how frozen Russian assets are looking for a way to their owners

Despite the fact that the general political situation and sanctions pressure on the Russian Federation are not easing, in 2023 it became clear that even a way out of stalemate situations can be found. Thus, efforts to unfreeze the assets of Russian individuals abroad have yielded the first fruits. The fastest and most effective way was to replace debt obligations. Slowly and difficultly, with restrictions, but by the end of the year an exchange mechanism had developed. And even if on an individual basis, it was possible to achieve direct release of the assets of a number of investors by foreign regulators. The market is in no hurry to rejoice: falling under the sanctions of the St. Petersburg Exchange has created a new set of problems. But there are apparently almost no such risk areas left.

When the number of sanctions packages has already exceeded ten in less than two years, and the rhetoric of political statements by all parties to current international conflicts is not becoming softer, unraveling the tangles of problems that have arisen, especially in the financial market, looks like an almost hopeless undertaking. However, it turned out that this is quite possible.

In June 2022, the volume of foreign securities of Russian investors blocked in the accounts of the National Settlement Depository (NSD) in European depositories was estimated by the First Deputy Chairman of the Central Bank, Vladimir Chistyukhin, at the equivalent of 6 trillion rubles. ($100 billion).

The fastest and most effective way to solve the problem was to remove Eurobonds of Russian issuers from being blocked by foreign depositories. In 2023, the volume of replacement bonds issued could exceed the equivalent of $21 billion, adding to the $7.7 billion that appeared in 2022 (the May presidential decree making the issuance of securities mandatory undoubtedly contributed).

Decisions have been made regarding another two dozen issues with a nominal volume equivalent to more than $9 billion, which, taking into account placement statistics, will result in an increase in released assets of at least $5 billion.

The situation with shares and depositary receipts, primarily of foreign issuers, turned out to be more complicated. But it also moved forward by the end of 2023 through two mechanisms – private, by appealing to foreign regulators, and a unified state exchange.

In July 2022, Deputy Chairman of the Central Bank Philip Gabunia estimated the blocking of foreign shares on NSD accounts in the amount of 320 billion rubles. ($5.3 billion). However, this affected a significant number of retail investors. In December of this year, Finance Minister Anton Siluanov estimated their number at 3.6 million people.

Private investors made the first attempts to unblock at the beginning of the year, after Euroclear and Clearstream announced about the possibility of submitting such applications. In general, there were several possible strategies in 2023, notes Elena Mende, partner at the Smolenka 33 Bar Association.

Retail investors could obtain a residence permit or second citizenship before moving abroad, begin “individual work with the regulator,” launch a lawsuit, or take part in a class action “under the wing of financial organizations.”

Institutional investors also had different options: changing the ownership structure in order to reduce relationships with sanctioned entities, appealing to regulators and subsequent legal appeal.

There are few examples of successful “individual” unlocks, but they do exist. In March 2023, Bank St. Petersburg received permission to unblock its assets in Euroclear. In May 2023 were for the first time papers of a person who has only Russian citizenship, without a residence permit in Europe, have been unblocked (see “Kommersant” dated June 28). In August, the investor was able to withdraw the unlocked assets to an account in another European country. In early December, two Russian companies were able to obtain permission from the Belgian Treasury to unfreeze their clients’ assets in Euroclear.

The prospect of systematically unblocking assets in NSD accounts appeared only towards the end of the year through the exchange of assets with non-residents for 100 thousand rubles, formalized by the November presidential decree, notes NAUFOR President Alexey Timofeev. According to the Ministry of Finance, about 2.5 million of the 3.6 million Russian citizens whose assets are blocked will be able to return their investments under the exchange mechanism, Finance Minister Anton Siluanov said in December. In August, he estimated that at the first stage it was planned to unblock accounts worth approximately 100 billion rubles. (just over $1 billion). But much will depend on the willingness of foreign investors to participate in the exchange. Some have already expressed their desire to do this, however, it is still difficult to estimate how large the demand will be.

An indirect lifting of the block on the assets of Russian investors was also implemented.

In particular, this concerned shareholders of investment funds that contained foreign assets (primarily shares). In the case of a large share of these securities in mutual funds, investors were deprived of the opportunity to trade shares. In the middle of the year, the process began to allocate assets to specially created closed mutual funds while preserving Russian assets in the previous funds. As a result, the investor received liquid shares of the “old” mutual fund (albeit in a reduced form), as well as illiquid shares of the new closed mutual fund, the redemption of which would proceed as foreign securities were sold, that is, for an indefinite amount of time.

The possibility of creating special companies to which banks could transfer frozen assets from their balance sheets is also being considered. The most common mechanism is the allocation of a legal entity that owns frozen assets and liabilities to creditors from unfriendly jurisdictions, commensurate with the frozen assets, explains Orchards advisor Azat Akhmetov. The first and so far the only bank to undergo reorganization according to this procedure was Sovcombank, the amount was not disclosed (see “Kommersant” dated September 22). Banks can carry out the procedure for allocating blocked assets until the end of 2024. Such plans were called by VTB, which plans to allocate assets worth at least 180 billion rubles.

Of course, the gradual unraveling of financial tangles does not protect against the emergence of new ones. So, in early November, the US SDN list hit SPB Exchange and its subsidiaries. The platform allowed Russian investors to trade foreign shares. Despite the decline in trade volumes this year, trade continued at a rate of several billion dollars per month. According to the exchange, over 2 million investors had foreign shares in their accounts. The process of unlocking these assets is just beginning and its prospects are vague – for example, a decision was made to contact the American Ministry of Finance with a request to lift sanctions from the depository of the exchange (SPB Bank) if the share of the trading platform in it is reduced below the control one.

But in general, on the St. Petersburg Exchange, systemic “carpet blocking”, apparently, has ended – due to the exhaustion of their subject matter. But the process of unfreezing assets will clearly continue.

Ksenia Kulikova