Mutual funds are losing liquidity due to restrictions on transactions of non-residents with shares of fuel and energy companies

Extension of restrictions on transactions of non-residents with shares of fuel and energy companies will negatively affect the activities of mutual funds with non-resident shareholders, market participants indicate. Due to these restrictions, a number of funds have had their liquidity greatly reduced, and they have also begun to violate Central Bank regulations. As a result, the restriction also affects Russian fund investors. However, so far the requests of market participants and the Central Bank to adjust the decree of the President of the Russian Federation that established the restrictions have not been successful.

The extension for another two years of Presidential Decree No. 520, which prohibits transactions with shares and shares of strategic enterprises, fuel and energy companies and credit institutions owned by “unfriendly” non-residents, will negatively affect the results of many Russian mutual funds, according to a survey of market participants conducted by Kommersant. The decree itself is intended to protect national interests in the face of unfriendly actions from the United States and other countries. Transactions with shares and shares of strategic companies are possible only if special permission is obtained from the President of the Russian Federation.

Failure to comply with the decree is the basis for the application of supervisory response measures by the Central Bank, and therefore most of the management companies have suspended operations with securities from the list of strategic enterprises (Gazprom, Rosneft, LUKOIL, ALROSA, Transneft, Norilsk Nickel, etc. .d.). This has a negative impact on the quality of management, since they form the basis of the Russian stock market, occupying 50–90% of assets in individual funds. “Management companies are limited in their ability to sell shares from funds, for example for portfolio rebalancing purposes or to pay redemptions. This entails a decrease in the quality of management and problems with liquidity, which will affect Russian clients,” notes Oleg Goransky, director of legal affairs at Pervaya Management Company.

Another consequence was the washing out of shares of companies not included in the “prohibited” list from funds. According to Kommersant’s estimates, based on data from Investfunds, of the 30 largest funds by assets in the portfolios of 10 mutual funds at the end of October, the share of shares of strategic companies exceeded 10%. This is a violation of Central Bank regulations, although the regulator has not yet fined for this. “If the situation further worsens, it may happen that the management companies will not be able to carry out transactions with shareholders, since there will be nothing to sell to redeem the share,” notes Kommersant’s interlocutor on the market.

According to NAUFOR, at the end of 2022, 287 funds with non-resident shareholders were represented on the market (more than 13% of the total number of mutual funds). But the average share of such shareholders, according to NAUFOR, was 0.24% of the total number of shareholders. “Our funds have less than 20 such shareholders from European countries. The total share of the assets of such shareholders in the mutual fund is about 0.5%,” said Andrey Korovkin, managing director of TKB Investment Partners. At the same time, the Central Bank noted that in the funds the share of shares of such PJSCs in most cases does not exceed 1% of their authorized capital.

“According to the law on investment funds, the property of a mutual fund is recognized as the common property of all its shareholders and belongs to them by the right of common shared ownership. Thus, on the basis of Decree No. 520, if the property of a mutual fund includes shares of “strategists,” then the presence of at least one “unfriendly” foreigner among the shareholders entails a ban on transactions with such shares,” explains partner of the Orchards law firm Yuri Aksenov. However, as Nikolay Shvaikovsky, head of government relations at Alfa Capital, notes, shareholders do not make decisions regarding the property of open-end and exchange-traded mutual funds, nor do they participate in the corporate actions of public companies whose shares are part of the funds’ assets.

NAUFOR and the Bank of Russia have repeatedly contacted the concerned authorities, relevant proposals have been prepared, but no decision has been made yet, notes NAUFOR Vice President Ilya Vanin. In particular, it was proposed to exempt from restrictions transactions made with the assets of strategic companies, provided that the assets of the mutual fund contain a small share of such shares (no more than 1% of the authorized capital). Such changes, as the Bank of Russia believes, on the one hand, will not lead to the emergence of risks, the control of which the decree is aimed at, and on the other hand, they will ensure high-quality trust management of mutual fund assets in the interests of Russian shareholders.

Yuri Aksenov sees two ways out of the situation: either obtain a special decision from the President of the Russian Federation to complete the transaction, or negotiate with “unfriendly” shareholders to buy out their shares. Andrei Korovkin said that the company sent two requests to the presidential administration for permission to carry out transactions within the framework of the decree. Oleg Goransky also announced plans to “apply for permission from the President of the Russian Federation to sell shares of strategic enterprises.” Some companies try to buy out fund shares, but as a result, the non-resident’s money ends up in S’s account. Therefore, it is often impossible to reach an agreement with shareholders, market participants note.

Vitaly Gaidaev, Anna Zanina