Investors face heavy losses on $170 billion in Russian assets

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As Russian troops advanced towards Ukraine’s two largest cities, a BlackRock portfolio manager closed a deal that looked like a bargain.

Polymetal, listed in London, lost more than a third of its value on February 24, the day Vladimir Putin launched an invasion of Ukraine.

BlackRock scooped up £12m worth of shares in the Russian gold miner and distributed them among four natural resource funds. The bet did not work. Shares have fallen around 70% since the close of trading on Feb. 25 as investors dumped Russian assets. Polymetal was ejected from the FTSE 100 index.

BlackRock is part of a large group of global investors, from pension plans to hedge funds and sovereign wealth allocators, that hold Russian assets worth nearly $170 billion at the end of 2021. Moscow stock markets are suspended, trading of many Russian funds listed companies abroad is halted and bonds are almost impossible to trade. This leaves these asset managers facing the prospect of significant losses.

“If you hold Russian assets, you either sell at a very low price, assuming it’s possible and you can actually find a buyer,” said Cristian Maggio, head of emerging markets portfolio strategy at Securities. TD Mobiliar. “Otherwise, you may have to cancel them to zero.”

In markets where Russian assets are still changing hands, prices have crashed. Russian dollar debt trades at around 20 cents on the dollar, while an MSCI index that tracks Russian stocks traded in London and New York is down more than 95% this year.

BlackRock said the purchase of Polymetal would not have been possible after it put in place new guidelines on Feb. 28 preventing the purchase of Russian assets, which reflect the “values” of the company and its customers. “We acted as quickly as possible in close coordination with many other parties to meet the needs of our customers in a very complex and fluid situation,” he said.

So far, at least 26 asset management companies, including JPMorgan, BlackRock, Amundi, UBS, BNP Paribas, Abrdn, Schroders and Pictet, have frozen funds with high Russian exposure, preventing investors from withdrawing their most of 4 billion euros of combined assets of the strategies.

Others should follow. Foreign holdings of Russian stocks totaled $86 billion at the end of 2021, according to data from the Moscow Stock Exchange. Foreign investors also held $20 billion in Russian dollar debt and ruble-denominated sovereign bonds worth $41 billion, according to the central bank, while JPMorgan estimates corporate debt at $21 billion.

The chief executive of Norway’s $1.3 billion oil fund said on Sunday its Russian holdings could be worthless after plummeting 90% in two weeks. Fidelity International said it significantly reduced Russian holdings in the affected funds. “For [Russia] listed securities that are not currently tradable and for those for which there is no price discovery, these prices may be adjusted to zero,” the company said on Friday.

Meanwhile, Prosperity Capital Management, one of Russia’s oldest and largest hedge fund investors with around $3 billion in assets, suspended investor redemptions and net asset value calculations. , with its Russian Prosperity fund having fallen 51% this year through February 24.

The group said it was “shocked” by the events on its website, adding that it believed an invasion “was unthinkable for several reasons that would have made it a colossal mistake”. Prosperity did not immediately respond to a request for comment.

Pension funds are also among foreign investors effectively trapped in Russian markets, although for most schemes Russian holdings represent only a small slice of overall assets.

Calpers, the largest public pension fund in the United States, had about $900 million of exposure to Russia, out of its $478 billion portfolio. The Universities Superannuation Scheme, the UK’s largest pension scheme, held around 0.5% of the scheme’s £90bn portfolio, or around £450m, linked to Russia. “We will be looking to sell these assets but, in the current environment and for obvious reasons, very little is trading,” USS said.

As investors consider divesting themselves of Russian assets, they are also unsure whether they can continue to receive interest payments on the Russian bonds they hold, bolstering belief that Moscow is in the process of renounce his debt.

The government on Wednesday paid an expected coupon of $96 million on one of its ruble-denominated bonds, but said the money would not reach bondholders outside Russia due to a central bank ban on making payments to foreigners.

A test of its commitment to pay interest on its external debt will come when it is due to make the next coupon payment on March 16.

For now, investors have little choice. “In the short term, if people want to sell, they will have to do so at crazy prices. . . or you create a good bank, a bad banking structure, put the assets in a drawer and hope they turn around,” said a senior executive at a European asset manager.

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