Russia, the Rand and the
Complexities of Emerging Markets


Mike Keenan

Head of Fixed Income
and Currency Research


Clients who watch the fortunes of the rand tend to focus on events at home, but events abroad can often have a significant impact on the value of South Africa’s currency.

Whenever a major news event occurs in an emerging market economy, international banking clients in South Africa start getting nervous. That’s understandable: if there’s political unrest in Brazil or a Covid-19 outbreak in India, South Africans start asking questions about the possible effects on the value of our own currency.

Russia’s invasion of Ukraine provides a very real example from recent headlines. Even though the events are happening on the far side of the world, what does it all mean for the rand?

Investor exposure

“This is a very powerful force in emerging markets,” says Mike Keenan, Head of Fixed Income and Currency Research at Absa CIB. “To use the Russian example, South Africa and Russia form part of global emerging market indices like the JP Morgan Bond Index (GBI) and MSCI Equity Index (EMI).” The GBI consists of the 20 most liquid emerging market bond market, while the EMI captures large- and mid-cap representation across a basket of 25 emerging market countries. Both indices weight the countries based on the amount of bonds or shares in issue and include countries like China, Taiwan, India, Brazil, South Africa and – yes – Russia and Ukraine

“Investors who have a mandate to invest in emerging markets have varying degrees of exposure to the 20 to 25-odd countries that are included in these indices,” Keenan explains. “The market weights only provide a guideline about how much exposure an investor should have in a country. For example, Russia might have a 10% weight within the index, but if active investors are put off by certain events that are taking place in Russia they may decide to reduce their Russian exposure to say 5%, which would make them underweight relative to those investors who are passively tracking the index weight of 10%. If Russia markets do indeed sell off, then the active manager will outperform the passive investors.”

Moreover, because these investors are mandated is to invest in emerging markets, when they do reduce their exposure to a particular country (for example, Russia), they would need to deploy those monies into another country (for example South Africa).

The contagion of negative sentiment

“Given the information age that we live in today, the markets often price in such event risk into the currency before they actually happen,” Keenan says. For example, in July 1997 it became clear that Thailand and South Korea could not repay their foreign debts, but Russia only defaulted only defaulted on its debt in 1998. Importantly, however, investors had already reduced a considerable of their emerging market exposure by the time the default actually occurred. South Africa did not escape the flight to quality during this period and the rand fell more than 28% in the run-up to the Russian crisis.

Fast-forward to 2022, and the war in Ukraine has prompted fears of a similar contagion of negative sentiment around emerging markets and their currencies. In the early months of the year, the Russian rouble and Ukrainian hryvnia both weakened against the US dollar as investors priced in their fears of a Russian invasion.

When that invasion happened on 24 February, the rouble plummeted to record lows. At the same time, the rand slumped from USD15,08 on 22 February to USD15,38 on 28 February. Events in Moscow and Kyiv were certainly not the only cause of the rand’s slip, but similar changes in the US dollar exchange rates of the Turkish lira, Brazilian real and Indian rupee served as a reminder that, to some extent at least, emerging market currencies are all in the same basket.

To access leading foreign exchange expertise for your business, corporate and institutional needs.

Mike Keenan

Head of Fixed Income and Currency Research

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