The Russian president issued Decree No. 844 on November 8, establishing the framework for release of blocked shares held by foreigners in Russia and their exchange for assets of Russian investors blocked abroad.
Following discussions of the Russian government and the Central Bank of the Russian Federation (CBR) (refer to our previous LawFlash), Russian Presidential Decree No. 844 of November 8, 2023 (Decree No. 844) introduces 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” accounts in Russia.
INVESTMENT EXCHANGE MECHANISM
Decree No. 844 relates to the purchase of foreign securities recorded in EU clearing systems where such securities are held by Russian investors through the link between the EU clearing systems and the Russian National Settlement Depository (NSD) (Foreign Securities). In June 2022, following the designation of the NSD as a sanctioned entity by the European Union, the European clearing systems effectively blocked the relevant Foreign Securities.
Previously, non-residents from “unfriendly jurisdictions” were generally prohibited from making any transactions with any securities conducted by absent approval from the Government Commission on Control over Foreign Investments (FDI Commission), which was extremely difficult to obtain. Decree No. 844 specifically stipulates that there is no need to receive separate approvals from the FDI Commission as long as the “investment exchange mechanism” referred to in Decree No. 844 is used.
The purchase of the Foreign Securities must be conducted within the Russian depository infrastructure. The process will be voluntary and will initially target small Russian assets blocked abroad. The aggregate initial value of the Foreign Securities that can be sold by a single Russian investor under the new procedure may not exceed 100,000 rubles ($1,087).
Decree No. 844 establishes that transactions between Russian and foreign investors will be concluded by means of “bidding.” The terms of such bidding procedure will have to be elaborated by the FDI Commission.
TRANSFER OF FOREIGN SECURITIES
The Foreign Securities purchased by foreign investors under the bidding procedure will be credited to “special transit custody accounts” with the Russian depositories. This means that the sale of the Foreign Securities will initially be made only within the Russian depository system and will effectively remain blocked under EU sanctions.
It is contemplated that the Foreign Securities could then be transferred from the special Russian transit custody accounts to foreign brokers, but the procedure and the regime of such special transit custody accounts will have to be introduced by the CBR separately.
The proposed exchange mechanism does not seem to have been agreed upon or even coordinated with the EU authorities, and even if the foreign investors manage to exchange their blocked Russian assets against the Foreign Securities, they will have to obtain licenses from the EU sanctions authorities to unblock those Foreign Securities.
TAKEAWAYS
Decree No. 844 outlined only the general framework of the investment exchange mechanism, and the detailed procedures should be elaborated on by the FDI Commission and the CBR. The CBR also should make the necessary changes to the Type C regime in order to allow foreign investors to pay for the Foreign Securities.
The exchange mechanism may be of interest to foreign investors because it will be the only way to use their frozen funds in Type C bank accounts without the need to obtain approval from the FDI Commission.
However, after the purchase, the relevant Foreign Securities will remain within the Russian depository system and will be blocked because of the EU sanctions against NSD. Obtaining licenses to move the Foreign Securities from NSD to foreign brokers and then unfreezing the Foreign Securities may prove complicated.
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