Moscow’s Exclusive Controls on Foreigners’ Trading of Russian Assets Raise Concerns About Asset Writedowns

Steam rises from the chimneys of a heating power plant over the skyline of central Moscow, Russia, November 23, 2020. REUTERS/Maxim Shemetov/File Photo

LONDON/NEW YORK, March 17 (Reuters) – Russia has set tough new rules for foreigners seeking permits to buy and sell Russian assets ranging from securities to real estate, according to a Citigroup client note. (CN) Which raises new concerns that Western investors could face significant writedowns.

Russia temporarily halted foreign trading of Russian assets this month, saying it wants to ensure exit decisions are heeded and not pushed into political pressure, in the wake of Moscow’s invasion of Ukraine. Read more

It has now revealed details of the application process that must be followed before the Treasury decides whether the assets can be traded, including the disclosure of any beneficiaries and strategic investments such as defense.

“Western investors will be very agitated and deeply concerned,” said Eric Schaeffer, CEO of California-based Patrick Oregon who specializes in risk management. “This is likely one of many future steps until Russia is clear about its financial security.”

Tens of billions of dollars worth of money dealing with Russia await details about the restrictions it will face as it seeks to offload assets, against the backdrop of President Vladimir Putin’s growing economic isolation.

“I don’t think anyone in Russia would dare tell Putin what financial problems lie ahead,” said Alistair Winter, global investment analyst at Argyll Europe, predicting “mass write-offs” for many foreigners exposed to the country.

The invasion, which Moscow calls a “special military operation” to disarm Ukraine, has led to a mass exodus of international businesses and largely cut off the Russian economy from the rest of the world.

Russian authorities published Decree No. 81 this month that says any transaction between Russians and their foreign counterparts requires permission from the Russian government’s Foreign Investment Monitoring Committee. Read more

Effectively, this means that foreign investors, who have grabbed Russian stocks and bonds without restraint, are left stranded with those holdings as the economy teeters from an oil-rich investment destination to a financial pariah.

“The Russian authorities announced the order to obtain permits to carry out the operations defined by Decree No. 81. A body empowered to make decisions on the issuance of permits has been created,” says Citigroup’s note.

The process includes an application and related documents submitted to the Russian Ministry of Finance, in Russian, containing “information on the purpose, subject matter, content and basic terms of the transaction”.

Applicants must also disclose full information about the beneficiaries and beneficial owners, the memo says, as well as details of any investments in companies in a “strategic sector” such as aviation, aerospace, natural resource production, or working with weapons or military equipment.

“This is just a mechanism to control the entities that can deal in foreign currencies and it will not be companies from hostile countries leaving the country,” a banking source said of the rules.

Citigroup declined to comment other than to confirm the authenticity of the memo.

A second banking source said it had advised clients not to trade on such terms, which dampened concerns about sensitive data being shared and a lack of transparency about order approvals or rejections. However, some investors are likely to comply in hopes of avoiding losses, experts say.

“If you have the prospect of losing all of your assets in exchange for data sharing, I think you will have some that will want to look into it,” said Patriarch Schaeffer.

(This story fixes a typo in the title to make it “raise” instead of “raise”)

Additional reporting by Megan Davis. Editing by John O’Donnell, Edmund Blair, Eileen Hardcastle and Jonathan Otis

Our criteria: Thomson Reuters Trust Principles.