OPM = Other People’s Money — namely US and European retail investors and pension recipients.

By Wolf Richter for WOLF STREET.

The Central Bank of Russia, which had closed the Moscow Stock Exchange on February 25, said over the weekend that the Exchange would remain closed until March 18 for sure and that in terms of trading the following week, the Central Bank would make an announcement. “later.”

Shares of Russian companies trading in London crashed before the halt in trading, such as Gazprom, which had collapsed 93% by the time trading was halted on March 2.

Corporate bonds issued by Russian companies in USD, EUR, GBP, etc. payments in rubles. What companies will do with maturing bonds that need to be repaid in hard currency remains a question mark.

Some debt repayments have been made. For example, Norilsk Nickel was allowed by the government to pay interest on the $6.4 million coupon on a $500 million bond, and has now paid that interest in dollars. And he recalled and repaid another $500 million bond that was due in April. Uncertainty reigns over anything that would have been taken for granted.

Funds with significant exposure to Russian equities, such as the JPMorgan Emerging Europe Equity Fund, were frozen on Feb. 28 after net asset values ​​plummeted.

Of the top 10 holdings in the JPMorgan Emerging Europe Equity Fund, only two (#7 and #8) are not Russian companies:

Company The country % assets
Lukoil, integrated oil and gas company Russia 9.8%
Gazprom, leading natural gas producer Russia 9.7%
Sberbank, largest bank, majority state-owned Russia 7.9%
Novatek, 2nd natural gas producer Russia 7.6%
Rosneft Oil, integrated oil and gas company Russia 4.8%
Tatneft, oil and gas company Russia 3.5%
Pekao Bank Poland 3.3%
OTP Bank Hungary 3.0%
Magnit, food retailer Russia 3.0%
MMC Norilsk Nickel, nickel and palladium mining, foundry Russia 3.0%

BlackRock, with about $10 trillion in funds under management, said through a spokesperson on March 11, as quoted by the FinancialTimes, that Russian assets in its funds on February 28 had fallen to about $1 billion from $18.2 billion a month earlier, and that the $17 billion drop was due to declines in the value of assets rather than asset sales. BlackRock did not provide details of the funds in which these losses occurred.

Ishares Msci Russia ETF from BlackRock [ERUS] crashed from $41.26 on Feb. 16 to $8.06 on March 3, when trading halted. The fund’s main holdings were Gazprom (19.7%), Lukoil (14.2%), Sberbank (12.1%) and Norilsk Nickel (5.1%). BlackRock has suspended trading in all of its Russian ETFs and an Emerging Europe fund with significant Russian exposure.

BlackRock CEO Larry Fink said LinkedIn“This has been a very complex and fluid situation, and BlackRock will continue to actively consult with regulators, index providers and other market participants to ensure our clients can exit their positions in Russian securities, when and where regulatory and market conditions permit.”

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 exposed in the same way.

But who is the money that has evaporated?

It is unclear at this point exactly how many billions of dollars have evaporated. But we already know who owned the money that evaporated. And it wasn’t JP Morgan, BlackRock or Pimco money – it was other people’s money (OPM).

These funds with exposure to Russian assets have been heavily marketed to retail investors not in Russia, but in the United States and Europe. “Emerging Europe” funds and Russia funds were to be part of the strategy of increasing returns and diversifying assets. This is mostly money from US and European retail investors.

US pension funds have also stocked up on Russian assets, and that is the beneficiaries’ money (OPM).

Today, pension funds are trying to get rid of these assets, but trading in these assets has stopped and the markets are frozen. This includes real estate assets which are now totally illiquid.

For example, the California Public Employees’ Retirement System (Calpers), the largest US pension fund, held $420 million in Russian stocks and $345 million in illiquid real estate assets, according to a letter seen by Reutershe sent Governor Gavin Newsom in response to his call for state pension funds to cut the money to Russia.

In internal discussions, Calpers staff were weighing the costs of a sudden exit from the Russian assets (which would require board approval), and “some senior executives felt that the investments would be worthless if they were tagged for early elimination amid stiff penalties and swooning prizes. for Russian assets,” according to Bloombergciting a source.

And with the Moscow Stock Exchange closed for the third week in a row, previously unimaginable and absurd questions arise, as if a stock market could simply disappear.

The Russian giants whose shares are listed on the stock exchange are partly owned by the state. These companies will not be allowed to collapse. But they could default on their obligations, and in a bailout the state could simply take over entirely and wipe out the stake of other shareholders, or dilute other shareholders into nonsense.

All of this is surrounded by gigantic uncertainty. But Russia understands that it is not the money of regular Russians in Russia that has evaporated. It was mainly the money of US and European retail investors who bought these mutual funds and ETFs, and the money of the beneficiaries of the pension funds, as well as money that the Russian oligarchs thought they had. The Russian government and state-controlled companies are not known for their pro-shareholder attitudes. It is therefore a difficult situation for foreign retail investors and beneficiaries of pension funds.

But for JP Morgan, BlackRock and other fund managers, the situation is not difficult. They took large amounts of fees for years from these funds that were marketed to retail investors, and they inflated their bottom line with those fees. Now retail investors, after paying those fees for years, can absorb the losses.

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