In the ever-evolving landscape of international investments, Western investors with stakes in Russian companies are anxiously awaiting the outcome of a proposed presidential decree in Moscow.
This potential decree is causing concerns among investors who fear that it could compel them to sell their shareholdings to the Russian government at significant discounts.
The contemplation of this decree adds to the woes of investors who were already grappling with the devaluation of Russian assets since February 2022.
The envisaged “super pre-emptive right” for Russia to acquire shares from foreign shareholders, particularly in strategic companies, is seen as another blow to investors who have seen their Russian holdings depreciate amid geopolitical tensions.
Russia’s efforts to diminish foreign ownership and influence over its major listed companies gained momentum following President Vladimir Putin’s controversial decision to deploy troops into Ukraine, triggering widespread sanctions from the West. Among the measures taken were the cancellation of special investment programs initially designed to attract international capital into Russian firms.
These initiatives, overseen by global banks, suffered disruptions, leading to losses for some investors and the disappearance of certain shares from their portfolios.
Ivan Chebeskov, the head of the finance ministry’s financial policy department, shared insights with Reuters, revealing that amendments to a presidential decree were in progress. The potential changes might empower Russia’s government with a “super pre-emptive right” to acquire shares from foreign investors exiting strategic companies.
However, Chebeskov clarified that this right would likely be applicable only in specific cases involving specific companies, emphasizing that the exact list had not yet been finalized.
During a financial forum in Moscow on November 14, Chebeskov hinted at the narrow scope of the companies that might be affected, stating that it would pertain to strategic companies in which the state already holds a share. He noted that the decree might not see the light of day before the year’s end, underscoring the lack of clarity and an uncertain timeline that characterizes regulatory changes, leaving investors and businesses grappling with unpredictability.
If the decree is enacted, investors from countries considered hostile to Russia could face an even greater challenge in recovering the value of their Russian holdings. The publication of such a decree will influence how deals are approved and whether discounts will be applied during purchases, resales on the market, or both.
Nato Tskhakaya, a partner at the law firm Rybalkin, Gortsunyan, Dyakin and Partners, emphasized the significance of the decree in shaping the dynamics of transactions involving Russian assets. As the global investment community navigates this complex landscape, the fate of Western investors in Russian companies remains uncertain, underscoring the challenges inherent in the ever-shifting geopolitical and regulatory environment.
“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, could be made clear in the decree.
Wheeling Dealers
The proposed presidential decree in Moscow, allowing Russia a “super pre-emptive right” to buy shares in strategic companies from foreign shareholders, has raised concerns among investors, potentially resulting in significant discounts on the market value of the company stock. Analysts anticipate Moscow’s purchases reflecting a discount of at least 50%, causing anxiety among investors still holding Russian assets.
While the arrangement may not explicitly qualify as asset appropriation, the expected discounts could have a similar effect, prompting apprehension among investors. Thomas J Brock, a financial consultant at U.S.-based Kaiser Consulting and one of the concerned investment advisers, highlighted the potential impact of the proposed decree on investors with lingering Russian assets.
Recent comments from the CEO of Danish brewer Carlsberg, describing Russia’s actions as “stealing” its business, underscore the heightened concerns among investors. The refusal to enter a deal that would legitimize Moscow’s seizure of assets reflects the unease within the business community.
Investors are also skeptical about the mode of payment from Moscow, doubting that Russia will pay in U.S. dollars. A decree signed by President Vladimir Putin in October mandated some exporting firms to convert a significant portion of their foreign currency revenue to support the Russian ruble. However, Russian retailer Magnit has managed to buy back some of its shares held abroad, making payments in dollars and euros after obtaining Russian government approval.
The uncertainty and potential risks associated with the proposed decree are reflected in the outflows from global funds reporting exposure to Russian equities. Morningstar Direct estimates show around $42 million in aggregate net outflows in September, up from approximately $37 million in August and $6.5 million in July. While these outflows are lower than those in previous months, the figures highlight the ongoing challenges and cautious approach of investors dealing with Russian assets amidst geopolitical uncertainties and regulatory changes.
Tool for Fundraising
The proposed presidential decree in Moscow, granting Russia a “super pre-emptive right” to purchase shares in strategic companies from foreign shareholders at significant discounts, is viewed by some advisers as a fundraising tool amid signs that Russia is facing financial strain. Moscow’s increased focus on military spending, higher taxes on businesses, and reliance on optimistic budget revenue forecasts have raised concerns, while the central bank’s maintenance of double-digit interest rates aims to combat high inflation.
The initiative, seen as a way to generate funds, instructs Russia’s Federal Property Agency to exercise pre-emptive purchasing rights at a discount, with the subsequent sale of assets at market prices. The transfer of proceeds to the federal budget is part of the outlined plan. This move, combined with existing challenges, highlights the difficulty Western investors face in extracting assets from Russia.
Investors have already encountered obstacles in recovering assets. In July, JP Morgan sought to recover shares in Magnit underpinning depositary receipts ,DRs, it issued to investors. Deutsche Bank also warned clients about potential challenges in accessing Russian stocks it holds. The disruption to normal market functioning is deemed significant, raising questions about when trust can be regained.
Executives note that navigating exit rules is becoming more challenging. While some, like Italian bank Intesa Sanpaolo, are on the verge of selling, others, like HSBC, await approval to sell their Russian units. The Russian government’s measures to restrict capital flows are anticipated to have a lasting impact on broad-based investor sentiment, influencing the dynamics of capitalistic investments in the country.
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