Exclusive: Russian companies and banks could profit from write-off of certificates of deposit

An illustration shows U.S. dollar and Russian ruble banknotes in Sarajevo, March 9, 2015. REUTERS/Dado Ruvic/File Photo

WASHINGTON/NEW YORK, April 14 (Reuters) – Russian companies and global banks, including BNY Mellon, Deutsche Bank, Citigroup and JPMorgan, could benefit if Moscow decides to delist Russian companies’ certificates of deposit on overseas markets, according to two people familiar with the matter.

The potential windfall is due to fees that banks issuing certificates of deposit can contractually charge investors when they terminate the product.

It’s unclear how much companies and banks could earn or whether banks will charge the fee and risk angering investors who say it would be unfair given the extraordinary circumstances that were triggered by the invasion of Ukraine. by Russia.

However, the fees could potentially translate into hundreds of millions of dollars according to Reuters calculations based on fee data provided by the sources.

Beset by Western sanctions, Moscow is preparing to withdraw the certificates of deposit of Russian companies from foreign markets and convert them into local Russian securities in a bid to reduce foreign control over these companies. Read more

Certificates of deposit are certificates issued by a bank representing shares of a foreign company traded on a local stock exchange. They allow investors to engage in foreign stocks in their own geographic area and time zone.

There are more than 30 certificates of deposit on Russian companies, including Gazprom, Rosneft, Lukoil (LKOH.MM) and Norilsk Nickel (GMKN.MM) issued by BNY Mellon, Deutsche Bank, Citigroup, JPMorgan, among others, traded on the American and European markets. .

Under standard agreements, certificates of deposit can be canceled by the issuer or the investor. When this happens, the investor typically derives cash from the sale of the underlying shares, although they have the right to take custody of the shares instead.

Banks charge an administration fee, typically around $0.05 per receipt, which can be shared with businesses, two sources said.

If Moscow removes Russian certificates of deposit, banks will have to cancel the products. Banks could still charge the fee, even if their hand was forced, according to three sources.

For example, an investor in Rosneft with 150 million certificates of deposit representing the same number of shares in the company could be liable for $7.5 million in cancellation fees, according to Reuters calculations.

Broad Western sanctions could make it difficult for banks to transfer money to certain businesses.

Either way, some investors say the fee shouldn’t apply. A global asset manager told Reuters that if Russia passes the delisting law there should be no fees as investors would have no choice in the matter. The other two sources, however, say banks still have to cover their costs.

BNY Mellon, Deutsche Bank, JPMorgan and Citigroup declined to comment. The Russian companies did not respond to emails from Reuters seeking comment.

MARKET FREEZE

As Western sanctions hit Russian stocks from late February, the Moscow stock exchange closed and the Russian central bank banned foreigners from transferring stocks out of their deposit accounts. He also banned foreigners from selling Russian stocks.

The restrictions have made it nearly impossible for banks to void receipts at the request of investors keen to reduce their exposure to Russia.

With restrictions on custodians recently lifted, BNY Mellon, Citi and JPMorgan have resumed processing cancellations. But with foreign banks still unable to sell the shares, investors should beware. To do this, investors need an account in Russia, which many do not have.

As a result, many investors are likely to hold onto the proceeds for now, according to three people.

Many investors are concerned, however, about the draft delisting law that Russia is preparing. Read more

Besides potential cancellation fees, investors worry about what will happen if they cannot open a local deposit account.

In a note to clients, JPMorgan said clients may be able to open a Russian account under certain unspecified circumstances if the new law is passed.

Editing by Michelle Price, Megan Davies and Nick Zieminski

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