Euroclear has suspended the unlocking of Russian assets due to US sanctions

The Belgian depositary Euroclear has suspended all asset servicing processes with the participation of the National Settlement Depository (NSD) due to the latter being subject to blocking American sanctions , according to a letter from Euroclear to clients, which was reviewed by RBC.

“We are currently analyzing the impact [of sanctions against NSD] on Euroclear Bank. Until further notice, asset servicing processes involving NSD, directly or indirectly, have been suspended,” Euroclear stated in a letter to its clients (professional market participants; depositories do not work directly with individuals).

The authenticity of the document was confirmed to RBC by Yulia Khandoshko, CEO of the European broker Mind Money (formerly Zerich). BGP Litigation partner Sergey Glandin, citing data from partners from Belgium, also confirmed that Euroclear had taken a break. The suspension of servicing assets with any participation of NSD on the part of Euroclear means the suspension of the execution of licenses for unlocking assets that Russian investors previously received, experts explained.

On June 12, 2024 , the US Treasury Department's Office of Foreign Assets Control (OFAC) imposed blocking sanctions against NSD, Euroclear noted. “This includes the immediate freezing of the assets of the National Settlement Depository (NSD), as well as the imposition of secondary sanctions on all persons in accordance with Executive Order No. 14024,” the depository explained in a letter to clients. Decree No. 14024 implies the possibility of introducing secondary sanctions against persons who provide any assistance to sanctioned Russian companies and individuals. In addition, on June 13, the United Kingdom joined the sanctions against NSD , which also means the freezing of the depository’s assets, Euroclear said in a letter. NSD has been under EU sanctions since June 2022.

“We are also analyzing the impact of new sanctions on internal free settlements for local Russian securities,” the letter says (we are talking about securities issued by Russian issuers, which were also blocked in the depository).

RBC sent inquiries to Euroclear and NSD.

“Euroclear has actually suspended interaction with the Russian side on the issue of unfreezing the assets of Russians,” Khandoshko states. This also affected those investors who had already managed to obtain a license from the Belgian Treasury, as follows from the comments of RBC experts. As sanction lawyers previously explained, unlocking assets under a license involves their transfer to another depository. But since the unlocked assets at one stage of the custody chain are taken into account in the NSD, Euroclear cannot carry out such a transfer without an explanation of the impact of blocking US sanctions against a Russian organization on it or without a permitting license from the US OFAC.

At the same time, the general license that OFAC issued on June 12 to complete operations with the sanctioned NSD is valid until August 13, Khandoshko points out. “That is, in essence, if an investor already has a license and has the opportunity to transfer securities, then assets can be transferred until August 13. In any case, you can count on it. Nobody knows what will happen in reality yet,” the expert notes.

In addition, the question arises of what to do when the OFAC general license expires, Khandoshko continues. “If the general license is completed, and the investor’s portfolio contains a lot of securities from the United States, which are located in the NSD along the chain, will Euroclear even carry out such calculations? How stringent will they be in requiring OFAC clearance for the portfolio? In my opinion, now, if you go to Euroclear, but have American assets in your portfolio, you will need to bring an OFAC license by default,” the expert says.

Glandin also says that Euroclear needs to get clarification from the Belgian regulator and the EU authorities on what to do during the period of validity of the OFAC general license and after its expiration. “For licenses obtained [for unlocking], this means the need to obtain a competent answer as to whether it is possible to execute [the Belgian Treasury license] without a US license. Or Euroclear should in each case, for fear of secondary sanctions, require an OFAC license,” explains Glandin. This is common practice; Euroclear always seeks explanations from regulators in such situations, the lawyer adds.

As a general rule, in such a situation it is really necessary to obtain both licenses - both Belgian and OFAC, notes Kira Vinokurova, partner at Pen & Paper. “However, we cannot exclude the possibility that the execution of orders sent within the framework of already issued licenses will be considered as the implementation of the necessary operations for the alienation and transfer of assets and termination of interaction with sanctioned persons, permitted by general license No. 99 until August 13, 2024,” admits she. But those orders for asset transfers that will be sent to Euroclear after the imposition of US sanctions against NSD will most likely be able to be executed only if permission is obtained in both jurisdictions, Vinokurova believes.

Despite Euroclear's pause, experts do not stop working on filing applications for licenses, as follows from their comments. “We submit applications [for licenses] to the Belgian Treasury; there are no comments from them yet about any changes in connection with sanctions against the Moscow Exchange, NCC and NSD. So far there is only a letter from Euroclear, that is, from the depository itself, that they are temporarily suspending, sorting it out, and waiting for internal decisions,” Khandoshko said.

It is important to wait for official clarification from Euroclear about what the wording on the suspension of servicing of assets directly or indirectly related to NSD means in practice, Khandoshko added. The information in the letter is just a message for now. “As of today, the only option is to wait. For those who are in the process of applying for licenses, I recommend that you continue to do so - it is better to apply than not. But in the next week or two, everyone (depositories, regulators) will be preparing comments on how they interpret these sanctions,” Khandoshko said. Glandin also agrees that we should wait for official clarifications, which are likely to arrive in the coming days.

“If everything is really suspended, then there are no alternative ways to unblock [without interaction with the NSD]. Only participation in the exchange of assets,” says Khandoshko. Or investors will have to receive OFAC licenses along with Belgian licenses, which will significantly increase the time for unblocking. Glandin estimates that it currently takes about a year to obtain a US license. Before the start of Russia’s special military operation in Ukraine, this process took about two months, the expert says. Now, during this period, OFAC only assigns a registration number to the application, Glandin clarifies.

Foreign assets of Russian investors and all payments on them have been frozen in the European depositories Euroclear and Clearstream since the spring of 2022. According to the Central Bank, more than 5 million private investors were affected by the blockage.

The EU sanctions procedure provided for the possibility of unlocking assets after receiving general licenses from European regulators. In December 2022, NSD received such licenses from Euroclear and Clearstream. After this, private and institutional investors were allowed to submit individual and collective applications to unlock assets. According to sanctions lawyers, investors have submitted several thousand applications for licenses, but positive decisions number in the dozens.

To unlock assets, the Russian side invited investors to take part in the so-called exchange. It implies that foreign investors, using money from type C accounts (where payments on Russian securities to non-residents are received - dividends, coupons and redemptions) will be able to buy their blocked foreign securities from Russians. Russian investors have already submitted applications for the sale of assets totaling 35 billion rubles, the organizer of the exchange, the broker Investment Chamber, reported. Until July 5, interested foreigners will have to submit applications for their purchase. It is assumed that non-residents themselves will receive permission to implement it in Western jurisdictions.