* This content was produced in Russia where the law
restricts
coverage of Russian military operations in Ukraine
LONDON/MOSCOW, Nov 16 (Reuters) – 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 billions of dollars prior
to 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 programs
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, told Reuters that amendments to a
presidential decree were underway and that 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 Nov. 14. “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.” Chebeskov said the decree was unlikely to be
published before the end of the year.
The lack of clarity and 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 to recover 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, 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,” Tskhakaya
said.
‘ANXIOUS SELLERS’
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, financial consultant at
U.S.-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 last month said
Russia had “stolen” its business, refusing to enter 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
U.S. 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 buy back
some of its shares held abroad, paying in dollars and euros
after obtaining Russian government approval. Its latest buyback
is underway.
Latest estimates from Morningstar Direct show global funds
it tracks which report exposure to Russian equities had around
$42 million in aggregate net outflows in September, up from
around $37 million in August and around $6.5 million in July.
This compares with net outflows of around $48 million in
March 2022 and $69 million in February this year.
FUNDRAISING TOOL
Two of the advisers described the latest initiative as a
fundraising tool for Russia, amid signs the country is feeling
financial strain.
Moscow 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 exclusively reported that JP Morgan had
told clients it was seeking to recover shares in Magnit, which
underpinned depositary receipts (DRs) JPM 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, 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.
(Reporting by Sinead Cruise and Alexander Marrow in London and
Elena Fabrichnaya in Moscow; additional reporting by Darya
Korsunskaya; Editing by Jane Merriman)
