Looking at the Impact of the Russia-Ukraine Conflict Through the Lens of Index Providers

Because indices follow a rules-based approach, some may consider index management to be on autopilot; however, this is far from reality. Index management ensures indices remain investable, replicable and true to the objective at all times. Therefore, index management needs agility to respond to global events and regulatory changes. It is important for index providers to keep track of current events, gather and process information, analyze the impact and make necessary adjustments while respecting the core principles of an index.

The ongoing Russia-Ukraine situation has created a dynamic scenario in which index providers must consider all the aspects impacted in index management and respond accordingly.

Below, we summarize some of the aspects that require greater attention of index managers and explain why these aspects are impacted and how to course correct. We also cover specific points for equity and debt indices, other asset classes and impact on ETF providers. Additionally, we touch upon some key considerations that index providers may use for reducing their business continuity risk.

Impact on Equity and Debt Indices:

For equity and debt indices, three scenarios are being monitored by index providers:

1.       Financial sanctions imposed by the US, the UK and EU on Russia

2.       Banning the sale of Russia-listed securities held by foreign investors by Russia

3.       Trading suspension of the Russian and the Ukrainian stock markets

Russian stocks listed both in and outside of Russia as well as depository receipts (DR) listed globally have now become difficult to trade. The sanctions and following actions by stock exchanges such as the NYSE, Nasdaq and LSE have resulted in a trading suspension of Russian-domiciled stocks and listed Russian DR. Russia has banned the sale of securities by foreigners, so foreign market participants cannot access the Moscow Exchange (MOEX) freely. Russia also announced the closure of its stock market from February 28 to March 9, 2022. The stock market in Ukraine has also halted trading operations. Hence, the Ukraine market has also become inaccessible. The index management teams are monitoring these scenarios and evaluating various options to manage their indices.

On a similar note, Russia debt securities (both sovereign and corporate) are included in various emerging market bond indices, which are linked to billions of dollars of AUM. These debt securities would be removed, or no new issues would be added to the indices. For example, JP Morgan informed that new debt securities from Russian entities that face sanctions will be excluded from the JPMorgan Emerging Market Bond Index (EMBI), which is the underlying index for an estimated $415 billion of assets.

For this article, we classify indices based on exposure and outline the affected aspects of index managements for each set of indices and the associated actions for index management teams:

1.       Indices that include Russian securities

2.      Indices that include Ukrainian securities

3.     All other indices


Scheduled Rebalance: Indices with Russian securities that are scheduled for rebalancing would need to consider “freezing” all adds/drops pertaining to such securities.

Corporate Action Adjustments: Corporate action adjustments such as changes in float factor, changes in shares and rights issue in which market participation is required would have to be halted. However, changes such as bonus and stock splits that do not require direct participation in the market can be implemented.

Country Classification: Country classification is done by index providers based on various parameters. Market accessibility is one of the important parameters. Russia’s country classification is under review and will likely be reclassified from an Emerging Market to a Standalone Market. Consequently, Russian securities would have to be removed from the global indices. Since Russian exposure cannot sold in the market, index provider should either freeze the holdings or remove them at a zero price.  

Diversification Constraints: Indices with weight capping on security, sector and country can undergo weight re-alignment only when all the constituents have free market access. Indices with Russian securities will face challenges managing pre-defined diversification limits.

Index Levels: Indices that have halted/suspended Russian securities can be calculated using the last available price until a decision is made to drop them from the index. Calculation of indices with only Ukraine securities is on halt. All global indices with Ukrainian stocks can be calculated using the last available prices. Ukraine is classified as a Standalone Market by major index providers, hence not many major global indices have Ukraine-listed stocks.

Volatility Triggered Rebalances: The conflict has increased volatility in the global markets. Several complex indices that get the signal to rebalance from the volatility threshold breach may undergo rebalancing.

Sanity Breaches:  Index managers are continuously performing sanity checks on underlying data to ensure proper quality of index calculations. With higher volatility, the probability of sanity breaches is also much higher.

Impact on Commodities-based Indices:

The ongoing conflict has a huge impact on the commodities markets since both Russia and Ukraine are resource economies. The following commodity supply chains are expected to be disrupted:

  • Grains – Russia and Ukraine contribute around 29% of the global wheat exports. Disruption of wheat is expected to have ripple effect on countries in the MENA region that are heavily reliant on imports from both countries. Ukraine is also the fourth largest exporter of corn and barley in the world.
  • Energy – Russia is the second largest exporter of crude oil and the top exporter of natural gas in the world. Europe is heavily dependent on gas from Russia, accounting for more than 40% of its imports. The gas from Russia is supplied to Europe through pipelines, some of which run through Ukraine, which might get disrupted.
  • Metals – Russia is the second largest exporter of refined copper and among the top countries with large copper reserves in the world. Besides copper, the supply of metals such as aluminum, titanium, nickel, platinum, neon, palladium and platinum face challenges due to the current crisis. These metals are used as raw materials in a variety of industries ranging from aircraft to construction.

All types of commodity Indices including broad-based indices, sectoral indices and single commodity indices are governed by Market Disruption Events (MDEs) clause.  Currently, MDEs have been observed in Wheat, Kansas Wheat, Corn, Soya Bean Oil and Lean Hogs. Index providers are unable to calculate the closing level of the relevant reference indices on the valuation dates. Scheduled rebalances in the indices with these commodities as constituents are impacted and will not rebalance until the market normalizes.

ETF providers also need to stay aware of the commodities disruptions that impacts futures position limits, trading halts, price limits, the inability to make/take physical deliveries, illiquid contracts, and price volatility and be prepared to take appropriate response measures.

Impact on Currency-Based Indices:

MDEs have also been accommodated in the currency-based Indices. Currency indices with Ruble (RUB) as constituent have been impacted. New ex-RUB strategies would need to be launched in place of the existing indices.

Operational Challenges for Index Providers and ETF Providers

For index providers, this crisis has significantly increased the volume of operations. They must handle a much higher number of restatements of index levels, price changes, sanity breaches, and deletions and exclusions. Furthermore, they must manage higher price volatility, limit movements, trading halts, suspensions, price freezes, discontinuations, index methodology revisions, new index strategies and regulatory requirements.

ETF providers face increased pressure to remain compliant to all laws related to sanctions and regulations as well as trading and investments. They cannot trade in Russian securities; therefore, the creation and redemption of baskets with these securities are frozen. While active ETFs can dispose of Russia-related positions, the passive ETFs cannot maintain index positions, resulting in higher tracking error. They also face difficulty in index tracking due to an increase in transaction costs (higher bid/ask spreads) and a decrease in liquidity. The NAV calculations are more complex with trading halts and price changes. Since the profit of trading desks is linked to these prices, there is higher potential for calculation errors.

Evalueserve Helps Mitigate Business Risk

Evalueserve’ s Risk and Quant Solutions division works with financial services clients to support their index business by offering a bouquet of services for index calculation and distribution, index design and development and index technology.  Our domain experts, flexible working models, mind+machine® approach and global presence make us particularly prepared and responsive to provide additional support during times such as these, when an expected increase in the volume of operations defines the winners in the index industry. 

Anu B. Gupta
Global Head of Index and Quant Posts
Sanket Wajge
Research Lead, Index & Quant Practice Posts
N. Kannan
N. Kannan
Senior Research Lead, Index & Quant Practice Posts

Latest Posts