The media’s attention has long been drawn to issues of swapping assets blocked due to sanctions imposed by western states, as well as due to the counter-sanctions Russia imposed in response.

Considering the sizable amount of assets blocked on both sides, the news about the asset swap procedure is truly a long-awaited event. At the same time, a closer look at the asset swap procedure gives an understanding that, unfortunately, only some investors will be able to enjoy its benefits and that there are significant nuances involved. Mostly, the nuances concern foreign investors whose assets are blocked on type C accounts, and these nuances need to be taken into account when making the decision on implementing the procedure.

1. WHO CAN TAKE PART IN THE EXCHANGE?

The persons that can take part in the asset exchange are:

• foreign corporate subjects (legal entities, branches, representative offices, non-incorporated entities) with money blocked in Russia on type C accounts;
• Russian individuals that own foreign securities with which operations are restricted by the Russian Central Bank due to the National Settlement Depositary being a link in the securities storage chain.

1. “So WHAT DO I GET OUT OF IT?”

Participation in the swap benefits investors on both sides:

• For foreign investors this is the only legal path to effectively start using the monies currently held on type C accounts without obtaining additional permissions and to try to recover funds and save them from devaluation.
• For Russian entities this is an opportunity to transfer money out of non-liquid assets.

1. HOW DOES THE SWAP WORK AND HOW LONG DOES IT TAKE?

The asset swap will be done through a special auction organized by the Investment Chamber (LLC Investitsionnaya Palata).

• Russian entities can apply to sell their blocked securities at the auction through brokers, and as a result will receive cash from the sale which they can use without any restrictions.

The main terms and conditions for Russian residents to participate in the auction have been known for some time. The main ones are listed below.

1. Portfolios of Russian investors with starting value of up to RUB 100,000 or a part of a portfolio within this amount can participate in the exchange.
2. Resident individuals will be able to post for sale to securities market participants over 3,500 financial instruments (shares, mutual fund shares, depositary note) the full list of which is posted on the auction organizer’s web site.
3. Submitting a proposal is no guarantee that the assets will be bought out, and the buyout will depend on the scope of bids from non-residents and their readiness to deposit monies.

Russian residents can apply to participate from March 25 to May 8.

• Then, from May 8 to May 31 the auction organizer will form lots to be sold. The assets participating in the auction will be divided into lots and a starting price will be set.
• Afterwards, foreign investors will be able to submit their bids to buy the securities being alienated by Russian residents, using monies from type C accounts. Bids can be submitted from June 3 to July 5.

By filing a bid to take part in the auction, foreign entities will be able to use their money currently blocked on type C accounts. The exchange will result in them receiving securities which will be deposited on special transit securities accounts. Transfer of the assets abroad from such accounts will not require permission from Russian regulators.

• After the applications and bids from residents and non-residents are received, the auction organizer will tally the auction results and will arrange settlements based on the swap results by July 29.

1. BUT THERE’S A NUANCE...

Based on published information available, the swap procedure is rather transparent for Russian investors, and it is something from which retail investors can certainly benefit.

At the same time, for foreign investors participation in the swap can be an opportunity to acquire a liquid asset, although when making the decision one should note the following significant nuances:

• Non-resident individuals cannot participate in the auction. At the same time, a type C account formally assumes the possibility of transferring funds from one type C account to another, and so it is possible to consider transferring funds on a type C account to a non-resident legal entity for them to participate in the auction. Though it is tough to say at this point how this will work in practice.
• At the auction, the non-resident buyer can bid on one or several lots. The bidding increments compared to the starting price are set at RUB 10 million, a sign that the swap procedure is aimed, first of all, at major foreign institutional investors (brokers, depositories, banks).
• Russian authorities are not in negotiations with foreign regulators concerning the asset swap; therefore, once securities are bought out and are placed on transit accounts, permission will be required from foreign regulators to transact with the National Settlement Depositary where the assets being exchanged are stored, in order to transfer the securities to foreign depositories.

There are still enough issues with the new procedure that need to be clarified, and our team is ready to assist those interested, to assess the risks of participating in the asset swap, to develop a road map for participating in the auction and obtaining potentially more liquid assets as a result.