Russian securities

Russian securities and foreign investors: 

current ownership issues

Since March 2022, in connection with the imposition of sanctions against Russia and its retaliatory sanctions against Western countries, it has become much more difficult for foreign persons to manage and dispose of shares and depositary receipts for shares of Russian issuers. The following is an overview of the main challenges and new procedures in Russian legislation that prescribe special rules for transactions with securities.

1.     Receipt of dividends for shares in foreign depositories

Because many foreign depositories began refusing to pay dividends on Russian shares, in accordance with the Decision of the Board of Directors of the Russian Central Bank dated 10 June 2022,[1] a new procedure for their payment was established.

The process of receiving dividends now works as follows. A Russian depository (for example, the NSD) that has an account opened with the relevant foreign depository must, immediately after receiving dividends, send requests to the foreign depository to disclose information about the holders of shares with a list of additional documents that must be provided for payments. In response to the request, the foreign depository must send the requested information about the owners within 70 days.[2]

After that, the course of action will depend on whether the foreign depository provides the requested information within the specified period. If it does, the Russian depository shall pay the dividends within 3 business days.[3] If not, you will need to independently submit an application for payment to the Russian depository. You can find out whether the foreign depository has disclosed information about the shareholder by contacting the broker through which the shares were purchased, or the depository with which a depository agreement has been concluded and which records the rights to Russian shares.

The application must be submitted within 10 working days after the deadline for the foreign depositories to provide a response to the request of the Russian depository. The application terms and the specific list of needed documents depend on the depository.

All requests sent by the NSD can be found at the following link: https://www.nsd.ru/upload/docs/dividends_IND.pdf. In addition, the following documents are required by the NSD for legal entities:

·      a completed application and questionnaires for payment of dividends

·      a document confirming the ownership of shares (for example, an account statement)

·      a document from the foreign depository with a share ownership scheme

·      the charter of the shareholder

·      the shareholder registration certificate

·      an extract from the register of legal entities in respect of the shareholder

·      a certificate of tax registration in the Russian Federation (if available)

·      sample signatures of the director, drawn up (certified) in accordance with applicable foreign law

·      confirmation of the director’s authority (for example, the decision on his appointment)

·      notarized power of attorney for representatives

·      copies of director's passports, as well as his Russian visas/residence permits (if available).

For individuals, applications, a passport, documents on share ownership and its scheme, and a power of attorney for representatives are required. Of course, all documents must be legalized/apostilled, if necessary, copies must be notarized and translated into Russian.

Dividends are payable 5 working days after the deadline for submission of documents. If the required documents are not submitted, the depository shall, within 10 days after one month from the date of the dividend payment period, return to the issuer the remaining funds, which the shareholder will have to apply for separately.[4] The deadline for applying to the issuer is 3 years.[5] The procedure for receiving the unpaid dividends for shares held in foreign depositories from the issuer is not currently regulated in Russian law (there are no clear deadlines or lists of documents to be submitted).

Separately, we must draw attention to the fact that the receipt of dividends by "unfriendly" persons (in particular, those who have citizenship of, are registered or operate in states that have imposed sanctions against Russia[6]) is complicated by the need to open a type "C" account.[7] The essence of this account is that the funds transferred to it are actually frozen and can only be used in some extremely limited cases (for example, to pay taxes and bank fees[8]). The expiration date of this dividend payment procedure has not been set, so it is currently impossible to predict when it will end.

According to the decision of the Central Bank, the depository itself must open a type “C” account without a separate application from creditors.[9] However, in practice, the depository may still require the submission of additional documents for this. We recommend that you check with the depository for the exact procedure.

2.     Opening of accounts

The procedure for opening bank and brokerage accounts to receive dividends and manage Russian shares largely depends on the specific bank or broker and is governed primarily by their internal rules. Some banks (and especially brokers) in principle do not open accounts for non-residents if they do not have a residence permit in Russia. Other banks are more liberal and, as a rule, allow you to open accounts through a representative if you have a notarized, apostilled copy of the applicant's passport (with a notarized translation) and a notarized power of attorney. If the applicant has a Russian visa or residence permit, then copies of these documents must also be provided to the bank. Some institutions can open bank and broker accounts online, requiring only a scanned copy of the passport and tax number, translated into Russian.

Opening an account in the absence of clarifying questions from the bank takes place quite quickly, usually in 2-3 business days. You can manage your account through a mobile application. However, please note that many banks require a Russian SIM card for its operation.

Bank fees for foreign currency accounts are constantly changing. In the summer of 2022, most banks adopted such fees, but in the fall, many abolished them or enacted them only based on a certain minimum currency threshold.

Some financial institutions may refuse to open accounts for "unfriendly" non-residents due to their internal policies. An additional complication is the ban on transferring funds held in Russian accounts abroad for such non-residents, introduced until 31 March 2023 (exceptions are provided for salaries/remuneration under employment and services contracts[10]). This makes having funds in Russian accounts unreliable.

3.     Other procedures and rules for non-residents

Until 10 November 2022, it was possible to apply for the forced conversion of depository receipts held in foreign depositories into Russian shares, as well as for the transfer of shares from foreign depositories to Russian ones.[11] These procedures were introduced so that investors could freely receive dividends and dispose of shares (due to Western sanctions, many securities were blocked without the possibility of their sale or conversion with the participation of foreign persons). To implement the procedures, it was necessary to submit applications and several documents in accordance with the requirements of the particular Russian depository responsible for the relevant shares/depositary receipt programs. We are currently unaware of any plans to extend the application deadline.

Separately, we note that in relation to "unfriendly" persons there is a general rule on the prohibition of securities transactions with Russian residents without a special permission from the Government Commission for Control over Foreign Investments.[12] An application for the permit must be accompanied by a number of additional documents (in particular, the articles of association, the applicant's registration certificate, information about its ownership structure and ultimate beneficiaries).[13] The deadline for consideration of the application is not established by law and takes, as a rule, about 1.5 months.

However, at the time of writing this article, there is still the option of not obtaining permission, among others:

·      when selling securities by non-residents in favor of other non-residents

·      when selling securities held in a foreign depository and making settlements through foreign banks, information about which is disclosed to the Russian tax authorities.[14]

In February 2022, the Russian Central Bank banned execution of any instructions by foreign clients to sell securities.[15]  This ban is directed at brokers, and public databases have no information on its cancellation. We recommend that you clarify this question with your broker.

Until 31 December 2023, there is also a blanket ban on transactions with shares held by “unfriendly” persons in certain enterprises such as strategic companies, companies making equipment in the fuel and energy sector, credit entities.[16]

4.     Our services

Avakov Tarasov & Partners is ready to provide the following services related to the management of Russian securities:

·      analysis of problematic issues and search for the best way to circumvent Russian restrictions and sanctions

·      preparation and submission of applications and all necessary documents for payment of dividends, opening of bank and other required accounts

·      full support of the procedure for obtaining permission from the Government Commission for transactions

·      representation of clients' interests before any state authorities and private organizations on the issues of managing Russian securities.

You can always contact us using the details below and we will respond to your request as soon as possible.

[1] On the establishment of requirements for the activities of professional participants in the securities market engaged in depository activities when they transfer dividends paid on shares of Russian joint-stock companies.

[2] Paras 2-4 of the Decision of the Board of Directors of the Russian Central Bank dated 10 June 2022 on the establishment of requirements for the activities of professional participants in the securities market engaged in depository activities when they transfer dividends paid on shares of Russian joint-stock companies.

[3] Para 4 of the Decision of the Board of Directors of the Russian Central Bank dated 10 June 2022 on the establishment of requirements for the activities of professional participants in the securities market engaged in depository activities when they transfer dividends paid on shares of Russian joint-stock companies.

[4] Para 11 of the Decision of the Board of Directors of the Russian Central Bank dated 10 June 2022 on the establishment of requirements for the activities of professional participants in the securities market engaged in depository activities when they transfer dividends paid on shares of Russian joint-stock companies.

[5] Art. 42(9) of Federal Law No 208-FZ dated 26 December 1995 on joint-stock companies.

[6] Decree of the Government of the Russian Federation dated 5 March 2022 No. 430-r on approval of the list of foreign states and territories committing unfriendly actions against the Russian Federation, Russian legal entities and individuals.

[7] Para 3 of Decree of the President of the Russian Federation dated 5 March 2022 No 95 on the temporary procedure for fulfilling obligations to certain foreign creditors.

[8] Para 1.1 of the Decision of the Board of Directors of the Russian Central Bank dated 21 November 2022 on the establishment of the type C account mode for settlements and the execution of transactions (operations) subject to the procedure for the fulfillment of obligations provided by Decree of the President of the Russian Federation dated 5 March 2022 No 95 on the temporary procedure for fulfilling obligations to certain foreign creditors.

[9] Para 10.1 of the Decision of the Board of Directors of the Russian Central Bank dated 10 June 2022 on the establishment of requirements for the activities of professional participants in the securities market engaged in depository activities when they transfer dividends paid on shares of Russian joint-stock companies.

[10] https://www.cbr.ru/faq/w_fin_sector/Transgranichnie_perevodi/, question No 1.

[11] Art. 6(20) of Federal Law No 114-FZ dated 16 April 2022 on amending Federal Law on joint-stock companies and certain legislative acts of the Russian Federation; Art. 5 of Federal Law No 319-FZ dated 14 July 2022 on amending certain legislative acts of the Russian Federation.

[12] Para 1(a) of Decree of the President of the Russian Federation No 81 dated 1 March 2022 on additional temporary economic measures to ensure the financial stability of the Russian Federation.

[13] Para 5 of Russian Government Decree No 295 6 March 2022 on approval of the rules for issuing permits by the Government Commission for Control over Foreign Investments in the Russian Federation in order to implement additional temporary economic measures to ensure the financial stability of the Russian Federation and other permits provided for by separate decrees of the President of the Russian Federation, as well as the exercise of other powers for these purposes and amending the regulations on the Government Commission for Control over Foreign Investments in the Russian Federation.

[14] Para 1.11 of Official clarification of the Russian Central Bank No 2-OP dated 18 March 2022.

[15] Instruction of Russian Central Bank No 018-38/1185 dated 27 February 2022.

[16] Paras 1-2 of Decree of the President of the Russian Federation No 520 dated 5 August 2022 on adoption of special economic measures in the finance and fuel and energy sector in connection with unfriendly actions of certain foreign states and international organizations.