John McCrank, Davide Barbuscia

NEW YORK (Reuters), – U.S. foreign investors owning Russian assets find it increasingly hard to get out of these investments.

After Russia’s invasion, new sanctions were announced by the United States of America, Britain, Europe, Canada and Canada on Saturday. They included blocking banks from accessing SWIFT International Payment System. Investors have been launching a wave of protest against Russia.

Investors trying to sell Russian assets face a dilemma: What do they do?

Russia’s central banks retaliated against Russian brokers by prohibiting them from selling foreign securities, though it did not list the assets that were affected by this ban. Russian Prime Minister Mikhail Mishustin stated on Tuesday that the country would temporarily prohibit foreign investors from purchasing Russian assets. This was to make sure they take an informed decision.

Moscow has imposed capital controls, meaning that millions of dollars of Russian securities are in danger of being frozen.

“It’s a pickle,” said Brett Johnson, partner at Snell & Wilmer. The Russian government’s actions right now are very concerning if I were an investor. I would be very, very concerned about that investment and how it’s going to play out over the long term.”

Some U.S. investors were able to access the Russian stock market through purchase of American Depositary Receipts. These are certificates issued by U.S banks and represent shares in foreign companies. People familiar with the matter stated that Intercontinental Exchange Inc (NYSE:) Inc has temporarily stopped trading in stocks from Russian-based companies on its exchanges because of regulatory concerns.

“It’s a real problem for investors to be able to somehow unwind their exposures,” said Andrew Karolyi, a professor of finance at Cornell University, who said that Russia in general was a very difficult market to access for global investors, which is why using American depository receipts had been an important vehicle.

Karolyi stated that the best way to get rid of these securities is to “work through depository banks which have issued them,” pointing out intermediaries such as JPMorgan (NYSE 🙂 or Bank of New York Mellon(NYSE :). Citigroup (NYSE:), in order to cancel receipts towards owning ordinary shares. JPM didn’t immediately reply to my request for comment, and Citi and BNY also failed to respond.

Karolyi stated that it is extremely difficult to move immobilized ordinary shares.

Nearly $20 billion was invested by foreign investors in Russian Eurobonds, and $31 million in OFZ bonds. Moscow Exchange data shows that 86% of Russian stock exchange free float was held by foreign funds as of the close of 2021.

Many funds want to sell their clients or exit from positions.

BlackRock Inc. (NYSE:), a leading asset manager, is seeking to consult with index providers, regulators and market participants in order “to ensure our clients can exit positions in Russian securities”, where permissible.

A source close to the situation said that JPMorgan Asset Management had suspended its JPM Emerging Europe Equity Fund on Monday.

Also, pension funds are trying to figure out how to proceed.

A lack of liquidity adds to the difficulty.

“There’s a lot of pass the parcel. My sense is a lot of people have been left with what they had when the ‘special operation’ was announced by Russia, because market liquidity has dried up,” said a London-based hedge fund manager invested in European financial firms, who declined to be named, adding that the fund had cut some indirect exposure to Russia.

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

SANCTIONED ENTITIES

The situation is even more complicated when the fund manager has recently sanctioned entities.

According to one fund manager holding sanctioned Russian stocks and stating that exiting existing positions was difficult, “The quick question is to the local shares.”

A fund manager requested anonymity in order to talk about particular holdings. He said that it may be tricky to transfer ownership of shares because it was up the local custodians who would interpret the rules set by the central banks.

London-listed Sberbank shares were nearly worthless after VTB trading was suspended at the London Stock Exchange.

Losing money can lead to litigation and wrangling for investors.

Benjamin A. Coates is associate professor in the Department of History at Wake Forest University. “There are a lot of conflicts between foreign investors and local governments over the ownership of different types of assets. These have been solved in ways that range from financial settlements, to foreign military invades.”