Russian and foreign investors will exchange blocked assets

The Bank of Russia has reported on the preparation of a draft presidential decree on the exchange of frozen assets of Russian and foreign investors. As a result of the sanctions, a significant part of Russian investments are blocked on the accounts of Russian brokers and other securities market participants in foreign depositories: for example, funds on the accounts of the National Settlement Depository (NSD) in Euroclear and Clearstream have been immobilized. If they wish, foreign investors will be able to purchase such assets at the expense of "frozen" funds on "C" accounts in Russian banks.

According to the Russian Minister of Finance, at the initial stage it is planned to unblock investments of small (up to 100 thousand rubles) portfolios of Russian retail investors totaling 100 billion rubles. For comparison, the total amount of blocked assets of Russian citizens reaches 1.5 trillion rubles while another 4 trillion of the “frozen” assets belong to Russian legal entities.

The details of this procedure have not been disclosed yet, but there are assumptions that foreigners will buy out securities from Russian investors at a below-market price, since the volume of funds in the “C” accounts is much smaller than the amount of blocked assets of Russians. Besides, unless otherwise stipulated by the decree of the President of the Russian Federation, “unfriendly” foreigners will also need the permission of the Government Commission for the transaction, which means the necessity to make a contribution to the budget.

However, the main problem for foreign investors may be the fact that the assets they receive as a result of the exchange will still be held in the accounts of sanctioned entities (e.g., the same NSD). Thus, actions with these assets will be possible only with the authorisation of the relevant European regulators. However, there are precedents of obtaining such individual licenses, including by Russian persons: for example, at the end of August 2023, the Russian media published information about a Russian investor, who does not have a residence permit in the European Union, obtaining permission from the Belgian Ministry of Finance to "unfreeze" assets worth 10 million euros. The number of refusals to grant such licenses, however, far exceeds the number of successful cases.

All of the above makes it doubtful how willing foreign investors will be to purchase “frozen” Russian assets. On the other hand, in the absence of alternatives and with the prospect of indefinite blocking of funds on “C” accounts, a number of foreigners are likely to agree to the exchange, albeit at a discount.

However, the scheme proposed by the Central Bank and the Russian Ministry of Finance can only be implemented with the consent of European regulators, and their position on this issue still remains unknown.