Foreign securities worth almost 6 trillion rubles, owned by Russian investors, have been frozen for more than a year due to sanctions after the start of the “special operation” in Ukraine. What is happening with these assets now, how are the Russians trying to get them out of the lockdown, and will they succeed?
How did it come about?
After the start of the “special operation” * in Ukraine and the first retaliatory Western sanctions, foreign stocks and bonds in which the Russians invested turned out to be blocked. For the past 10 years, Russian brokers have been actively promoting the opportunity to become global investors and invest in foreign securities. The amount of blocked assets amounted to 5.7 trillion rubles, 20% of which falls on 5 million private investors. For comparison: this is a fifth of the annual budget of Russia in 2023, or 16% of all funds of individuals in banks, a huge amount.
The blocking occurred because the chain of rights management for shares and bonds broke. A significant part of foreign securities is held or accounted for in the Euroclear and Clearstream depositories – these are the key companies in the European financial infrastructure.
When you buy foreign shares through a Russian broker, the right of ownership also changes – a record in the depositary that these shares now belong to you. On-chain entry from a Russian broker through the Russian National Settlement Depository (NSD) is recorded in Euroclear and Clearstream as a final or intermediate storage location.
When immediately after the start of the “special operation” Euroclear and Clearstream blocked NSD’s account, and then the depository fell under blocking EU sanctions, it turned out to be impossible to manage the rights to shares and bonds.
What does blocking mean?
No one has canceled the ownership of securities, but they cannot be sold, as well as withdrawing money – coupons or dividends on these securities. Investors have been trying to restore the ability to dispose of their assets for almost a year. But it is difficult, expensive, long and few people understand exactly how to act and what to do.
Russian investors and brokers come up with different schemes to get out of the situation. For example, blocked securities can be sold to another Russian at a discount in the over-the-counter market. In December, such an opportunity was opened by SPB Exchange and Tinkoff Investments. In April, OTC transactions became available to Finam’s clients.
When buying such assets on the OTC market, the transaction is carried out by a broker, the place of storage of blocked securities does not change – through NSD in Clearstream, but in the Finam depository, these shares change the names of the owners.
Can assets be unlocked?
Theoretically yes. The fact is that on October 6, 2022, an easing was released in the eighth package of EU sanctions for investors: the EU states, if necessary, can allow the unblocking of assets to stop contacts with sanctioned organizations, such as NSD.
In late December, the Treasury of Belgium, in whose jurisdiction Euroclear is located, and the Ministry of Finance of Luxembourg, where Clearstream is registered, issued regulations inviting everyone to apply for an unlock by January 7, 2023 – a couple of weeks were allotted for this, including the Christmas holidays in Europe and New Year holidays in Russia.
Belgium introduced an additional requirement in the unblocking rules – to find a guarantor in the European Union who can confirm that sanctioned assets are not subject to unblocking. It is in the Belgian jurisdiction, in the Euroclear depository, that the bulk of the frozen assets of Russian investors.
At the beginning of the year, all major brokers, including Finam, BCS, Tinkoff Investments, Ingosstrakh Investments, KIT Finance, VTB, reported on filing applications for unlocking. Dmitry Lesnov, Head of the Finam Customer Service Development Department, also said that the company has not yet received any response to its application. BCS and Veles Capital have no news either.
Belgian Treasury spokesman Francis Adins declined to comment. At the same time, earlier in mid-April, the general manager of the administration of the department, Alexander de Guest, told Le Soir that a group of eight people was processing about 1,000 Russian applications, of which about 300 had already been verified.
Cases with unlocking, as well as with failures, are rare, the Central Bank noted earlier. “We do not yet see a trend towards unfreezing, but nevertheless, NSD and relevant professional participants continue to work to protect the rights of our retail investors,” said the head of the Central Bank, Elvira Nabiullina.
Has anyone succeeded?
These are isolated cases. Kristina Ustinova, head of the department for legal support of corporate activities of IC Veles-Capital, told Forbes that among the clients of their company there are those who managed to obtain a license on individual applications. She did not specify how many such investors were and declined to disclose the details of obtaining approval for these applications.
There are two known instances where unlock authorization was granted to clients of the law firm BGP Litigation. In both cases, the investors had a European residence permit and an account in Europe, says Tatiana Neveeva, partner, co-head of BGP Litigation’s compliance and sanctions practice. According to her, after receiving permission to transfer, clients continue to interact with NSD. So far, the process of transferring their assets has not been completed.
In mid-May, the Belgian Treasury issued a release permit for a private investor from Russia without the right to reside in Europe, said Andrey Timchuk, partner, head of the sanctions practice at the Delcredere Bar Association, which accompanied the case. The investor had less than €100,000 in his accounts and several million dollars worth of Eurobonds.
Another not fully understood case is the permission to unlock the assets of the Bank St. Petersburg, which is under US sanctions, in Euroclear in the amount of $110 million. This was reported in an interview with Le Soir in April by the General Manager of the Administration of the Treasury of Belgium, Alexander de Guest. According to him, the bank became one of those who filed “no more than five” appeals to the Belgian State Council against the refusal to unfreeze assets and achieved the same unfreezing. The details of how this happened, Gest did not give. There is no information on the website of the Belgian State Council.
Bank Saint Petersburg refused to confirm or deny the unlock. At the same time, in January the bank won a lawsuit against Euroclear Bank for the recovery of $107.1 million and €489,000 in the Moscow Arbitration Court, Interfax reported. A source familiar with the situation confirmed that the decision to unlock the bank’s assets had been made, but could not explain the mechanism behind the decision. Guest did not respond to Forbes’ request for comment.
Are there other options?
Yes, but they are even more complex. For example, the Russian National Settlement Depository applied to the European Court of Justice in Luxembourg with a claim to lift the sanctions imposed against it. So far, it follows from the case file on the website that NSD is actively preparing for the trial. For example, the depository did not object to the fact that JSC “Maritime Bank” and a certain Andrey Lipatov entered the case as third parties on its side. His full namesake is a St. Petersburg lawyer, co-owner of the Teplocom company, a member of the scientific and expert council at the State Duma Committee on Energy and the author of the book “The Right Society. moral foundations.
In both cases, these persons tried to prove that their securities were blocked in Euroclear, but they failed to do this – the accounts of the nominal holding of NDRs in Euroclear were depersonalized. The court refused to join the case to both the Sea Bank and Lipatov for this reason – the impossibility of proving their relationship directly with Euroclear.
NRD declined to comment. According to NSP partner Sergey Glandin, who is familiar with the details of this case, the written part of the consideration of the claim is now underway, not a single meeting has yet been held, the date has not yet been set.
Permission granted: what’s next?
In theory, a Russian broker or an individual, based on the permission of the Belgian and Luxembourg regulators, should apply directly to Euroclear or Clearstream and order the withdrawal of assets in connection with the “termination of relations” with NSD. But how this will happen is also unknown.
Sergey Glandin, a partner at NSP law firm, does not exclude that this may be within the framework of a non-standard procedure – the transmission of written messages or e-mail. It is not clear when and how the depositories will react after that. “There is a ‘reasonable period’ rule for complying with the terms of such MoF permits, and in case of conflict, one can refer to the 30-day period provided for by Belgian administrative law law,” he explains.
If the license is partially executed or not executed at all, the investor can appeal against the inaction of the depositary in the Belgian Ministry of Finance or in court. True, according to Glandin, in the case of Belgium, the investor will face one of the slowest judicial systems in Europe. “And since there has not yet been such a practice, then only at first instance can you hang for three to six years,” the lawyer says.
European sanctions prohibit Russians from having more than €100,000 in accounts in Europe. This rule applies to Euroclear and Clearstream, as well as other banks in the EU. This restriction will also affect the unlocking process, says Andriy Timchuk from Delcredere. “If the funds go to an account in an EU financial institution, they will be blocked, at least in excess of €100,000. This does not apply to those who have a residence permit in the European Union,” says the lawyer.
Is this case solved at all?
It seems that the EU will be able to fully unlock the funds of investors only after the end of the “special operation” and the lifting of sanctions against NSD. All other options involve legal action in Europe.
If investors are refused by European regulators, they can challenge these decisions in court or try to get compensation for the value of their assets, says Oles Gruzdev, a lawyer at Forward Legal. But the likelihood of satisfying these requirements is low, the lawyer adds.
You can also try your luck at the ECHR, since its decisions are binding on Belgium and Luxembourg, despite the fact that Russia has withdrawn from the Council of Europe. You can file a complaint within four months after the refusal of the national regulator.
Also, in case of refusal, you can apply to investment arbitration with a claim for the recovery of damages from European countries whose authorities refused to unblock assets. “This path is possible for investors-organizations that have the necessary resources to conduct litigation, but not for citizens. The specificity of this path is that disputes in investment arbitrations have been considered for decades, and a positive result is not obvious,” says Gruzdev.
Aassets of the Russians will continue to block?
Yes. All over the world. After trading in foreign securities in Russia ceased, Russian investors began to open accounts with foreign brokers, for example, in Kazakhstan and the United Arab Emirates. However, even here they faced restrictions related to European sanctions, since many foreign depositories still have accounts with Clearstream and Euroclear.
Of course, European depositories see only an array of securities from a particular country, but do not know who exactly they belong to. “Euroclear and Clearstream cannot control compliance with sanctions restrictions against Russians. They just don’t see them,” explains Timchuk from Delcredere.
But on the other hand, they can ask their clients – national depositories to do this work: to separate the accounts of Russian citizens into a separate category and limit the use of funds on them. In essence, do the same thing that Euroclear and Clearstream did with Russians’ accounts at NSD – freeze them.
Lawyers and financiers have come up with the phrase “asset segregation” for this. In April, it became known that this segregation of Russian assets is being carried out by the second largest bank in the UAE, ENBD. And since May, this procedure, at the request of European structures, has been started by the Central Depository of Kazakhstan.
Despite the fact that the requirement to allocate the assets of Russians and Belarusians has been in effect since last year, now both European depositories and foreign counterparties have begun to treat this procedure more carefully. If the banking system is used to bypass restrictions that have already been introduced, financial institutions run the risk of being sanctioned themselves, says Anton Imennov, senior partner at Pen & Paper.
At the same time, the fulfillment of the requirements of European depositories in practice depends on each particular bank, Imennov says. “Some are tightening compliance and requiring clients to provide a lot of documents and disclosures. At the same time, the timing of such inspections is also significantly increased. Other banks, for reputational reasons, refuse to work with Russian clients in principle and announce the closure of accounts, ”says the lawyer.
