The shares of Russia's two biggest banks rallied on Monday (Aug 11) after avoiding being dropped from a top emerging markets index as part of the West's response to the Kremlin's stance in Ukraine.

The New York-based MSCI index provider decided on Friday to keep offering the shares of Sberbank and VTB to clients as long as the two Russian state-held giants did not issue any more stock. VTB's shares gained nearly four per cent and those of Sberbank rose more than three per cent in the opening minutes of trading on Moscow's main exchange.

The Moscow stock market followed the banks' lead higher and was up nearly two per cent while the ruble gained one per cent against the euro and also edged up against the dollar. Russian investors said they now expected the other main exchanges in Europe to follow New York's lead and keep the two stocks.

"We believe that the risk of two of the heavyweight members of the MSCI Russia being excluded from the index was weighing on the broader Russian market last week, and that the news will therefore provide some relief to the market," VTB Group's investment house said in a research note that stressed it may have a conflict of interest in the matter.

The MSCI Russia index is global traders' preferred way to access a balanced package of paper that reflects the price of the main Moscow-issued stocks. The ordinary and preferred shares of Sberbank make up about 12 per cent of the MSCI Russia index while those of VTB are weighed at just under three per cent.

MSCI was under pressure to drop the two finance houses as part of a sanctions package unleashed against Russia's financial and defence and high technologies sectors over the Kremlin's perceived backing of insurgents in eastern Ukraine. The index provider said it reached its decision after "consultation with the investment community" over concerns that the two banks were now prohibited from issuing new shares on the US and European markets.

MSCI said it had decided not to raise the weight of the two stocks in its Russia index should the banks ignore the restrictions and proceed with a share issue in order to raise more capital. "Both Sberbank and VTB Bank have officially announced that they do not intend to issue new shares in the near future," MSCI said. It added that it would take up the matter again should VTB and Sberbank announce plans to issue new stock.

Traders said that a delisting threatened to accelerate the pace of investors' capital outflows from Russia.

'Improve the mood'

Russia's central bank said net capital outflows had reached about US$75 billion (55 billion euros, S$93.7 billion) in the first half of the year - more than the entire figure for 2013.

The overhanging threat of Western sanctions has effectively frozen investment in Russian projects and seen industrial output shrinking in both May and June. The IMF has repeatedly cut its 2014 growth outlook for Russia and now believes it will reach just 0.2 per cent.

The Moscow exchange climbed in value between late early March and June when most traders thought the West would mete out only token punishment for Russia's March seizure of Ukraine's Crimea peninsula and subsequent efforts to fight Kiev's new pro-European stand. But it shed nearly a fifth of its value as the crisis turned more bloody and the threat of sanctions mounted in the past two months.

Moscow's Promsvyazbank economist Oleg Shagov said the MSCI decision "should help change the mood of investors for the better".

(AFP)