Investors Who Shorted Russia ETFs Are Now Stuck Paying Never-Ending Fees

(Bloomberg) — Investors who bet against ETFs tracking Russian assets in the build up to the Ukraine invasion made the right call — and they’ve been paying the price ever since.

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Stocks linked to Russia plunged following the outbreak of war and subsequent economic punishment meted out to the country, vindicating bearish wagers. But sanctions also made trading Russian securities almost impossible, leaving short sellers unable to exit their positions.

The result? Investors who shorted — sold borrowed shares with the intention of buying them back more cheaply before returning them — are still borrowing, paying the associated fees indefinitely.

The short-selling world is notoriously opaque and dominated by institutions who rarely disclose their bets. But based on available data, technology and analytics firm S3 Partners estimates short sellers of Russia-focused exchange-traded funds have paid around $2.6 million in borrow fees since the products were halted in early March.

“Short sellers are in a position where they’re effectively halted or frozen right now,” said Jacob Rappaport, head of equities at trading house StoneX. “It’s a difficult position to be in when there’s no resolution in sight.”

Of course, all the investors in funds like the VanEck Russia ETF (ticker RSX) and the iShares MSCI Russia ETF (ERUS) are effectively stuck after U.S. exchanges halted trading and issuers ceased creating and redeeming shares because underlying assets had become untradable. But generally, most fees on the vehicles have been waived so holders aren’t bleeding cash.

Short sellers, on the other hand, are usually paying a daily market rate for the shares they borrowed. The average rate for the ETFs has jumped this year to about 16% from 1%, according to S3. And while short interest in the ETFs was decreasing before they stopped trading, over $96 million worth of shares in the funds remain on loan, according to S3.

Ian Bezek, a Colombia-based investor and financial writer, has a $10,800 short position on ERUS. The 33-year-old is now paying an annualized borrow rate hovering at around 60%.

“If the borrow fees were like 5% or 10%, then not a problem. But at 60%, it’s definitely a major aggravation,” he said. “I have no idea of when the situation will change. It’s very frustrating.”

There’s still no clarity about how or when the freeze on the ETFs will end, nor how it will be resolved. Moscow-listed stocks are trading again, but foreigners aren’t allowed to sell them. Meanwhile, Russian companies with depositary receipts listed overseas — which several of the ETFs hold — are being forced to delist them by a law that took effect last month.

One trader at a family office who is short RSX said he asked three prime brokers about how he’ll be able to cover and none of the brokers had answers. The trader, who asked not to be identified, said he also asked about obtaining shares over-the-counter, but brokers and market makers seem unwilling to conduct those transactions.

The short-selling headache looks like a first in the ETF industry. In previous dramas, when a market or group of assets has shuttered, the structure of ETFs has allowed them to keep trading. When the underlying assets restarted, often they fell in line with ETF pricing. It’s a measure of the turmoil that on this occasion, ETFs had to halt, too.

Read more: ETFs Finally Find a Crisis They Can’t Trade Through in Ukraine

The securities-lending market falls under the purview of the Securities and Exchange Commission, though it’s unclear whether regulators will get involved because no rules have been broken. An SEC spokesperson declined to comment.

RSX, the largest Russia-focused ETF, had an annualized borrow rate that hovered at 1% at the start of the year, according to S3. As Russia-Ukraine tensions intensified, the rate spiked above 20% before coming down slightly. The data from S3 captures the market rate, but rates can vary across brokers.

Short sellers aren’t the only group hit by these rising borrowing costs. Some put holders also tapped the securities lending market to find the shares to exercise their options — and those who did are still paying.

Russell Edwards, a U.K.-based retail trader, managed to borrow 2,200 shares of RSX to exercise put options that expired in March. His brokerage requires him to pay borrow fees currently running at about 30%. It’s a minor drag on his tiny portfolio for now, but the 26-year-old has no idea how long it will last.

“If suddenly those shares cost a lot more to loan and it’s at 300% next day, I don’t really have any recourse to” help avoid the fees, he said. “I’m just kind of stuck waiting.”

In the fog of the invasion and sanctions, some holders and brokers have stopped making shares available to loan, according to Ihor Dusaniwsky, head of predictive analytics at S3. That, alongside the halt to new share creation by issuers, has capped the supply available to borrow, leading rates to rise, he said.

Being trapped in their bearish bets has also left borrowers facing the possibility that their winning wagers will be losers by the time they can get out. They need funds and stocks trading again to cover their positions, but that would likely only happen if the Russia-Ukraine war de-escalated and the outlook improved dramatically — which could trigger a recovery in asset prices.

In such a scenario, “I wouldn’t be surprised if my short position ends up losing me a lot of money,” said Abraham Miller, a Seattle-based software engineer who is shorting ERUS.