russia's exclusion from SWIFT system to hit local Russia funds
The sign for the Society for Worldwide Interbank Financial Telecommunications (SWIFT) is seen outside the company's headquarters in Brussels on Feb. 20, 2007. The U.S., EU and U.K. agreed on Saturday to block selected Russian banks from the SWIFT global financial messaging system and to impose restrictive measures on its central bank in retaliation for its invasion of Ukraine. AP-Yonhap
By Anna J. Park
The U.S. and EU have agreed to remove selected Russian banks from SWIFT ― the Society for Worldwide Interbank Financial Telecommunication, which enables secure cross-border settlement and payments ― as part of joint sanctions against Russia, imposing severe limits on Russian-denominated assets and the country's capacity to access international reserves.
Russia's oil and gas exports are heavily reliant on the SWIFT system, which facilitates global transactions between more than 11,000 banks and financial institutions around the world.
The removal of Russia from the SWIFT system is not only expected to wreak havoc on targeted Russian financial institutions, but also deliver a heavy blow to local mutual investment funds and ETFs related to Russia. Around 150 billion won ($125 million) worth of local retail investors' money is parked in Russia-related mutual fund products in Korea.
The so-called Russia funds enjoyed the height of their popularity among retail investors in the late 2000s with over 820 billion won being invested, yet the amount of the assets under management has since decreased. However, the funds saw an influx of money in 2021, with the rise of raw materials prices.
Some of the representative products are Hanwha Russia Securities Feeder Investment and Kiwoom Russia Explorer Securities Investment. Both mutual funds displayed a three-month investment return of about minus 20 to minus 25 percent, as of last Thursday.
Since the figure did not reflect the Russian stock market's plunge late last week, the funds' losses could grow in the coming weeks.
KINDEX MSCI Russia ETF ― Korea's only ETF product related to the Russian market ― also witnessed a plunge in its net asset value (NAV) on Friday. Despite a temporary increase in demand for the ETF among local investors late last week, seeking short-term gains following the Russian stock market's major plunge earlier in the week, the ETF's price is set to be in tune with its NAV in the end, which experienced a significant drop of more than 40 percent last week.
Market analysts say such losses could expand with Russia's removal from the SWIFT system, as it means the mutual funds and ETF products would now be suspended from redeeming their original principal invested in Russian securities assets.
“As Russia's market volatility has been accelerated, the price gap between the trading price of the Russian ETF in the local stock market and its NAV could be widened to an extreme degree,” a local market analyst said warning of unpredictable market conditions, adding that additional joint sanctions by the U.S. and EU against Russia could worsen the situation.
Bill Ackman, a billionaire American hedge fund founder, also warned that bank runs could begin in Russia in the coming week due to the removal of some of the county's lenders from the SWIFT system.
“Once a bank can't transfer or receive funds from other banks, its solvency can be at risk. If I were Russian, I would take my money out now. Bank runs could begin in Russia on Monday,” Ackman wrote in his Twitter message on Saturday, local time.