The Russian Ministry of Finance recently announced the development of a mechanism for releasing blocked foreign investments and exchanging them for Russian assets blocked abroad. If approved, the initial stage will apply to funds in “type-C” accounts, benefitting retail investors, with a limit of 100 billion roubles (approximately $1 billion). In parallel, the Russian president issued a decree that sets out a procedure for forced exchanges of Russian sovereign bond payments to foreign investors against the blocked Russian funds held with Euroclear and Clearstream.
On August 22, 2023, during a meeting of the Russian Council for Strategic Development and National Projects, the Russian Ministry of Finance announced that the Russian government and the Central Bank had developed a mechanism allowing for the release of the blocked non-Russian investments and their exchange for the assets of Russian investors blocked abroad.
In June 2022, following the designation of the Russian National Settlement Depository (NSD) as a sanctioned entity by the European Union (EU), the European clearing systems stopped taking instructions from the NSD. As a result, Russian investors that held securities recorded in the European clearing systems through the NSD lost their ability to perform any transactions with such securities. This included coupon payments and the redemption of securities.
Simultaneously, the Russian government implemented a series of actions against investors from so-called “unfriendly states,” which currently includes the United States, Canada, EU member states, the United Kingdom, UK overseas territories, Ukraine, Montenegro, Switzerland, Albania, Andorra, Iceland, Liechtenstein, Monaco, Norway, San Marino, North Macedonia, Japan, South Korea, Australia, Micronesia, New Zealand, Singapore, and Taiwan.
Among other things, the new regime introduced by the Russian state restricted the sale of securities and interests in Russian limited liability companies by nonresidents from “unfriendly states” without approval from the Government Commission on Control over Foreign Investments. Additionally, the Russian Central Bank prohibited brokers from performing sales of securities at the instruction of foreign legal entities or individuals.
Income distribution to non-Russian investors from Russian securities was also restricted. Under Russian Presidential Decree No. 95, the dividends and coupon distributions to non-Russian residents from “unfriendly states” must be made in Russian roubles to special “type-C” bank accounts, which are effectively blocked due to an extremely limited number of transactions that are authorized with such accounts. Similar restrictions apply to loan transactions.
The possibility to unblock non-Russian investments was discussed several times by Russian officials who acknowledged that the Russian Central Bank was considering several options for the investment exchange mechanism, including the non-Russian investors purchasing the Russian assets blocked in Europe from the amounts held by foreigners on the frozen type-C accounts.
While no specific details of the proposed mechanism for the release and exchange of the blocked assets have been given by Russian authorities beyond the announcement, it was mentioned that the process would be voluntary and would initially target the funds accumulated by non-Russian investors in type-C accounts, benefitting retail investors. Reportedly, the decree would first apply to the smallest investors holding minor investments blocked abroad, and the subsequent stages would cover larger investors and financing institutions.
It is proposed that the decree would protect type-C accounts from enforcement by third parties (such enforcement is currently permitted) and would allow Russian investors to sell their foreign securities to nonresidents while allowing nonresidents to use funds standing to the credit of their type-C accounts for the purposes of paying the purchase price.
The Russian government and the Central Bank jointly developed the draft decree, which was submitted to the Russian president and is now awaiting his approval.
While a solution is being considered for the non-Russian type-C account holders, on September 9, 2023 the Russian president issued Decree No. 665, which introduced a forced swap mechanism in connection with the payments under Russian sovereign Eurobonds directed to non-Russian investors.
Decree No. 665 provides that, as previously, the payments intended for investors whose Russian sovereign Eurobonds are held in foreign depositories will be initially transferred to a special “type-I” rouble account with the NSD. Such investors should independently contact the NSD and provide evidence of their title to the Russian Eurobonds. On the basis of provided documents, the NSD maintains a special register of holders whose Russian sovereign Eurobonds are held in foreign depositories (the Register).
If the relevant Eurobond holder has submitted the required evidence to the NSD and has been included in the Register within 90 days after the date of the regular Eurobond payment, such holder may receive payment in roubles from a “type-I” account. After 90 days from the date of the regular Eurobond payment, the payments to the Eurobond holders are to be made in foreign currency.
For this purpose, the NSD will use the foreign currency blocked on accounts held with Euroclear and Clearstream. It is unclear whether Euroclear and Clearstream will unblock any of the funds to effect such payment. According to Decree No. 665, the NSD will be deemed to have duly performed its payment obligations to the foreign investors from the moment it has submitted to Euroclear/Clearstream a payment instruction regardless of whether the Eurobond holder ultimately receives the payment.
It is unclear whether the Russian government will use some of the swap mechanics set out in Decree No. 665 with respect to the funds held on type-C accounts.
It remains to be seen whether the proposed exchange of assets would be a workable solution for non-Russian investors. First, the text of the draft decree is not yet publicly available, and the proposed mechanism is still subject to change. Second, the exchange is likely to be complicated by compliance and legal issues for non-Russian investors, and may require licenses from the relevant regulators.
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