Tue. Jul 5th, 2022

BNY Mellon has launched a scheme that allows US bank’s clients to swap their holdings of overseas shares in Russia’s biggest companies for local listings as Moscow’s capital markets diverge from the west.

The program lets holders of Russian depositary receipts swap them into local shares in nearly 20 Russian firms including Gazprom, VTB, Norilsk Nickel and Rushydro. Investors will be asked to pay a fee for the cancellation of the depositary receipts, according to a notice to the custodian bank’s clients seen by the Financial Times.

New York-based BNY said earlier this month that it would take a $ 100mn revenue hit after making a decision to stop accepting new banking business in Russia and halt the purchase of Russian securities following Vladimir Putin’s invasion of Ukraine.

The launch of BNY’s exchange scheme comes after Russian news agency Interfax reported on Tuesday that the country is studying a mechanism through which depositary receipts in major companies would be delisted and then converted to securities that would trade in Moscow.

International investors in Russian assets have been left in limbo by President Vladimir Putin’s invasion of Ukraine last month. Many foreign-listed shares in Russian companies were suspended after western allies hit Moscow with financial sanctions, while international investors’ access to the country’s local markets has been crimped as banks take a cautious stance on processing transactions.

A decision by Moscow to delist overseas depositary receipts could serve as a prelude to the bifurcation next month of Moscow’s stock market into local and international shares, according to two people with knowledge of the stock exchange’s plans.

One person compared the plan to China’s division of its market into A and B shares. China B shares are more widely used by international investors because they can be traded by non-residents, with fewer restrictions. They are also quoted in US dollars, rather than local currency.

BNY and the Moscow stock exchange declined to comment.

Russian depositary receipts, many of which are listed on the London Stock Exchange, plummeted in value in late February and early March as western countries imposed sanctions on several Russian businesses and individuals.

The subsequent suspension of those certificates left companies including VTB and Sberbank, and energy groups Gazprom and Lukoil, priced at just a fraction of their value a few weeks previously.

Meanwhile, trading of ordinary shares on the Moscow exchange partially resumed last week, having been closed for nearly a month after Russia invaded Ukraine.

Some tentative steps have been taken to normalize dealings in Moscow, such as the settlement of billions of dollars of equity trades for international investors who had become trapped when the market shut down. However, many restrictions remain in place – meaning the market is already informally fracturing into local and international markets.

Foreign investors are still blocked from selling shares until April 1. Putin has also introduced capital controls, barring Russian-based institutions from transferring foreign currency abroad.

Before the war in Ukraine, about 15 per cent of trading in Russian dual-listed companies was in depositary receipts, according to data from the Moscow Exchange.

Fear of breaching sanctions has gummed up the system for overseas investors receiving payments on bonds and other securities from Russia. Lawyers and compliance departments in western institutions must assess the risk of inadvertently breaking the rules, as well as the risk of being sued by clients for forcing them into defaults.

In a sign of how the ejection of Russia from the international financial system has complicated the role of custodians and other financial intermediaries, this month JPMorgan resigned from its role as the bank holding the depositary receipts of Sberbank.

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