Buy-side urged to consider Russian liquidity risk

US and EU sanctions against Russia could result in liquidity problems for institutional investors, but also present some opportunities, according to experts on the country.

US and EU sanctions against Russia could result in liquidity problems for institutional investors, but also present some opportunities, according to experts on the country.

The trading sanctions, which have been implemented as a result of Russian intervention in the Ukrainian civil war, were most recently updated by the EU on 12 September as investors in Russian securities must ensure they are well informed of the restrictions, warned Linedata product manager, Matt Gibbs.

“The main concern for a trading desk is that if you already own shares in a Russian company that is subject to sanctions or is majority owned by an individual on the sanctions list, then you cannot trade in those shares,” he explained.

US and EU sanctions are presently targeted at individuals that are part of, or are, close to the country’s government, as well as companies in strategically important industries, particularly oil and gas.

For existing investors in an affected firm, the shares are effectively untradeable though they can continue to pay dividends as normal.

Buy-siders looking to buy into Russian companies need to ensure they aren’t going to fall foul of the rules.

“It’s imperative to have a system in place that can check holdings in any target company against the sanctions list and is aware of the parent and child relationships between firms and can stop a trade happening if it breaches the rules,” added Gibbs.

However, sanctions are not the only thing currently affecting liquidity in Russian shares, and macro-economic factors are also helping contribute to a “perfect storm” according to Joseph Dayan, head of markets at London-based specialist Russian broker, BCS Financial Group.

“There are some external factors that are having just as much impact on Russia as the sanctions” he said, “Firstly, the price of oil has fallen, with Russian Urals at about $90, which is 10% below the level the state budget is dependent on, and the Federal reserve interest rate environment is starting to change, which is affecting the value of the ruble”

Dayan said institutional investors should shy away from strategically important sectors and instead focus on areas such as banking, retail, media and technology. Speaking at Sibos 2014, which took place in Boston last week, Adam Szubin, director, Office of Foreign Assets Control, US Department of the Treasury said the situation with Russia will continue to be monitored and indicated sanctions could be increased.

“He [President Obama] has also made clear that we and our allies are prepared to impose costs on Russia if its behaviour does not change.

“We will continue to examine in the weeks ahead what additional measures will be necessary. “

Dayan added, “A year ago no one really expected to be facing a strict sanctions regime today. However, it’s unlikely the sanctions will extend to pure private sector companies so these shares shouldn’t suffer undue liquidity issues in the future.”

Failure to comply with sanctions against Russia could result in substantial penalties for firms, and past transgressions have seen seven figure fines, meaning buy-siders risk a heavy price for trading in Russian shares without doing their due diligence first.

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