A complex scheme devised by Moscow to swap Russian and western investors’ frozen assets and return more than $1bn to ordinary retail shareholders has fallen short of the Kremlin’s expectations, with less than 10 per cent of the original target delivered.
Investitsionnaya Palata, a little-known brokerage in Voronezh, a city closer to the Ukrainian border than it is to Moscow, operated the scheme. But it managed to secure just Rbs8.1bn ($89mn) for the millions of ordinary Russians whose foreign share purchases were locked in custodian accounts at Clearstream and Euroclear after the west imposed sanctions in the wake of Russia’s full-scale invasion of Ukraine in March 2022.
Just over 708,000 Russians were able to receive funds — far fewer than the 3.5mn that have had their assets trapped for more than two years — after interest in the scheme from foreign investors proved more lukewarm than Russian officials had hoped.
Investitsionnaya Palata received an exclusive mandate from the Kremlin in March to operate the swap programme. Moscow hoped it would enable ordinary Russians to prise back up to Rbs100bn ($1.12bn) worth of foreign equities frozen by sanctions imposed by Ukraine’s western allies.
The brokerage finished the first round of the scheme last week, and revealed that it was undersubscribed on both sides. Ordinary Russians submitted applications to sell shares worth about half the allotted amount, while foreign investors were only willing to take up about a fifth of the offers.
The brokerage has not yet set a date for a second round, and is still considering whether or not to press ahead.
Russia’s swap programme
Russian stocks were hit by western sanctions just after the country’s citizens had begun to develop a taste for private investment.
In the years after the 1990s, most people in the country viewed the stock exchange as a casino, preferring to keep their money in banks, where double-digit interest rates provided high returns on deposits, or simply under their mattresses.
But in the late 2010s the government began offering tax benefits for equities investments, and brokerages made investing possible with just a few taps on a smartphone app. In 2017, there were just over 1mn personal Russian accounts on the Moscow Exchange — by mid-2024, that number had grown to more than 30mn.
On the other side of the swap scheme are foreign companies with at least Rbs600bn trapped in Russia, in so-called Type C accounts, which are overseen by the Russian state.
Initially, Investitsionnaya Palata seemed confident in the programme’s success. “Everyone is keen to swap,” CEO Alexey Sedushkin told the Financial Times in May.
But many foreign investors had reservations.
The head of a European investment company assisting clients with assets blocked in Russia said their customers kept asking: “How do I know who I am ultimately buying from? Who is the real counterparty? What if I violate restrictions?”
The scheme’s attractiveness for foreign investors was further hampered in June, when US sanctions hit the Moscow Stock Exchange — Russia’s main platform for securities trading — and its subsidiaries, the National Settlement Depositary (NSD) and the National Clearing Centre.
Sedushkin said the sanctions “were not expected to significantly impact non-residents’ ability to buy back Russians’ securities”.
“Non-residents will interact directly only with the programme operator, which is not subject to any restrictions,” he said, adding that investors could specify in their bid that they did not want to buy securities from sanctioned persons.
Both Euroclear and Clearstream, which operate from Belgium and Luxembourg respectively, discouraged investors from participating.
“We believe that the market understands generally that an elective asset swap may not be consistent with western policy goals,” a person familiar with Clearstream’s thinking said.
Euroclear, which holds most of the frozen Russian shares, said it was “not involved in the process”, while clients participating “would do so fully at their own risk”.
Successful Russian retail investors have already received their cash, but foreign investors still face a struggle.
Those whose bids were successful became the owners of assets that are currently held in custodian accounts of Russia’s NSD at Euroclear and Clearstream.
To transfer the stock from the NSD to a foreign custodian, new shareholders needed to contact either Euroclear or Clearstream and the authorities in their own country to obtain approval for the asset transfer.
Essentially, the foreigners exchanged the risk that the Russian government would never allow them to withdraw their roubles for the risk that the European authorities would not permit them to withdraw securities held in an NSD account.
While, several Russian law firms, including BGP Litigation and Delcredere, have reported successful instances of unblocking Russian-owned assets held by European depositories and transferring them to non-sanctioned, non-Russian accounts, these were individual cases unrelated to the swap scheme.
“We have clients who have not only received positive permission from the Belgian treasury but have, in fact, already transferred their assets to a western jurisdiction,” Sedushkin said. “I am sure that European authorities will make such decisions faster for their own citizens.”
However, two people familiar with the matter said the asset swap scheme would likely circumvent EU sanctions against Russia.
The person familiar with Clearstream downplayed the likelihood of earlier precedents being replicated on a large scale.
“We are aware of only a very few specific cases where the EU competent authorities have authorised investors to withdraw assets from NSD’s accounts in the EU,” the person said.
Data visualisation by Chinny Li
