OPM = Other People’s Money — namely from American and European retail investors and pension beneficiaries.
By Wolf Richter for WOLF STREET.
Russia’s Central Bank, which had closed the Moscow Stock Exchange on February 25, said over the weekend that the stock exchange would remain closed through March 18 for sure, and that in terms of trading in the following week, the Central Bank would make an announcement “later.”
Stocks of Russian companies that traded in London collapsed before trading was halted, such as Gazprom, which had collapsed by 93% by the time trading was halted on March 2.
Corporate bonds issued by Russian companies in USD, EUR, GBP, etc. are now facing default as these companies are having difficulties making interest payments to bondholders in foreign currency, or may be blocked by the Russian government to do so and may have to make payments in rubles. What companies will do with maturing bonds that need to be paid off in hard currency remains a question mark.
Some debt payments have been made. For example, Norilsk Nickel was cleared by the government to pay the coupon interest of $6.4 million on a $500 million bond, and has now paid that interest in dollars. And it recalled and paid off a different $500 million bond that was due in April. Uncertainty reigns over everything that would have been taken for granted.
Funds with large exposure to Russian stocks, such as the JPMorgan Emerging Europe Equity Fund, were frozen on February 28, after Net Asset Values collapsed.
Of the top 10 holdings of the JPMorgan Emerging Europe Equity Fund, only two (#7 and #8) are not Russian companies:
|Company||Country||% of holdings|
|Lukoil, integrated oil & gas company||Russia||9.8%|
|Gazprom, largest natural gas producer||Russia||9.7%|
|Sberbank, largest bank, majority state owned||Russia||7.9%|
|Novatek, 2nd largest natural gas producer||Russia||7.6%|
|Rosneft Oil, integrated oil & gas company||Russia||4.8%|
|Tatneft, oil and gas company||Russia||3.5%|
|Magnit, food retailer||Russia||3.0%|
|MMC Norilsk Nickel, nickel & palladium mining, smelting||Russia||3.0%|
BlackRock, with about $10 trillion in funds under management, said on March 11 through a spokesperson, cited by the Financial Times, that Russian assets in its funds on February 28 were down to about $1 billion, from $18.2 billion a month earlier, and that the $17-billion plunge was from markdowns of asset values, rather than asset sales. BlackRock didn’t provide details as in which funds these losses occurred.
BlackRock’s Ishares Msci Russia ETF [ERUS] collapsed from $41.26 on February 16 to $8.06 on March 3, when trading was halted. The fund’s top holdings were Gazprom (19.7%), Lukoil (14.2%), Sberbank (12.1%), and Norilsk Nickel (5.1%). BlackRock suspended trading of all of its Russian ETFs and of an Emerging Europe fund that is heavily exposed to Russia.
BlackRock CEO Larry Fink said on LinkedIn: “This has been a highly complex and fluid situation, and BlackRock will continue actively consulting with regulators, index providers and other market participants to help ensure our clients can exit their positions in Russian securities, whenever and wherever regulatory and market conditions allow.”
Pimco funds held at least $1.5 billion in Russian government debt in January and $1.1 billion in bets on Russia through credit-default swaps. Other funds are similarly exposed.
But who’s money was it that evaporated?
There is no telling at this point exactly how many billions of dollars evaporated. But we already know whose money it was that has evaporated. And it wasn’t the money of JP Morgan, BlackRock, or Pimco – it was other people’s money (OPM).
Those funds with exposure to Russian assets have been heavily marketed to retail investors not in Russia, but in the US and Europe. “Emerging Europe” funds and Russia funds were supposed to be part of the strategy to increase returns and diversify assets. This is mostly the money of American and European retail investors.
US pension funds too have loaded up with Russian assets, and that’s the money of beneficiaries (OPM).
Now pension funds are trying to unload those assets but trading in those assets has halted and markets are frozen. This includes real estate assets that are now totally illiquid.
For example, the California Public Employees’ Retirement System (Calpers), the largest US pension fund, held $420 million of Russian stocks and $345 million in illiquid real estate assets, according to a letter, seen by Reuters, it sent to Governor Gavin Newsom in response to his call for state pension funds to cut off money to Russia.
In internal discussions, Calpers staff was weighing the costs of a sudden exit from Russian assets (which would require the board’s approval), and “some senior managers reckoned the investments would be worthless if they tagged them for hasty disposal amid stiff sanctions and swooning prices for Russian assets,” according to Bloomberg, citing a source.
And with the Moscow Stock Exchange closed for the third week in a row, there are now previously unthinkably absurd questions cropping up, such as if a stock market can just vanish.
The giant Russian companies whose stocks are publicly traded are in part state-owned. Those companies won’t be allowed to collapse. But they might default on their bonds, and during a bailout, the state might just take over entirely and wipe out the stake of other stockholders, or dilute other stockholders into meaninglessness.
All this is shrouded in gigantic uncertainty. But Russia understands that this isn’t money from regular Russians in Russia that has evaporated. It’s mostly money from US and European retail investors that bought these mutual funds and ETFs, and money from pension fund beneficiaries, along with some money that Russian oligarchs thought they had. The Russian government and state-controlled companies are not known for pro-shareholder attitudes. So for foreign retail investors and pension funds beneficiaries, this is a tough situation.
But for JP Morgan, BlackRock, and other fund managers it’s not a tough situation. They extracted large amounts of fees for years from these funds that were marketed to retail investors, and they padded their bottom lines with these fees. Now retail investors, after having paid those fees for years, get to eat the losses.
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