The Russian Government Commission on Control over Foreign Investments approved the terms and conditions of the bidding process carried out within the framework of the blocked investment exchange mechanism.
Russian Presidential Decree No. 844 of November 8, 2023 (refer to our previous LawFlash) established a legal framework for the investment exchange mechanism allowing foreign investors to purchase the blocked foreign securities held by Russian investors using as consideration the cash held by foreigners on the frozen “type-C” bank accounts in Russia.
On February 2, 2024, the Government Commission on Control over Foreign Investments (FDI Commission) approved the terms and conditions of the bidding process and the procedure for entering into transactions with foreign securities (Terms and Conditions of the Bidding Process) and nominated LLC "Investitsionnaya Palata" as transaction organizer (Transaction Organizer). On March 11, 2024, the Transaction Organizer officially published the Terms and Conditions of the Bidding Process.
The Terms and Conditions of the Bidding Process provide that the following securities can be sold by Russian investors (Foreign Securities):
The aggregate initial value of the Foreign Securities that can be sold by a single Russian investor under the investment exchange mechanism may not exceed 100,000 rubles (approximately $1,097). This limit does not apply to foreign investors that purchase the Foreign Securities, as long as there are sufficient matching Sale Offers (discussed below).
Step 1
The Transaction Organizer collects offers for the sale of blocked Foreign Securities from the Russian investors through their brokers and trust managers (Sale Offer). The collection of the Sale Offers will be conducted from March 25, 2024 to May 8, 2024.
Step 2
On the basis of the Sale Offers, the Transaction Organizer divides the total pool of the Foreign Securities into lots, which should be, to the extent possible, identical in terms of their total value. After that, a single starting bid is set for all lots, which cannot be less than the average value of the Foreign Securities included in each lot.
Step 3
The Transaction Organizer collects bids of foreign investors to buy formed lots (Bids). Note that according to Terms and Conditions of the Bidding Process, only legal entities can submit the Bids. The current bidding process does not contemplate the participation of foreign individuals in this procedure, but the market expects the procedure to be extended to apply to foreign individual investors in the future. The collection of the Bids will be conducted from June 3, 2024 to July 5, 2024. The foreign investors can submit the Bids directly to the Transaction Organizer, there is no need for non-residents to submit the Bids through Russian brokers.
Step 4
As a result of selection of the Bids, the Transaction Organizer will determine a single final sale price for all lots, which will not be lower than the asset's value in rubles at the close of the trades on March 22, 2024. After that, transactions are settled: Russian investors receive the cash initially held by foreigners on the frozen “type-C” accounts in Russia, and non-residents receive the Foreign Securities.
It is expected that transactions should be concluded and settled by July 29, 2024. The Foreign Securities purchased by foreign investors under the bidding procedure will be credited to “special transit custody accounts” with the Russian depositories.
As outlined in our previous LawFlash, after the purchase, the relevant Foreign Securities will still remain within the Russian depository system and will be blocked because of the EU sanctions against the National Settlement Depository (NSD) and the foreign investors will have to obtain licenses from the EU sanctions authorities to unblock those Foreign Securities.
The Terms and Conditions of the Bidding Process outline the detailed procedures for the bidding process that may be followed by interested foreign investors whose funds are blocked in a “type-C” bank account.
Foreign investors might find the exchange mechanism advantageous as it offers the exclusive option to utilize their frozen funds held in “type-C” bank accounts without necessitating approval from the FDI Commission. Nonetheless, foreign investors should contemplate additional steps to obtain EU licenses to move the Foreign Securities from NSD to foreign brokers.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following: