The Path to “Defrosting” Will Not Be Quick
The National Settlement Depository (NSD) is trying to challenge the complete blocking of foreign assets that belong to Russian investors: foreign stocks and bonds totaling about 6 trillion rubles.
Operations with them – including the receipt of coupons and dividends – became impossible for Russians in early March, when the depositories Euroclear and Clearstream stopped operations with the NSD. It should be clarified here that Euroclear and Clearstream acted as partners of the NSD in cases of cross-border purchases, when Russians bought securities abroad, and vice versa, when foreigners bought assets inside Russia. Later (in June) the EU imposed sanctions on the NSD, legitimizing the actions of European structures. As a result, domestic investors were deprived of access to securities worth about 6 trillion rubles (by Bank of Russia estimates).
Now the Moscow Exchange, along with the NSD, the Bank of Russia, the Ministry of Finance, and the largest Russian banks, is developing various options for further action. The main question is how to return to investors either the frozen assets themselves (or rather, access to them) or their monetary equivalent. And this is not just about protecting private investors who are caught up in Western sanctions, despite the fact that the majority are not on any sanctions lists. It’s also about the blocked money, which could provide significant support to the domestic stock market. At the end of the first half of 2022, the total capitalization of the entire Moscow Exchange was about 41 trillion rubles (at the beginning of October 2022, slightly less). Thus, an additional 6 trillion (14% of the current total capitalization) could be a significant help for the domestic stock market. Moreover, except for private investors, it has practically no support left: the opportunities for foreigners to trade in domestic securities are blocked, and there was almost never any long money on the Russian stock market, due to the very small volume of the collective investment market and the freezing of pension savings in 2014.
Options for Solutions
There are several options so far for solving the problem of frozen foreign assets. The most obvious is an attempt to challenge the sanctions against the NSD. In August, the NSD filed a lawsuit with the EU Court of Justice in Luxembourg. In a statement, the National Settlement Depository emphasizes that the EU Council did not provide sufficient justification for the need for sanctions, misjudged the facts, and imposed disproportionate restrictions – violating the norms of the EU Charter. When imposing sanctions, the EU said that as the NSD is the largest securities depository in Russia, it plays a key role in the functioning of the Russian financial system and is “directly or indirectly involved in the activities, policies and resources of the Russian government.” However, according to the NSD statement, the EU Council relied on incorrect facts: the Moscow Exchange (which owns 99% of the NSD) is not at all “included in the Russian government” – since 60% of its shares are in free circulation on the exchange, and are owned by both Russians and foreign investors.
True, the NSD’s lawsuit does not affect the most important issue – the freezing of the assets of investors who are not under sanctions. However, in fact this is understandable from a legal point of view, as the plaintiff here is the NSD – while if private investors want to unfreeze their assets, they themselves need to prove to the Belgian Treasury (in whose jurisdiction Euroclear is) that they are not under sanctions. The European Commission has explained: unfreezing is possible if the payment goes from the NSD in favor of a non-sanctioned person under an agreement concluded before the date of inclusion of the NSD in the sanctions list.
In addition, the European Commission allowed settlements with the NSD only if it does not receive economic benefits from the transactions made, so the NSD immediately abolished commissions for transferring money from abroad to Russia. Several law firms offer their assistance in this, but so far no successful case is known of the unblocking by a Russian investor of its own assets stuck in Euroclear.
At the same time, while the case between the NSD and the EU Council continues in the Luxembourg court, other methods can be tried to return the frozen funds of Russian investors to the country, and to the market. All of these options are based on some kind of exchange, in one way or another, of frozen assets (or rights to them) for something more liquid.
At first, the Bank of Russia considered the following method: professional market participants issue derivative financial instruments, which are distributed in a certain proportional way among the owners of frozen assets. After that, these derivatives can be sold, and only qualified investors will be allowed to buy them.
Now another option is being discussed: the creation of some kind of compensation fund on the basis of the Deposit Insurance Agency. At the end of September, the head of the DIA, Andrei Melnikov, said that the DIA had already begun preparations for the performance of the functions of such a fund. “We see that this project for the compensation fund is being worked out at the Central Bank very actively. We are preparing IT-technologies in order to take on the compensation fund quickly,” said Andrei Melnikov at the forum “Banks of Russia – XXI Century.” This fund is intended to be filled by the coupons and dividends that are accrued on Russian stocks and bonds owned by non-residents. True, the question arises what legal consequences this will have.
Therefore, there is another idea: the exchange of frozen assets on both sides. Specifically, such a scenario was proposed by the head of VTB, Andrei Kostin. The exchange itself should be formalized through redemption – in general terms, non-residents sell Russian assets and buy foreign ones owned by Russians. However, such a scheme also has drawbacks: in the current situation of an all-out sanctions war, it is unlikely that foreigners will dare to take such a step, fearing a variety of consequences. And the mechanism itself involves close cooperation between Russian and foreign depositories – which can hardly be discussed yet.
Finally, professional market participants are beginning to take their own steps. Thus, Tinkoff bought the blocked assets of its own fund Tinkoff Eternal Portfolio USD, and thus restarted trading in its shares. And Otkritie Investments is working on several options for exchanging blocked assets. One of them is an exchange between Russian and foreign investors on the principle of “everything for everything.” The other is the collection of frozen assets in a mutual fund, their withdrawal from the NSD to another non-sanctioned depository, and their subsequent sale. And the last option is the search for a buyer for frozen assets. Generally, attempts to buy frozen Western assets from Russian investors have been going on for several months. However, first of all the question is the price – so far, due the high risks, they offer to buy only at a large discount. The second issue is the volume of assets, as it is hardly profitable to buy small portfolios worth 10-100 thousand rubles.
In mid-October, “SPB Exchange” announced that it had begun the process of preparing for the payment of dividends on securities of US issuers. According to the head of the platform, Roman Goryunov, it has a preliminary agreement with one of the foreign participants about the exchange of part of the assets from the NSD to an external depository. But this will not affect the securities blocked by Euroclear, and the process itself may take several months.