Stuck Holding Russian Stocks? This Is What’s Going On.

What happened to the Russian market?

Russia’s central bank has closed the Moscow Exchange since the weekend, for a fifth straight day––the longest streak since 1998––and banned brokers from processing foreign investors’ transaction orders. That means billions of dollars worth of Russian securities held by foreigners are at risk of being trapped.

What about shares of Russian companies listed on foreign exchanges?

Instead of buying local shares, most US investors gain access to Russian stocks through American depositary receipts––certificates issued by American banks that represent shares in foreign companies and trade on US stock exchanges.

They haven’t been spared. On Monday, the Nasdaq and New York Stock Exchange halted trading in ADRs of Russia-based companies, including

HeadHunter Group

(HHR), Ozone (OZONE),

qiwi

(QIWI), Yandex (YNDX), and Mobile TeleSystems (MTS).

After keeping trading open earlier in the week, the

London Stock Exchange

has followed suit. On Thursday, it suspended trading in dozens of stocks in Russian companiesincluding the country’s largest lender,

Sberbank

(SBER.UK), and the energy giant

Gazprom

(OGZD.UK).

Will this hit my retirement savings?

Maybe a tiny bit. Foreign investors owned about $86 billion of Russian stocks at the end of last year, according to data from the Moscow Exchange. But even assuming all that was held by US shareholders, it would only amount to 0.3% of the $30 trillion in assets the Investment Company Institute says US-registered investment firms were holding at the end of 2020.

Have markets been closed this way before?

Yes. In extreme situations, when a country faces significant political or economic uncertainties, it isn’t unheard of for a stock exchange to temporarily shut down to limit the damage from panic-based selling.

In the midst of the Greece debt crisis in 2015, the Athens stock market was shut down for five weeks. During the mass protests of the Arab Spring in 2011, the Egyptian stock market was closed for nearly two months.

When will trading resume?

It’s hard to say. Depending on how the Russia-Ukraine negotiations pan out and how long the Western sanctions stay in place, it could be weeks or even months before investors can access their funds in Russian companies again.

If I own Russian stocks, could I lose the investment entirely?

It’s possible. Many Russian companies, recently valued at billions of dollars, were nearly wiped out on the London stock exchange before the bourse halted trading in those shares on Thursday.

Sberbank, priced at $15 per share in mid-February, slumped 99.6% over the past two weeks, trading at five cents when the stock most recently changed hands in London. During the same period, Gazprom lost 93.2% of its value, falling from $9 a share to 58 cents.

That is an indication of how the Russia- and US-listed shares might react when trading eventually resumes. Even at such low prices, it might be difficult to find buyers, so some investors may need to write down the value of their holdings to zero.

Still, there’s hope. When the Greek market reopened after its shutdown, it plunged nearly 23% within a day, but didn’t go to zero. The Egyptian market plummeted 9% upon reopening, but also didn’t hit the floor.

Moscow has already announced that it will deploy up to $10 billion from its sovereign-wealth fund to prop up the country’s battered stocks once the market reopens. That is a fraction of the $86 billion of Russian securities foreigners held at the end of last year, but it will mitigate investors’ losses.

What if I own a fund that invests in Russian stocks?

That’s a problem, too. The NYSE ARCA exchange has halted trading in the iShares MSCI Russia exchange-traded fund (ERUS), according to

BlackRock
†

the ETF’s issuer. The New York Stock Exchange website says the

iShares MSCI Russia ETF

was stopped at 3:54 am Eastern time on Friday, with “regulatory concerns” given as a reason. The Franklin FTSE Russia ETF (FLRU) and Direxion Daily Russia Bull 2X Shares (RUSL) were also halted, according to the website.

BlackRock acknowledged the halt. “Due to ERUS’ concentrated exposure to Russian equities, the closure of the Russian stock market and MSCI’s decision to remove Russian securities from its Emerging Markets Indexes, BlackRock strongly supports NYSE Arca’s decision and is committed to protecting the best interests of ERUS shareholders,” the release said.

Russia-focused funds have seen steep selloffs. As of the close of trading on Thursday, the

VanEck Russia ETF

(RSX) had tumbled 77% over the past two weeks, while the iShares MSCI Russia ETF was down 80%.

Their prices might collapse even further once the Russian market opens again, because these funds are now trading at a significant premium to the net value of the assets they hold.

With Russian stocks not trading, it has become nearly impossible for the companies running the ETFS to create and redeem shares in accordance with demand. That has made them essentially closed-end funds, whose share prices can deviate from the underlying assets depending on investors’ demand for the funds themselves. In fact, the VanEck Russia ETF has attracted some trading interest reminiscent of last year’s meme-stock frenzy and was priced 485% higher than its net asset value on Friday afternoon.

Many other funds, usually the diversified emerging-markets funds, allocate money to Russia as an element of a broader strategy. For example, the Vanguard FTSE Emerging Markets Index Fund ETF (VWO) had a roughly 3% stake in Russia at the end of January. Investors in these funds will be negatively affected, but to a much lesser extent.

Some active funds might have higher allocations to Russia than their index-tracking peers. The GMO Emerging Markets (GMOEX), for example, had a 14% stake in Russia by the end of last November, while the Invesco Developing Markets Fund (ODMAX) had an 8% exposure as of year-end. It isn’t clear whether the two funds shed their Russia positions before the recent rout. They have lost 17% and 12% in the past month, respectively.

While it’s nearly impossible to trade Russian stocks now, many of these index and active funds will likely bring further selling pressure once the market reopens. That’s because MSCI and FTSE Russell, two of the major index issuers, said on Wednesday that they would remove Russian stocks from their widely followed emerging-markets indexes.

That means all the funds that replicate these indexes or use them as a guide––with trillions of dollars in assets––would need to follow that change and unload their Russian holdings. Although Russia only accounted for a small slice of the emerging-market benchmarks, the sheer amount of assets in the affected funds could bring a new round of selloff for Russian stocks.