Exclusive: Russian companies and global banks can reap windfall profits from writing off deposit receipts

Illustrative image showing US 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 profit if Moscow moves to delist Russian companies’ deposit receipts from foreign exchanges, according to Two knowledgeable people. Subject.

The potential windfall is due to the fees that bank issuers of deposit receipts can contractually charge investors when they cancel the product.

It is not clear how much companies and banks can earn or whether the banks will charge fees and risk angering investors who say it would be unfair given the exceptional circumstances created by Russia’s invasion of Ukraine.

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

Due to Western sanctions, Moscow is preparing to delist the deposit receipts of Russian companies from foreign exchanges and transfer them into domestic Russian securities in an attempt to reduce foreign control of these companies. Read more

Depository receipts are certificates issued by a bank that represent shares in a foreign company that is traded on a local stock exchange. They allow investors to engage in offshore stocks in their own geography and time zone.

There are more than 30 deposit receipts on Russian companies including Gazprom, Rosneft and Lukoil (LKOH.MM) Norilsk Nickel (GMKN.MM) Issued by BNY Mellon, Deutsche Bank, Citigroup, JPMorgan, etc., and trading in the US and European markets.

Under standard agreements, the issuer or investor can cancel deposit receipts. When this happens, the investor usually gets cash from selling the underlying shares, although they are entitled to take over the custody of the shares instead.

Two sources said that banks charge an administration fee, usually around $0.05 per receipt, which can be shared with businesses.

If Moscow cancels the lists of Russian deposit receipts, the banks will have to cancel the products. According to three sources, banks can still collect the fees, despite being forced to pay the fees.

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

Comprehensive Western sanctions may make it difficult for banks to transfer liquidity to some companies.

Regardless, some investors say fees should not apply. One global asset manager told Reuters that if Russia passed the write-off law, there would be no fees because investors would have no choice in the matter. However, the other two sources 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 in late February, the Moscow Stock Exchange closed and the Russian Central Bank banned foreigners from transferring shares from their trust accounts. It also prevented foreigners from selling Russian stocks.

The restrictions made it nearly impossible for the banks to cancel the receipts when investors, anxious to reduce their exposure to Russia, asked them.

With restrictions on custodians recently lifted, BNY Mellon, Citi and JPMorgan have resumed processing the cancellation. But since foreign banks still can’t sell the shares, investors have to take them instead. To do this, investors need an account in Russia, which not many have.

As a result, a lot of investors are likely to be holding receipts for now, according to three people.

However, many investors are concerned about Russia’s delisting bill. Read more

Aside from potential cancellation fees, investors are concerned about what will happen if they are unable to open a local trust account.

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

Editing by Michelle Price, Megan Davis and Nick Czyminski

Our criteria: Thomson Reuters Trust Principles.