Lawyers assessed the chances of unlocking assets frozen on the St. Petersburg Exchange

The mechanism for unlocking assets through OFAC (Office of Foreign Assets Control of the US Treasury) by obtaining an individual license is simpler than unlocking assets through the Belgian Ministry of Finance , but its implementation may take more than a year, according to the assessments of sanctions lawyers made during a session at the forum "Invest Weekend", organized by RBC.

Experts spoke about only one case of applying for an individual license. “One client and I, who bought assets on the St. Petersburg Exchange, filed our first application with OFAC literally that week,” Anton Dzhugan, senior banker at Wealth IQ Solutions, shared a case from his personal practice. BGP Litigation partner Sergey Glandin noted that investors are seeking advice on obtaining individual licenses from OFAC, but no one has taken practical action. Investors are waiting for someone to apply for a license first in order to follow his example, the lawyer described the situation.

The procedure for submitting an application to OFAC is simpler compared to the same process in Belgium (the Ministry of Finance of this country issues licenses to unlock assets frozen in the Euroclear depository), Dzhugan noted. Top manager of Rosbank L'Hermitage Private Banking Andrey Alekseev also confirmed that working with the American agency is easier than with the European Union. But the main question is the timing of consideration of such applications, which are not regulated, Glandin noted. According to experts, obtaining a license may take from several months to two years.

St. Petersburg Exchange came under blocking US sanctions on November 2, 2023. As a result, trading in all foreign assets on the site was frozen, and foreign securities already purchased by investors totaling about $3 billion were frozen. Currently, the St. Petersburg Exchange trades only Russian instruments. In the future, the platform plans to develop the market for settlement instruments, engage in IPOs of Russian companies, including sanctions, and work with digital assets, said Evgeny Serdyukov, General DIRECTOR of the St. Petersburg Exchange.

Serdyukov, in an interview with RBC, said that submitting applications to OFAC for individual licenses will be the new main strategy for unlocking assets. Simultaneously with private investors, St. Petersburg Bank (the depository of St. Petersburg Exchange) will submit an application for a collective license to OFAC, he specified. For its part, the exchange will prepare an application form for investors to OFAC and instructions for submitting an application, Serdyukov promised. Investors will need to complete the application, collect the required documents, have a qualified English translation done, and submit the documents electronically to OFAC.

Lawyers who already have experience in obtaining licenses from foreign regulators note that filing an application with OFAC technically looks simpler than filing an application with the Belgian Ministry of Finance. In a comment to RBC on the sidelines of Invest Weekend, Glandin admitted that an ordinary investor can handle this process without the involvement of consultants, but this will require a lot of “paper work.”

But there are certain problems in the procedure, Dzhugan pointed out: “We encountered a number of difficulties when transferring [assets] from a sanctioned broker to a non-sanctioned one. We were faced with the fact that a number of brokers refused to accept securities at all, because it turned out that that broker was buying a number of securities within himself, not on the St. Petersburg stock exchange, [that is] making transactions [within himself], and this was strictly prohibited by law.” At the same time, it was quite easy to open accounts for the future transfer of papers under a license, he noted: “We easily opened accounts - in America, Armenia. They took the American [account] as a basis. It happened more easily than the Belgium story.”

Another difficulty that lawyers drew attention to was the failure of the St. Petersburg Exchange to disclose the chain of custody of foreign assets purchased on the site. “Failure to disclose the chain reduces the chances of obtaining a license. OFAC checks the transaction, but you cannot show how the assets will go,” explained Tatyana Neveeva, senior partner at Verba Legal. According to her, this explains the lack of applications for individual licenses to date.

“When everything happened and we discussed with clients what needs to be submitted now, that the general license is now in force (License No. 76A OFAC, issued to complete transactions with the St. Petersburg Exchange.), and no one has yet run, that is, there is a greater chance [of receiving approval] . [But] the exchange did not in any way disclose the chain of how the assets are held,” Neveeva said. Also, investors were in no hurry to submit applications due to the exchange’s statements that it was in communication with OFAC and “will do everything itself.”

Glandin also drew attention to the non-disclosure of the chain of custody of the St. Petersburg Exchange. There are now two ways to obtain this information from the exchange - with the help of a lawyer’s request or through the COURT , he clarified on the sidelines of the forum. It is possible that the St. Petersburg Exchange itself will be ready to disclose the chain of custody under the NDA (confidentiality agreement) only to brokers who, having this information, will be able to submit collective applications to OFAC, admits Elena Ryazanova, Deputy Director of the Legal Department of the Sinara Investment Bank.

A representative of the St. Petersburg Exchange, in response to a request from RBC, said that “all the necessary information for investors to independently apply to OFAC for an individual license will be disclosed on the information portal “unblocking assets.rf” along with application templates, including instructions for filling them out.”

“At first there will be many refusals, as was the case with Belgium, because we do not fully understand all the requirements that OFAC will want to see,” Ryazanova expects. But within a few months the situation will stabilize and it will be clear “what documents need to be attached, what requirements will be - whether you need to have American citizenship or not; it is necessary that the securities be sent only to American brokers, or Kazakh and Armenian brokers are also suitable,” the expert describes.

According to Ryazanova’s forecast, the procedure for obtaining a license may take a year, and if OFAC is inundated with applications from investors, then two. Glandin, who has already received such licenses, but not as part of the case with blocking of securities on the St. Petersburg Exchange, also speaks about a period of about a year. “My practice [shows that] according to the applications that we submitted in April-May-June last year, licenses are received. What we filed in July-August is still [not],” the lawyer noted.

The unblocking of Hong Kong securities, which could also be purchased on the St. Petersburg Exchange and which were also frozen, may happen “faster [than] other frozen assets,” since it is not related to obtaining licenses from OFAC, the HEAD of the St. Petersburg Exchange noted. According to him, these assets do not have a direct connection with American jurisdiction, so US blocking sanctions do not directly apply to them. Current restrictions on trading in Hong Kong securities are temporary and are associated with increased compliance of counterparties who are afraid of secondary sanctions, Serdyukov explained.

Lawyers have different assessments of the prospects for unlocking Hong Kong assets. Ryazanova notes that in the chain of custody of such securities there were indeed only friendly counterparties. The platform itself reported that assets from Hong Kong were stored through a friendly infrastructure in September 2023. But these friendly counterparties, major market participants, are guided by US policy, Ryazanova continues. “They were scared by these sanctions, so their assets were blocked. As far as I know, my colleagues are looking for some smaller players, some umbrella solutions that will allow them to withdraw their papers. They are ready to give it to them, the question is where to take it,” said the lawyer.

Neveeva is more pessimistic and believes that unlocking Hong Kong assets will also require an OFAC license, since the United States is very aggressive in its sanctions policy. “They (Hong Kong professional participants) are not ready to come under secondary US sanctions due to the fact that they are transferring assets from the St. Petersburg Exchange. Therefore, in my opinion, the same OFAC license will be required here,” the expert believes.

“SPB Bank has not yet received consent from counterparties from friendly countries to transfer Hong Kong assets to other depositories. Counterparties carry out compliance, so it is premature to talk about any decisions made or agreed upon mechanisms,” a representative of the St. Petersburg Exchange said about the status of the situation with the unblocking of Hong Kong assets.