by Sinead Cruise and Carolina Mandl
LONDON/NEW YORK (Reuters) – Deutsche Bank has warned customers that it can no longer guarantee them access to their Russian stocks, underlining the difficulties faced by investors holding securities of companies in Russia.
In a note dated June 9, and which Reuters was able to consult, the first German bank said it had discovered that shares backed by a certificate of deposit issued before Moscow’s invasion of Ukraine had disappeared. These shares were held in Russia through another custodian bank.
In the note, Deutsche Bank explains this disappearance by a decision by Moscow authorizing investors to convert certain certificates of deposit into local shares. This conversion occurred without the “involvement or supervision” of the German bank which was unable to reconcile the local shares with the certificates of deposit.
Deutsche Bank is the first major institution to officially warn holders of certificates of deposit that they may not be able to acquire all the shares to which they are entitled, two sources advising investors who continue to hold certificates of deposit told Reuters. deposits in Russia.
Certificates of deposit are securities issued by a bank representing shares of a foreign company traded on a local stock exchange. Converting certificates of deposit into shares of a Russian company is a first step for investors to recover their money invested in Russia.
The shares affected include Russian companies such as the airline Aeroflot, the construction group LSR Group, the mining company Mechel and the steelmaker Novolipetsk Steel.
Mechel declined to comment while the other groups named did not immediately respond to a request for comment.
Western sanctions against Moscow, and retaliatory measures taken by the Kremlin, have put investors in Russia in difficulty.
A significant number of them, ranging from small hedge funds to large asset management firms, still hold certificates of deposit, the sources said.
Some investors have already resolved to depreciate the value of their Russian assets to zero, but others still hope to be able to extract value from them in the future.
For Irina Tsukerman, president of geopolitical risk consultancy Scarab Rising, Deutsche Bank’s announcement comes as no surprise.
“In Russia, literally everything is vulnerable, whether it’s certificates of deposit, stocks, real estate or any other form of financial assets,” she told Reuters.
The Central Bank of Russia had no immediate comment.
The Russian Deposit Regulation Authority indicated that the conversion of the shares took place in accordance with Russian law and that it was not the institution responsible for implementing this mechanism.
“COMPLETE CHAOS”
Lawyers and legal advisers have described the conversion process as “complete chaos”.
“To a certain extent, this resulted in double counting because, in the absence of a rapprochement between Russia and foreign banks, an investor could obtain Russian stocks while maintaining certificates of deposit with the bank foreign,” explains Grigory Marinichev, partner at Morgan Lewis.
Deutsche Bank is now allowing investors to exchange certificates of deposit for shares, as part of its plan to withdraw from all its activities in Russia, a source said.
JPMorgan & Chase, Citigroup and BNY Mellon act as the depository bank for most other Russian certificate of deposit programs, according to Clearstream.
The three banks declined to say whether they had also identified any disappearances. Their records remain closed due to reconciliation difficulties, according to statements posted on their websites.
In its note, Deutsche Bank indicates that if it manages to reconcile the certificates of deposit with the Russian shares in the future, it would try to return more shares to their holder.
But it warns that the net divestiture from the sale of the shares it would be able to return to investors would come at a “much lower” price than the market.
According to Deustche Bank, the Russian governmental commission for the control of foreign investments requires that such shares be sold “at a discount of at least 50% compared to the market value”, it is indicated in the note.
(Reporting Sinead Cruise in London and Carolina Mandl in New York; with the contribution of Alexander Marrow in Moscow; Blandine Hénault for the French version, editing by Kate Entringer)
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