The statements the Russian Central Bank made in August about creating conditions for unfreezing assets for retail investors and rumors that this would apply to portfolios of up to 100,000 rubles have been confirmed – Vladimir Putin signed a decree^[1] allowing certain Russian and foreign investors to swap frozen assets on mutually beneficial terms (the “Decree”).

It is expected that the Government Commission on Monitoring Foreign Investment in the Russian Federation will soon determine the procedure for holding the auctions required to perform such foreign securities transactions. Under the Decree, residents will not be charged for the auctions and transactions, and it is most likely that the related charges will be imposed on the non-resident buyers, e.g. through a deposit using funds on their type C accounts or through a fee to be paid by non-resident buyers on the purchase, which in the end may adversely affect the investment appeal of the mechanism. In any case, the procedure has not yet been developed.

The Russian Central Bank also has an interesting role in the swap: the regulator will be responsible for the interaction between securities market participants, for establishing the specifics of identifying non-resident buyers with type C accounts, as well as for opening special transit securities accounts for the owner. It is also expected that the Russian Central Bank will soon make the decisions needed to implement the Decree.

The Decree seems to have gone unnoticed by the West, based on the media coverage, or rather its complete absence. The actual demand among foreign investors for the mechanism will probably become clear once the Central Bank and the Government Commission develop the specific procedure for the swap of frozen assets. However, one should have no illusions – Western regulators could shut out the Russian initiative if they treat it as a way for foreign investors to circumvent sanctions. According to Vladimir Chistyukh, First Deputy Chairman of the Central Bank, the consent of foreign regulators is necessary to implement the mechanism.[2]

Lastly, we think that the portfolio limit and statements made by the heads of financial authorities indicate that the current form of the frozen asset swap is a pilot project to test the waters. If the mechanism proves to work despite all the risks, the Decree may be further amended to include larger portfolios of frozen securities.