Anyone selling Russian assets faces few options and big losses

[NEW YORK] Investors seeking to offload holdings in Russian assets will find that the actual unwinding will be a complex and potentially expensive endeavour. A growing number of institutions are rethinking their portfolios in the wake of Russia's invasion of Ukraine. Norway said it is removing Russian assets from its US$1.3 trillion wealth fund; UK oil giant BP is looking to offload its stake in Rosneft PJSC.

But selling shares in the open market and finding buyers for these investments will not be easy, given a dramatic increase in sanctions that have turned Russia into a political and economic pariah. Here are some of the complexities - and possible losses - that investors will need to consider if they want to follow through:

Accelerated offerings

Big investors and corporate shareholders often opt to sell a chunk of shares in an accelerated placement after markets close. These transactions are typically underwritten by banks, who buy the stake and offer it on the open market and take on the risk of the disposal. Russia's ban on foreigners selling Russian securities via domestic banks rules them out as underwriters, while sanctions and compliance issues preclude western institutions from stepping in.

Russ Mould, investment director at AJ Bell, also noting the lack of appetite for these stocks, said: "It is not clear whether western investment banks would be willing to get involved or whether they would wish to be seen to take fees from business in Russian-related securities."

Finding buyers

For large stakes, shareholders in Russian companies could try to find a buyer willing to take over the holding wholesale. Sellers could try to appeal to investors in Asia, but this would carry its own political risk.

"There are potential long-term consequences of selling assets to the Chinese, especially if it means lesser Western exposure to or control or influence over commodities," said Mould.

And the crippling international sanctions are making Russian assets financially unattractive, even at steep discounts, meaning that Chinese investors may not want to risk the political headache either.

"There is always the question of how the Chinese will position themselves," said Ipek Ozkardeskaya, a senior analyst at Swissquote. "From the perspective of business profitability, there is no reason, and hence there should be no appetite among Chinese investors to buy Russian assets."

A slow drip

Sellers may try to slowly drip their holdings of Russian stocks into equity markets over a longer period. While spreading out the disposal might help ease pressure, holders run the risk of reputational damage if they hang on to their investments for an extended period of time.

"Institutional buyers, especially with ESG or sanction-related restrictions, likely won't be able to buy and have no intention to do so," said Oliver Scharping, a portfolio manager at Bantleon. There may be some buyers from small hedge funds or family offices, where time horizons are long enough, he added.

Unlikely buyers

In an ironic twist, Russian investors could turn out to be the most obvious buyers for some assets. But there are huge obstacles that make transacting almost impossible in the short term. Stock trading on the local bourse was cancelled while the rouble plunged to an all-time low on Monday. This means buying global depositary receipts of Russian stocks being traded on exchanges such as London has also become prohibitively expensive for Moscow-based portfolio managers.

Russian companies' London-listed depositary receipts such as lender Sberbank of Russia PJSC, retailer Magnit PJSC, energy firm Gazprom PJSC catered in UK trading.

Taking the hit

BP has warned that it could take a write-down of as much as US$25 billion from exiting Russia, as finding a buyer for its 20 per cent stake in Rosneft will be very challenging. Shell is exiting its Russian gas ventures, including a massive liquefied natural gas facility.

Other companies with significant investments in Russia may opt to reduce the value of their holdings to zero.

Some other sellers are struggling to offload their shares. Abrdn has been left unable to sell its £5 million (S$9 million) Rosneft shareholding amid restrictions on foreign share trades on Moscow's stock exchange, Sky News reported, without saying how it obtained the information. A representative for the investment company declined to comment.

TotalEnergies SE has operations in Russia representing about US$1.5 billion of its total cash flow, or around 5 per cent. It has a stake in gas producer Novatek as well as a large interest in the Yamal LNG project. Chevron Corp and Exxon Corp have a presence in lubricants. "It is going to be difficult to find a buyer, with Russia gaining pariah status among the international community," Susannah Streeter, an analyst at Hargreaves Lansdown, said of BP's planned retreat.

"For now, a very hefty write-down is likely to remain the main course of action," she said.

BLOOMBERG