Frozen assets of Russians provided half of Euroclear's annual profit

Due to the termination of work with RUSSIA, Euroclear lost income from operations in the interests of its residents. But the losses were offset by the profits from the investments of the frozen assets,

The net profit of the international financial group Euroclear at the end of 2022 amounted to €1.2 billion, of which €597 million came from investment income from the frozen assets of Russians, follows from the company's report. Compared to 2021, Euroclear's profit increased by 162%, the company said, calling the financial result a record.

How Euroclear earns on the assets of Russians

Assets (dividends, coupon payments and redemptions on securities) that Russians have no access to due to EU sanctions against the National Settlement Depository (NSD, the Russian clearing house participating in the international securities chain) are accumulated in Euroclear accounts.

According to the company, by the end of 2022, the balance sheet of Euroclear Bank (part of the Euroclear group) increased by €99 billion compared to 2021 and reached €124 billion. These funds were invested in accordance with the company's strategy. The total income from such investments at the end of last year amounted to €821 million.

The Central Bank estimated the volume of blocked assets of Russians at ₽5,7 trillion Investments

Euroclear acknowledged that due to the termination of work with Russia, the company lost income received from the business related to servicing local customers. But the accumulated interest income "more than made up for" these losses.

“Future revenues associated with sanctions will continue to depend on prevailing interest rates and the evolution of sanctions. The Board of Directors expects that interest income will continue to grow as blocked payments and repayments accumulate, but in 2023 the pace of such growth will be slower,” Euroclear said in a statement.

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Why are the papers blocked

Problems with conducting operations and receiving payments on foreign securities arose for Russian investors in early March. Even before the sanctions against NSD, foreign counterparties suspended work with the depositary, citing the need to obtain clarifications from regulators in connection with the imposition of sanctions against the Russian financial sector.

In June, after falling under the sanctions of the NSD, relations with Euroclear and Clearstream were completely terminated, the assets of the Russians were blocked. According to the Bank of Russia at the end of November 2022, the freeze affected assets worth 5.7 trillion rubles, about 20% of this amount falls on the assets of retail investors.

In August, the European Commission announced the possibility of unblocking the assets of Russians in the presence of permits from the regulators of countries where foreign clearing houses are registered. In December, regulators in Belgium and Luxembourg issued such permits, after which NSD and a number of Russian brokers filed applications for unblocking. These applications are currently under consideration.

At the same time, the board of directors of Euroclear notes that windfall profits should be disposed of prudently, "taking into account Euroclear's obligations to stakeholders and further possible risks."

How Sanctions Disputes Could Affect Euroclear's Performance

“The nature of [the company's] activities in the financial market infrastructure has led various parties to challenge the sanctions and counter-sanctions, as well as their application. Litigation is ongoing both in the European Union and in Russia,” Euroclear reminded.

At the end of February, after the start of a special military operation in Ukraine and the imposition of sanctions on international foreign exchange reserves, the Bank of Russia froze securities held by foreigners, prohibiting brokers from executing orders to sell such assets. Payments on assets also do not reach non-residents, but are accumulated on specialized C-type accounts. Previously, banks were servicing these accounts, but in December 2022, the Central Bank instructed to open “C” accounts on the basis of the Deposit Insurance Agency (DIA) in order to further use the funds from these accounts for investment and create a compensation fund for affected investors.

Will it cover losses? Investments

In August, the NSD filed a lawsuit in Luxembourg demanding that the sanctions be lifted. Proceedings with Euroclear are also taking place inside Russia: for example, the Moscow Arbitration COURT satisfied the claim of Saint Petersburg Bank against Euroclear Bank for the recovery of $107.1 million and €489,000.

At present, disputes and counter-sanctions are not a significant risk, Euroclear said in a statement. “But the likelihood of a financial impact has increased, which could lead to possible events after the publication of the financial statements,” they admit. Therefore, when analyzing the position of the group, income from Russian assets is separated.