SPB Exchange will discuss with the authorities the payment of dividends on frozen assets

The St. Petersburg Exchange is discussing with regulators the payment of dividends on blocked securities through payments on external government debt. This will be a positive signal for investors, although it will not fully compensate for their losses, lawyers say

The St. Petersburg Exchange is discussing with Russian regulators the possibility of making payments to investors under Presidential Decree No. 665, a representative of the site told RBC. This decree provides for payments in rubles of income (dividends and coupons) on blocked foreign securities to Russian investors at the expense of the Ministry of Finance funds intended for payments to foreigners on sovereign Eurobonds.

“The St. Petersburg Exchange is discussing with Russian regulators the possibility of extending the payment mechanism under Decree No. 665 or another document to foreign assets frozen as a result of the imposition of sanctions against the St. Petersburg Exchange,” the site said in a commentary.

RBC sent inquiries to the Ministry of Finance and the Bank of Russia.

St. Petersburg Exchange came under blocking US sanctions on November 2, 2023. As a result, trading in all foreign assets on the site was stopped, and foreign assets already owned by investors totaling $3 billion were blocked.

The fact that such an initiative is being discussed was previously stated by Elena Ryazanova, Deputy Director of the Legal Department of the Sinara investment bank, as part of the Invest Weekend forum organized by RBC.

How dividends and coupons are paid under this decree

The decree, which also describes the mechanism for paying Russian investors income on their foreign assets, was signed by President Vladimir Putin in early September 2023. This document approves the procedure for payments on Eurobonds of the Ministry of Finance, depending on the infrastructure through which such securities are owned by investors. If through the Russian one, then they can receive payments in rubles to their accounts through the National Settlement Depository (NSD). If an investor owns a sovereign Eurobond through a foreign infrastructure, then payments to him will also come in rubles, but to type I accounts, the withdrawal of funds from which is limited.

At the same time, the decree made it possible to pay investors holding securities through foreign chains by receiving payments in foreign currency from NSD accounts frozen abroad (came under EU sanctions in June 2022) after the depositary submitted a corresponding order. And those ruble funds that NSD received from the Ministry of Finance for transfer to non-residents and ordered to be written off from its accounts abroad, the depositary can use to pay coupons and dividends to Russian investors on their blocked foreign securities.

But payments are made only on assets accounted for through NSD, and assets accounted for through St. Petersburg Bank (the depositary of St. Petersburg Exchange) are not subject to the decree. Ruble payments of income on foreign securities began at the end of 2023, brokers reported. At the end of January 2024 , the director of the department of investment financial intermediaries of the Central Bank, Olga Shishlyannikova, reported that first-stage investors - individuals and clients of Russian management companies who own foreign shares, depository receipts and shares of investment funds - had received full payments.

Lawyers interviewed by RBC confirmed that the payment mechanism works effectively. Some clients received almost all the money due to them within the framework of this decree, said Sergei Tarasevich, a lawyer in the tax and administrative law practice at Maxima Legal. “Investors actually receive payments for assets frozen at NSD,” said Anton Namenov, senior partner at Pen & Paper. On March 25, 2024, NSD announced that it had made the ninth replacement of obligations in foreign currency with obligations in rubles to holders of foreign securities, the expert recalled. That is, the ninth round of income payments on foreign assets took place according to the decree. Neither NSD nor the Ministry of Finance disclosed the monetary volumes of the exchange.

But in order to apply the decree to assets blocked on the St. Petersburg Exchange, adjustments to the document will be necessary. Firstly, the mechanism described in the decree provides for payments for unfulfilled obligations from February 1, 2022 to September 9, 2023, and sanctions on the St. Petersburg Exchange were imposed in November 2023, Tarasevich points out. “If the period for which payments are compensated is not changed, then the mechanism most likely will not work,” he states.

Secondly, in addition to changing the period for which compensation of payments is made, it may be necessary to regulate the procedure for interaction between NSD and St. Petersburg Bank on this issue, continues Tarasevich. Now NSD acts as the only main agent for payments to Russian investors.

What does this mean for investors?

If the payment mechanism under Decree No. 665 extends to assets frozen on the St. Petersburg Exchange, investors will only be able to receive dividends and coupons on them in rubles. At the same time, the assets themselves will remain frozen; they can only be unblocked by obtaining a license from OFAC (Office of Foreign Assets Control of the US Treasury ).

Payments in any case will not cover the cost of blocked assets completely, but receiving even a relatively small part of the funds from actually illiquid securities is a good prospect, says Imenov. In addition, one must understand that such a scheme is limited by the amount of funds accumulated in type I accounts, the expert adds.

“The position of investors will greatly depend on which of their assets have been frozen. If the shares of growth companies that do not pay dividends were mostly frozen on the St. Petersburg Exchange, then this mechanism is unlikely to be useful for investors. At the same time, those investors who have frozen bonds or shares of companies that pay stable dividends will find themselves in a more advantageous situation,” Tarasevich notes.

Can launching the payment mechanism affect the unlocking?

In May, the St. Petersburg Exchange announced a new concept for unlocking assets, the priority of which will be for investors to obtain individual licenses from OFAC. The exchange also submitted an application for a collective license to OFAC.

Both Tarasevich and Namenov believe that the launch of the mechanism in relation to assets blocked on the St. Petersburg Exchange will not have a negative impact on the procedure for unblocking assets through OFAC. Part of the assets was initially frozen by Euroclear and Clearstream, and so far there were no grounds for non-issuance of personal licenses in connection with Decree No. 665, Tarasevich shares his observations. “We believe that in this case this should not become a stumbling block,” he says.

“For OFAC, the nature of the assets themselves and the lack of provision of benefits to the sanctioned entity as a result of their unfreezing, as well as the compliance of the unfreezing of assets with the goals of sanctions regulation, will be of paramount importance,” notes Imenov. The payment mechanism under Decree No. 665 concerns only the income portion of assets, and it does not in any way change the main basis for unfreezing - that the assets do not belong to the sanctioned person, the expert continues.

“The parallel appeal of foreign investors to other protection mechanisms to partially restore their rights in this case is unlikely to be considered by the body administering the sanctions as a reason for refusing to unblock,” Imenov believes.

In addition to Decree No. 665, the St. Petersburg Exchange is also discussing with regulators the possibility of extending Decree No. 844 on the exchange of assets with foreigners to securities blocked on the site, Evgeny Serdyukov, CEO of the exchange, said in an interview with RBC. Deputy Minister of Finance Ivan Chebeskov also reported that the exchange mechanism could be extended to the St. Petersburg Exchange.

Decree No. 844 implies that non-residents will be able to buy blocked foreign securities from Russians using money from type C accounts (where foreigners receive payments on securities of Russian issuers). Some of the assets from the St. Petersburg Exchange, which were accounted for through NSD, already fall under this scheme, Serdyukov noted. According to his estimates, at the time of the introduction of sanctions, assets with a total value of $4.7 billion were taken into account through NSD.