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 – Russian companies and global banks including BNY Mellon, Deutsche Bank, Citigroup and JPMorgan could benefit if Moscow moves to remove depositary receipts from Russian companies from the currency markets, two insiders said Reason.
The potential windfall comes from the fees that bank depository receipt issuers can contractually charge investors if they cancel the product.
It’s unclear how much companies and banks could make, or if banks are charging the fees and risk angering investors who say it would be unfair given the extraordinary circumstances thrown up by Russia’s invasion of Ukraine.
However, the charges could potentially run into the hundreds of millions of dollars, according to Reuters calculations based on the charging data provided by the sources.
In the face of Western sanctions, Moscow is preparing to delist Russian companies’ depositary receipts from foreign stock exchanges and convert them into local Russian securities in a bid to reduce foreign control over these companies. Continue reading
Depositary receipts are certificates issued by a bank representing shares in a foreign company that are traded on a local stock exchange. They allow investors to try foreign stocks in their own region and time zone.
There are more than 30 depositary receipts on Russian companies, including Gazprom, Rosneft, Lukoil (LKOH.MM) and Norilsk Nickel (GMKN.MM), issued by BNY Mellon, Deutsche Bank, Citigroup, JPMorgan, among others, and on the US American and European markets are traded .
Under standard arrangements, depositary receipts can be terminated by the issuer or by the investor. In this case, the investor typically receives cash from the sale of the underlying shares, although they have the right to hold the shares instead.
Banks charge an administration fee, typically about $0.05 per receipt, which can be shared with businesses, two sources said.
If Moscow delists Russian depositary receipts, banks will have to cancel the products. According to three sources, the banks could still collect the fees even though their hand has been forced.
For example, a Rosneft investor with 150 million depositary receipts representing the same number of shares in the company could face $7.5 million in cancellation fees, according to Reuters calculations.
Sweeping western sanctions could make it difficult for banks to wire the money to some companies.
Regardless, some investors say the fees shouldn’t apply. A global wealth manager told Reuters that there should be no fees if Russia passes the delisting law because investors have no choice on the matter. However, the other two sources say banks still need to cover their costs.
BNY Mellon, Deutsche Bank, JPMorgan and Citigroup all declined to comment. Russian companies did not respond to a Reuters email asking for comment.
FREEZE MARKET
As Western sanctions hit Russian stocks from late February, the Moscow Stock Exchange closed and the Central Bank of Russia banned foreigners from transferring stocks from their custody accounts. It also banned foreigners from selling Russian stocks.
The restrictions made it almost impossible for banks to cancel receipts when asked by investors to reduce their exposure to Russia.
With custodian restrictions recently lifted, BNY Mellon, Citi and JPMorgan have resumed processing cancellations. But because the foreign banks still can’t sell the shares, investors have to hold them instead. For this, investors need an account in Russia, which many do not have.
As a result, many investors are likely to keep the earnings for now, according to three people.
However, many investors are concerned about the delisting law that Russia is preparing. Continue reading
Aside from the potential cancellation fees, investors worry about what will happen if they can’t open a local account.
In a note to clients, JPMorgan said clients may be able to open a Russian account in unspecified circumstances if the new law is passed.
Edited by Michelle Price, Megan Davies and Nick Zieminski