Moscow’s compulsory share purchase plan gives Western investors the jitters

London/Moscow — Western investors in Russian companies are bracing for a new presidential decree under consideration in Moscow which they fear could force them to sell their shareholdings to the Russian government at big discounts.

The potential decree, which could give Russia a “super pre-emptive right” to buy shares in strategic companies from foreign shareholders, marks the latest blow to investors holding Russian assets that were worth several billion dollars before February 2022.

Russia has been trying to cut foreign ownership and influence over its biggest listed companies since President Vladimir Putin ordered troops into Ukraine, triggering sweeping Western sanctions.

These methods include cancelling special investment programmes originally designed to increase the flow of international capital into Russian companies and bypassing global banks in the supervision of those schemes, resulting in losses for some investors and the disappearance of some shares they owned.

Ivan Chebeskov, head of the finance ministry’s financial policy department, said amendments to a presidential decree are under way and possible changes could give Russia’s government a “super pre-emptive right” to buy shares in strategic companies from exiting foreigners.

“This super pre-emptive right will work only in specific cases, with specific companies,” Chebeskov said on the sidelines of a financial forum in Moscow on Tuesday, adding that the exact list has still not been approved.

“The idea was that this concerns only those strategic companies in which the state already has a share,” Chebeskov said. “That is to say, this is a rather narrow list of companies.” He said the decree is unlikely to be published before the end of the year.

The lack of clarity and an uncertain timeline highlights the unpredictable nature of regulatory changes facing investors and businesses seeking to adjust their exposure to Russia.

As and when such a decree is passed, investors from countries considered hostile to Russia are likely to face an even bigger challenge in recovering value in their Russian holdings, five international investment advisers told Reuters.

The decree, once published, will affect how deals are approved and whether discounts would apply when being purchased, resold on the market or both, said Nato Tskhakaya, a partner at law firm Rybalkin, Gortsunyan, Dyakin and Partners. The decree could make clear “whether the seller has the right to withdraw their application and not close the deal, if they are not satisfied with the final parameters”.

Moscow’s purchases are expected to reflect a discount of at least 50% on the market value of the company stock, the investment advisers said.

“This arrangement does not explicitly qualify as asset appropriation but it effects the same result for anxious sellers,” said Thomas J Brock, a financial consultant at US-based Kaiser Consulting, one of the investment advisers who are worried about the impact of the proposed decree on investors still holding Russian assets.

Danish brewer Carlsberg’s CEO said in October that Russia had “stolen” its business. It had refused to enter into a deal that would make Moscow’s seizure of its assets look legitimate. Russia said it had appointed temporary management.

Investors also have reason to doubt that Moscow will pay in US dollars. Putin signed a decree in October forcing some exporting firms to convert a significant portion of their foreign currency revenue in an attempt to shore up the rouble.

But Russian retailer Magnit has managed to buy back some of its shares held abroad, paying in dollars and euros after obtaining Russian government approval. Its latest buyback is under way.

Latest estimates from Morningstar Direct show global funds it tracks which report exposure to Russian equities had about $42m in aggregate net outflows in September, up from about $37m in August and $6.5m in July. There were net outflows of $48m in March 2022, shortly after Russia’s invasion of Ukraine.

Two of the advisers described the latest initiative as a fundraising tool for Russia, amid signs the country is feeling financial strain. Moscow, which is pouring resources into the military, has raised taxes on business and is relying on optimistic budget revenue forecasts, Russian analysts said, while the central bank is keeping interest rates in double digits to battle high inflation.

A report by the Interfax news agency on July 25 said Putin had instructed officials to work out an arrangement to give Russia’s Federal Property Agency pre-emptive purchasing rights. Assets bought “at a significant discount” would be prepared for “subsequent sale at a market price”, with the transfer of proceeds to the federal budget, Interfax said, without identifying sources.

Western investors have already struggled to get assets out of Russia.

In July, Reuters reported that JPMorgan told clients it was seeking to recover shares in Magnit, which underpinned depositary receipts it had issued to investors.

That followed a Deutsche Bank warning to clients that it could no longer guarantee full access to Russian stocks belonging to them. Both banks declined to comment on the search process.

Depositary receipts are certificates issued by a bank representing shares in a foreign company traded on a local stock exchange.

“The disruption to normally functioning markets is very significant and who knows when trust can be earned back,” said Vijay Marolia, a managing partner of investment firm Regal Point Capital.

Navigating the rules on exits is becoming harder, executives have said. Italian bank Intesa Sanpaolo is on the cusp of selling, but HSBC is still waiting for the green light to sell its Russian unit to local lender Expobank.

“Capitalistic investors will always crowd around troubled markets, but the Russian government’s moves to restrain capital flows will have a lasting impact on broad-based investor sentiment,” Brock said.

Reuters