Deutsche Bank, Germany’s largest bank, has informed its clients that it can no longer guarantee full access to their Russian stocks, highlighting the challenges faced by global investors seeking to recover their investments in Russian companies.
In a note dated June 9, the bank revealed a shortfall in the shares that support the depositary receipts (DRs) it had issued before the Ukraine invasion. These shares had been held in Russia by a different depositary bank.
Deutsche Bank attributed the shortfall to Moscow’s decision to allow investors to convert some of the DRs into local stock without involving or overseeing the German bank.
As a result, Deutsche Bank was unable to reconcile the company shares with the depositary receipts, which means that depositary receipt holders may not receive full ownership of all the shares they are entitled to.
This formal notification by Deutsche Bank is the first of its kind to alert investors in Russian DRs about the potential issue.
Depositary receipts are certificates issued by a bank that represent shares in a foreign company traded on a local stock exchange. Swapping these receipts for shares in the Russian company is the initial step for investors in their effort to recover their funds.
The affected shares include those of companies such as Aeroflot, LSR Group, Mechel, and Novolipetsk Steel. Mechel declined to comment, while the other companies did not immediately respond to requests for comments.
The imposition of Western sanctions and Russian countermeasures has resulted in stranded assets held by individuals and companies on both sides of the political divide.
Additionally, Moscow is demanding a 10% contribution to the federal budget, referred to as an “exit tax” by Washington.
The Kremlin has also taken temporary control of assets, seizing the Russian subsidiaries of two European energy firms in April, as part of its strategy to reduce foreign inspiration on companies grave of its economic and radical interests.
Numerous investors, ranging from small hedge funds to large global asset managers, still hold depositary receipts, despite most having already devalued their Russian assets to zero. Some investors remain hopeful of recovering value in the future.
Irina Tsukerman, president at geopolitical risk consultancy Scarab Rising, stated that vulnerability is pervasive across all forms of financial assets in Russia, including DRs, equities, and real estate.
The Central Bank of Russia has not provided an immediate comment on the matter.
The National Settlement Depository of Russia asserted that the conversion of shares had been conducted in accordance with Russian legislation and that it was not responsible for implementing this mechanism as the accounting institution.
Legal experts and advisers have described the conversion process as “complete chaos.”
Without proper reconciliation between Russia and foreign banks, there is a risk of double counting, as investors could end up with Russian shares while still holding DRs at foreign banks. Grigory Marinichev, a partner at the law firm Morgan Lewis, highlighted this issue.
Deutsche Bank is now permitting investors to swap their DRs for shares as part of its plan to exit its Russian business.
The bank believes that clients might be in a better position if they could at least partially convert their DRs. JPMorgan Chase, Citigroup, and BNY Mellon act as depositary banks for most other Russian depositary receipt programs, but they have declined to comment on whether they have also identified shortfalls.
Their books remain closed due to challenges with reconciliation, as mentioned on their respective websites.
In its circular, Deutsche Bank mentioned that if it could reconcile its books at a later date, it would aim to return more shares to the rightful owners. However, it cautioned that the net proceeds from the sales of shares it could return would likely be significantly lower than the current market price.
