Analysis: Getting rid of Russian assets is a big problem for US fund managers

Russian ruble banknote sits on top of US dollar banknotes in this illustration taken February 24, 2022. REUTERS/Dado Ruvic/Illustration

NEW YORK, March 1 (Reuters) – U.S. investors holding Russian assets are finding themselves in an increasingly difficult position to find a way to dump them.

The United States, Britain, Europe and Canada announced new sanctions on Saturday – including the blocking of certain banks’ access to the international payment system SWIFT – following the invasion of the Ukraine by Russia. This sent a wave of investors announcing that they were removing their positions in Russia. Read more

But investors trying to sell their Russian assets are faced with a problem: how to do it?

Russia’s central bank retaliated by banning Russian brokers from selling securities held by foreigners, although it did not specify which assets the ban applies to. To make matters worse, Russian Prime Minister Mikhail Mishustin said on Tuesday that the country would temporarily block foreign investors from selling Russian assets to ensure they make a considered decision. Read more

Moscow’s decision to impose capital controls means that billions of dollars in securities held by foreigners in Russia are at risk of being trapped.

“It’s a pickle,” said Brett Johnson, partner at Snell & Wilmer. “If I were an investor, I would be really concerned about what the Russian government is doing right now. I would be very, very concerned about this investment and how it evolves in the long term.”

Some U.S. investors had been able to access the Russian market by buying American Depositary Receipts (ADRs), which are issues certified by U.S. banks that represent shares of foreign companies to be traded on U.S. stock exchanges or purchased over-the-counter. Trades. But Nasdaq Inc (NDAQ.O) and Intercontinental Exchange Inc (ICE.N) NYSE have temporarily halted trading in shares of Russian-based companies listed on their exchanges due to regulatory issues, people familiar with the matter said. Read more

“It’s a real problem for investors to somehow be able to unwind their exposures,” said Andrew Karolyi, a finance professor at Cornell University, who said Russia in general was a very difficult market for global investors to enter, which is why the use of US Certificates of Deposit had been an important vehicle.

Karolyi said the way to offload those securities “would be through the custodian banks that issued those receipts,” pointing to intermediaries like JPMorgan (JPM.N), Bank of New York Mellon (BK.N) and Citigroup ( CN), to set aside proceeds toward the ownership of the common stock underlying them. JPM did not immediately respond to a request for comment, Citi did not immediately provide comment, and BNY declined to comment.

“Being able to move these tied up common shares is really, really difficult,” Karolyi said.

In over-the-counter markets, Sberbank ADRs were still trading, according to OTC Markets Group, which showed that more than 20 million ADR shares of the sanctioned Russian bank had been traded as of 2 p.m. EST, compared to an average over 30 days. of just under 3 million shares.

London-listed shares of Sberbank wiped out almost all of their value after the London Stock Exchange suspended trading in global certificates of deposit (GDRs) of VTB, another sanctioned Russian bank.

The LSE said it halted trading on VTB after Bank of New York Mellon resigned as custodian of the shares. This also affected the US trade in GDR VTBs.

Foreign investors had invested nearly $20 billion in Russian Eurobonds and $31 billion in OFZ government bonds. Foreign funds held 86% of the Russian stock market float at the end of 2021, according to data from the Moscow Stock Exchange.

A number of funds have said they want to exit their positions – or help their clients sell.

Top asset manager BlackRock Inc (BLK.N) consults with regulators, index providers and other market participants “to ensure our clients can exit positions in Russian securities” when appropriate. authorized. Read more

JPMorgan Asset Management on Monday suspended its JPM Emerging Europe Equity fund, a source familiar with the matter said.

Pension funds are also trying to figure out what to do. Read more

The difficulty is compounded by a lack of cash.

“There are a lot of parcels passing through. I feel like a lot of people ended up with what they had when the ‘special operation’ was announced by Russia as market liquidity dried up,” a fund manager said. London-based speculators invested in European financial companies, who declined to be named, adding that the fund had reduced some of its indirect exposure to Russia.

Russia calls its actions in Ukraine a “special operation”.

SANCTIONED ENTITIES

This is an even more pressing dilemma when the fund manager owns newly sanctioned entities.

“The real quick question is local stocks,” said a fund manager who holds sanctioned Russian stocks, adding that it was unclear how to exit existing positions.

The fund manager, who requested anonymity when speaking about specific holdings, said it could be problematic to transfer ownership of shares because it was up to local custodians to interpret rules issued by the central bank.

Investors who lose money could face numerous disputes and lawsuits to try to recover.

“There is certainly a long history of foreign investors clashing with local states over ownership of various types of assets, and these have been resolved in ways ranging from financial settlements to foreign military invasions,” he said. said Benjamin A. Coates, associate professor in the Department. in History from Wake Forest University.

Reporting by Davide Barbuscia and John McCrank; Additional reporting by Iain Withers in London; Written by Megan Davies; Editing by Mark Porter and Andrea Ricci

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