Shares of foreign companies owned by Russians are frozen by the Central Bank

The disconnection of the National Settlement Depository with international exchanges is a direct consequence of the sanctions.

Yulia Suntsova, Natalya Seybil

The order of the Central Bank on the distribution of 14% of the risk among all investors who have shares of foreign companies in their portfolios, and the transfer of this share of securities to the non-trading section, was received by the St. Petersburg Stock Exchange and Russian brokers on May 30. They must temporarily block foreign securities in customer accounts held at the National Settlement Depository.

At present, shares cannot be sold, cashed out, or receive dividends from them. How long this will last is unknown.

Starting from May 30, Russian investors discover changes in their personal accounts. Depending on the broker, someone has a lock icon in front of the shares of foreign companies, or, as in SberInvestments, for example, the shares simply disappear from the portfolio.

The Central Bank blames international depositories for everything and at the same time convinces that the measures are aimed at “protecting the rights and interests of investors and minimizing their risks” (!). They promise to keep the ownership of foreign securities, and resume trading as restrictions are lifted. When this will happen is unknown.

Here is how the regulator himself comments on the situation:

“The Bank of Russia has decided to limit the circulation in organized trading of foreign securities blocked by international settlement and clearing organizations from May 30, 2022, with the exception of securities of foreign issuers carrying out production and economic activities mainly in Russia.

Now blocked foreign securities are circulating on the St. Petersburg Exchange in a small amount. Since such assets are not marked in its trading and clearing system, they will be distributed among trading participants and their clients on equal terms, taking into account proportionality and with the possible exception of non-trading accounts of small client portfolios".

As a result of the decision taken by the Bank of Russia, foreign securities were completely divided into those that can be freely traded and those that are accounted for by the National Settlement Depository and cannot be traded. Securities registered and stored on the accounts of the settlement depository of SPB-Exchange - PJSC "Best Efforts Bank" - in NCO JSC "National Settlement Depository" (NSD) were subject to blocking, as the international depository Euroclear Bank SA / NV partially restricted operations with securities in the National Settlement Depository.

In monetary terms, the volume of blocked securities amounted to about 14% of the entire client portfolio of brokers available for trading, providing access to the St. Petersburg Exchange. At the same time, the blocking did not affect some papers at all, and for some papers, 100% was blocked on customer accounts. The securities will be released when Euroclear resumes work with the Russian National Settlement Depository. At the moment, Euroclear and the National Settlement Depository are awaiting clarifications from European regulators - the Belgian Ministry of Finance and the European Commission, brokers explain.

The Central Bank has determined the principles according to which the stock exchange and brokers should choose securities and their quantity for blocking on clients' accounts.

There are "pardoned" foreign issuers for which an exception has been made. The Central Bank included, for example, Rusagro (AGRO), Cyan (CIAN), United Medical Group (EM44), Etalon (ETLN), X5 Retail (FIVE), Fix Price (FIXP), United Medical Group GDR (GEMC), Globaltrans (GLTR), HeadHunter (HHRU), HMS Hydraulic Machines & Systems (HMSG), Lenta (LNTA), MD Medical Group (MDMG), Okay (OKEY), Ozon (OZON). Petropavlovsk (POGR), Polymetal (POLY), Qiwi (QIWI), Softline (SFTL), TCS Group (TCSG), VK (VKCO), Yandex (YNDX), Veon (VEON-RX). Trading in the securities of these companies and tickers continues on the Moscow Exchange.

"The decision touched upon the papers that passed the primary listing on the American stock exchanges. Exceptions: HeadHunter, Yandex, Ozon, Cian, etc. Also, this will not affect securities listed on other exchanges, in particular, securities of TCS Group and Fix Price", - explains private investor Yevgeny Shepelev. - The securities are subject to restrictions due to the disconnection between the National Settlement Depository and Euroclear, which is considered a superior depository to the National Settlement Depository. For each name of foreign securities subject to blocking, the proportion of shares between securities available for trading and accounted for by NSD will be determined. Based on the proportion obtained, the account of each client who owns such securities will determine the number of securities that cannot be temporarily sold.

The client can transfer his securities to another broker or to another depository, but only within NSD, but this does not solve the problem - the shares of the new broker will also remain blocked.

The receipt of dividends and income from securities is also blocked.

On the evening of May 30, St. Petersburg Exchange published a list of securities subject to blocking. Among them, for example, shares of Alphabet, the parent company of Google, Amazon and other foreign giants. In total - several hundred items.

The Moscow Exchange, in turn, reported that no new restrictions were introduced from May 30. True, foreign securities have not been traded on it since the end of February - first due to the general suspension of the Moscow exchange stock market, then due to restrictions from Euroclear. At the same time, the Moscow Exchange warned that dividends may not be received on foreign securities already acquired and it may not be possible to participate in corporate actions.

In user chats, clients of Russian brokers express extreme dissatisfaction with the actions of the Central Bank. It can be said that political circles are already gathering here. There is a lot of swearing in hot statements.

It is understandable, according to the results of 2021, the Russians invested 14 trillion rubles in the stock market (for comparison, only twice as much as 33 trillion on deposits). That is, today, due to the decision of the Central Bank, the owners of brokerage accounts in the aggregate lose almost 2 trillion rubles.

“The last months have been terrible, but this morning is just shocking! With Russian shares bent in March, forbidding them to trade. I just decided to switch to foreign securities and bought myself a couple of companies, when they were blocked on my account. It's impossible to withdraw. What to do is not clear. Investments in Russian”;

“There was no longer enough for a special operation, frankly and brazenly they went to squeeze out the pockets of citizens”;

“They are thieves, no matter how beautifully they describe their theft”;

“Sanctions against their own citizens, excellent”;

“Z***** [zashib] invested. On the other hand, invested, of course, the question is for whom? Definitely not for myself”;

“How can you call property what you cannot dispose of? Ownership in Russian”;

“According to tradition, a selfish act is to announce the fact of blocking on the day off of the exchange, without giving the opportunity to withdraw even into a minus”;

"Casino 5:0 - everything you need to know about investing in Russia";

“They borrow hard-earned money and return it in 40 years. May be. As long as they use it. I don’t like it - but there was nothing to invest in “unfriendly countries”;

“The native regulator needs to somehow sober up the brains of fellow citizens, otherwise the unfortunate people still think that they live in a free and powerful country. They wanted to invest, look...

The broker "TinkovInvestitsii" stated that it would engage law firms to protect the rights and interests of its clients.

Talks that Russians should be banned from buying shares of foreign companies on the stock exchange have been going on since April. Such an initiative was born in the minds of the deputies of the State Duma. An initiative to ban the purchase of foreign securities from Russian investment accounts was made on April 21 by Anatoly Aksakov, head of the State Duma committee on the financial market.

The head of the National Association of Stock Market Participants (NAUFOR), Alexey Timofeyev , confirmed that such a bill had been submitted for their assessment, and the association spoke in favor of the possibility of partially limiting the share of foreign securities in Russian exchange accounts.

The Bank of Russia also supported the idea of limiting tax benefits for investors buying foreign assets on IIA. “The purpose of these tax preferences, first of all, should be to stimulate investment in Russian securities and financing the Russian economy,” the Central Bank explained.

With these innovations, decision makers are trying, they say, to stimulate long-term investment in domestic companies and non-state pension products.

Ideas are put into practice, as we see, without even waiting for the adoption of laws. At the same time, innovations are spread not only to newly arrived customers, but retroactively - to those who opened their accounts neither yesterday nor today.

Comment by Dmitry Potapenko, economist:

- Everyone who shouts “robbery” according to this story, in general, shouts correctly. The Central Bank has limited the circulation of so-called foreign securities. The date when they can be sold or bought has not been determined in any way. Access to assets is severely limited.

In fact, it can be explained more simply. We are currently under severe sanctions. It's clear why. Accordingly, our regulator and the National Settlement Depository have a serious problem - it becomes extremely difficult for them to interact with international depositories, to fulfill their terms of cooperation, and then he decides to simply block trading in foreign securities. Partly at first.

Our market is not independent. By and large, it can be said that it is not.

We have a huge number of intermediaries, brokers. But they are all pads. The Central Bank blocked trading in securities blocked by international depositories. The international depository said - guys, either you have a "special operation", or you place something here and invest.

If our fellow citizens entered the international exchanges not through pads in the form of our depositories, but directly, then foreign depositories would have to “shoot” everyone individually. But since we are going there through the hub, foreign depositories sent Russia out through the Central Bank. He, in turn, said that he was not able to provide guarantees. He could, of course, pervert and jump, giving Russian citizens the opportunity to work directly with foreign brokers, transfer papers to foreign jurisdictions, but he did not do that.

Igor Nikolayev, Professor, Doctor of Economics:

- The European Depository has limited trading in Russian securities, and this is a retaliatory sanctions measure. If the European depository restricts trading, then there are risks for transactions - it is impossible to know whether such a transaction will be recognized as legitimate or not. The Central Bank therefore transfers foreign shares to a non-tradable section and restricts investors from trading in such shares. It can be considered that the assets are frozen.

Valery Zolotukhin, investor, founder of the investment company Impact:

- What actually happened? If you delve into the technical details, then:

1) The EU and the US froze the assets of the Central Bank of Russia,

2) in response, the National Settlement Depository prohibited transactions of non-residents with Russian securities,

3) in response, Euriclear symmetrically froze operations for residents of the Russian Federation.

Here the most interesting began. Sanctions were introduced, but trading on the St. Petersburg stock exchange was not stopped. Some of the securities on the SPB-stock exchange were accounted for directly in the European depository, and some in the NSD. Those in the NSD - blocked Euriclear.

4) Trading in shares at NSD was not stopped in time, and they spread throughout the market. Now, months later, there is no turning back, and the Central Bank decided to block everything proportionally for everyone, that is, to share responsibility between all players in the St. Petersburg stock market.

For example: out of 1,000,000 shares of some Microsoft on the St. Petersburg stock exchange, 700 thousand would be in the SWISS depository, 300 thousand in the NSD - they would be blocked.

But within 2 months everything changed. And so the Central Bank decided to share responsibility between all clients of the SPB-exchange and block 30% of Microsoft shares from everyone.

Why hands reached only after 2 months? There are rumors that "they released some important clients from their shares." And as soon as they jumped out, they blocked the assets of ordinary "physicists".

According to my information (from employees of leading brokerage houses), companies in Russia are now creating an analogue of an over-the-counter platform, where transactions on blocked assets could be resumed. How successful this idea will be is unknown.

Financial consultant Maria Tarasko:

- At the moment there are more than 200 depositories in Russia. Accounting for the owners of foreign shares was kept in several depositories. The largest of these was the National Settlement Depository (NSD).

Since the shares were purchased from abroad, information about their owners also had to be transferred to a foreign depository. For this purpose, NSD cooperated with the foreign depository Euroclear.

When the special operation and sanctions happened, Euroclear stopped working with the Russian Federation and stopped working with NSD. Accordingly, in the sale and purchase transactions recorded by NSD, it became impossible to correctly account for the owners of shares, since this information can no longer be conveyed to the foreign depository and registrar of shares. Therefore, it was decided to block purchase and sale transactions with shares whose ownership rights are registered in NSD.

However, the St. Petersburg Stock Exchange is unable to obtain information about exactly whose shares were listed in NSD (the reasons are not clear to me). Therefore, for each share, we calculated what percentage of its ownership is recorded in the NSD and proportionally divided the responsibility among the investors.

For example, in the conditional Apple, NSD accounted for 20% of the total number of shares purchased by Russian investors. This means that each investor will have 20% of his shares blocked.

I see a big risk in such a system. If conditional Vasya owned 10 shares of conditional Apple, froze 20% of the shares, then he has 2 frozen. But it may be that the specific ownership of all shares of Vasya could be reflected in the NSD. And they blocked only 2 from him. Accordingly, he can sell 8, as a result, there will be confusion with the right of ownership, since in fact you need to write off from the account with NSD, and this information will not go anywhere further.

It is not known when the shares will be unfrozen. This will happen when our country reaches a consensus with Europe.

Valery Polkhovsky - Senior Analyst at Forex Club Group of Companies:

- The resumption of trading in blocked foreign securities depends entirely on the next decision of the Bank of Russia, which, obviously, depends on geopolitics and further relations with Western trading floors and depositories. For how long the shares are withdrawn and whether there will be new withdrawals, no one knows. The owners of these securities retain ownership of them, but they cannot dispose of them... The Bank of Russia has already introduced similar unprecedented restrictions since February of this year - they concerned the withdrawal of foreign currency from deposits or the transfer of foreign currency abroad.