The European Commission has banned participation in asset swaps with Russians

Individuals and legal entities from EU countries are prohibited from participating in the asset swap scheme proposed by RUSSIA , according to clarifications from the Union's Directorate-General for Financial Stability, Financial Services and Capital Markets (DG FISMA), published by the European Commission.

“EU individuals and entities will be prohibited from participating in the asset swap scheme due to the participation of the NSD (National Settlement Depository),” the directorate said in response to a question about whether EU individuals could participate in the Russian investor-to-investor asset swap scheme.

NSD has been on the EU sanctions list since June 2022, so interaction with it is impossible, follows from the clarifications. “All funds and economic resources belonging to, held or controlled by NSD must be frozen, and no funds or economic resources may be made available to this [exchange] directly or indirectly,” the clarifications state.

The document published shows that the European Commission is aware of the existence of an asset swap scheme between Russian and foreign investors. "This scheme allows Russian retail investors to submit offers to swap Western securities currently frozen in NSD accounts in EU central securities depositories for funds of hostile investors blocked in Russia in type C accounts," the essence of the swap is described in the explanations prepared by the directorate.

The clarifications, which set out the ban on participation in the exchange, were published on July 24, according to information on the European Commission website. That is, the directorate expressed a tough position regarding the exchange after NSD fell under blocking sanctions from the United States on June 12 , 2024. Before that, the European Commission bodies did not officially comment on the possibility of participation of EU persons in the asset exchange procedure with Russians.

The asset swap deals between Russian and foreign investors are scheduled to take place on August 12, 2024, the organizer of the swap, the broker Investment Chamber, reported. Although it was initially planned that applications from non-residents would be accepted until July 5, settlements on the deals would be made until July 29. The deadlines were extended "at the request of potential non-resident buyers," the Investment Chamber explained.

Russian investors offered to buy assets worth a total of 35 billion rubles, the organizer reported. Private investors with assets valued at up to 100 thousand rubles can participate in the exchange. In total, about 2.5 thousand types of assets were submitted for sale, most of them shares and depositary receipts for shares of foreign issuers (for example, shares of Alphabet, Tesla andMICROSOFT ), noted in the "Investment Chamber".

RBC sent a request to the Ministry of Finance , the Bank of Russia and the Investment Chamber.

Earlier, a representative of the Investment Chamber noted that the exchange mechanism is designed in such a way as to minimize the role of the NSD in it. "The NSD does not charge a commission for settlements within the procedure for buying out foreign securities. This should provide foreign investors with additional comfort in terms of compliance with sanctions regulations. The role of the NSD is technical and consists of keeping records of transactions. Settlements in cash during the exchange will take place outside the NSD," explained the representative of the exchange organizer.

The presidential decree on the exchange of assets was signed in November 2023. It states that investors from Russia will be able to sell their blocked foreign securities worth no more than 100 thousand rubles to non-residents. Non-residents can use funds from type C accounts to purchase these securities (payments on Russian securities owned by foreigners are sent to these accounts). Money from type C accounts cannot be withdrawn or freely used, but they can be used to make mandatory payments - fines, account maintenance fees, and others. To implement the exchange mechanism, the Russian authorities are ready to unfreeze part of the funds in type C accounts, and foreigners will also be allowed to withdraw all assets bought from Russians without obtaining approvals from the Russian side. But foreigners may need permission to participate in the procedure from their regulatory authorities, Vladimir Chistyukhin, First Deputy Chairman of the Bank of Russia, noted earlier.

The exchange mechanism becomes risky for non-residents, since it is assumed that violation of this clarification may entail the application of liability measures for violation of EU sanctions regulation, notes Kira Vinokurova, partner at the Pen & Paper Bar Association. In addition, the ban makes it virtually impossible to further withdraw securities from the Russian circuit if investors decide to make a deal.

"Non-residents will need to somehow withdraw the received securities from Russia in order to dispose of them at their own discretion. Given the ban imposed by the European Commission, such a conclusion seems difficult to implement," adds Sergey Tarasevich, a lawyer in the tax and administrative law practice at Maxima Legal.

But for large structures, the risks of participating in the exchange were obvious even without a direct ban from the EU, notes Gleb Boyko, a lawyer in the practice of sanctions law and compliance at NSP. Firstly, foreigners do not see the sellers of securities, and secondly, large European depositories do not have legal grounds to unblock the purchased securities and have previously announced that they will not facilitate the exchange, the expert recalls.

"It is possible that the clarifications are aimed at smaller non-institutional investors whose chains of custody of Russian securities do not involve Euroclaer and Clearsream or other European financial institutions. Such investors were less afraid of risks and were ready to send orders through their non-European financial institutions," the expert says.

In addition, the clarifications are addressed to European financial institutions that are involved in the chain of custody of Russian securities, Boyko continues. "From the clarifications it follows that assisting any investors in participating in the exchange is a violation of EU sanctions regulation," the expert notes.

At the same time, it cannot be said that the exchange will not take place at all and not a single lot will be bought from Russians, Boyko believes. "Most likely, foreign investors will have to be found who are ready to take on the risks of participating in the exchange. Finally, the funds of friendly non-residents who, for example, accounted for their Russian securities through unfriendly financial organizations may be blocked on type C accounts," the expert reasons.

Tarasevich does not rule out that interested foreigners may try to challenge the European Commission's position or try to obtain individual licenses for unblocking in order to participate in the exchange. "I don't think that non-residents will be happy with the fact that, while they can withdraw part of the funds frozen by the Russian Federation, the European Commission prohibits them from doing so , and they will simply resign themselves to it. The decision is, to put it mildly, unpopular," the expert says. In addition, having frozen securities received as part of the exchange in a portfolio, rather than frozen rubles in type C accounts, is more profitable, Tarasevich adds: "The securities can potentially grow in value, while the purchasing power of cash gradually falls."

As for the potential participation in the exchange of individuals from the United States, to whom the European Commission ban does not directly apply, everything will depend on the position of their regulator. “In the United States, a similar ban or clarification has not yet been provided, and in general it can be assumed that upon the expiration of OFAC (Office of Foreign Assets Control) license No. 99, provided for the completion of transactions with NSD, OFAC will formally retain the mechanism for issuing individual licenses, but the scenario of their successful receipt seems unlikely,” Vinokurova concludes.