Update: Russia to Permit Certain Transactions with Securities of Non-Russian Issuers

Decree 844, issued by the Russian president on November 8, 2023, marked the latest piece of legislation making up the so-named Russian countersanctions law. We have previously covered the rules set by Decree 844 for funds held in frozen type S bank accounts—in this LawFlash, we discuss the item of Decree 844 that removes restrictions on certain other transactions with securities of non-Russian issuers (foreign securities) when conducted outside of Russia.

See our previous LawFlash on the rules set by Decree 844 for using funds blocked in Russia in so-called type S (also known as type C) bank accounts of non-Russian investors in exchange for foreign securities belonging to Russian persons that are blocked in Euroclear and Clearstream.

DECREE 81 PROHIBITION

By way of background, Russian president decree No 81 of March 1, 2022 (Decree 81) was one of the first key post–February 2022 countersanctions law decrees restricting transactions with securities between Russian persons and non-Russian (foreign) persons.

Decree 81 generally prohibits any sale and purchase transaction with any securities between a Russian person and a person from an “unfriendly state,” or, under certain circumstances, a person from a “friendly” state, unless the transaction is approved by the Russian government commission on control over foreign investments.

ITEM 8 OF DECREE 844

On its face, item 8 of Decree 844 removes the Decree 81 prohibition for transactions with foreign securities. For example, shares of stock, bonds, or depositary receipts issued by foreign issuers would be considered as such foreign securities.

However, despite the sweeping language of item 8, one should not assume that all transactions with foreign securities are now permitted. On the contrary, it should be interpreted that only transactions covered by Decree 844 are permitted.

TRANSACTIONS ALLOWED UNDER ITEM 9 OF DECREE 844

Item 9 of Decree 844 allows transactions with foreign securities that would otherwise be prohibited by Decree 81, when the following two conditions are met (qualifying transactions):

1. The foreign securities are held outside of Russia with a foreign organization that is authorized to maintain recordkeeping of, and register transactions with, such foreign securities (e.g., a foreign custodian, registrar, or broker)
2. Settlements for the transaction are done via accounts that a Russian person has with foreign banks or other financial institutions, provided that the Russian person has reported these accounts to Russian tax authorities as required under Russian laws

A similar rule existed for some period in the past until March 3, 2023, based on Russia’s Central Bank (the Central Bank) clarification letters 2-OR of March 18, 2022, and 1-OR of March 28, 2023.

Note that transactions with Eurobonds that are foreign securities are not permitted by Decree 844. These transactions are subject to other countersanctions law rules.

Based on item 9 of Decree 844, if a foreign person desires to sell foreign securities to a Russian person through its brokerage or other securities account outside of Russia, the Russian person can acquire and pay for these securities without a Russian government commission approval only if such Russian person has securities or bank accounts outside of Russia and has reported those accounts to Russian tax authorities in accordance with applicable Russian laws. Otherwise, approval from the Russian government commission will be required.

As a matter of Russian countersanctions law, transactions concluded in violation of Decree 844’s rules would generally be deemed invalid. Foreign persons must have this in mind when deciding whether to enter into transactions.

OTHER COUNTERSANCTIONS LAW RESTRICTIONS

Russian countersanctions laws contain many other restrictions. For example, the direct and indirect sale and purchase of an equity interest (however insignificant) in a Russian limited liability company or strategic, energy, or finance company is generally prohibited without government approval.

These restrictions may be relevant to transactions with securities issued by foreign holding companies that have businesses in Russia. Foreign persons must assess the effect of these and other restrictions before exiting from their Russian and Russia-related holdings and investments.

FURTHER REGULATION

While Decree 844 is vaguely drafted and poses many open issues, it does grant the Central Bank an authority to issue formal interpretations. We expect that the Central Bank will use this authorization and issue further regulation. At this time, while the Central Bank has not yet issued an official clarification, it has been reported that the Central Bank representative confirmed that only qualifying transactions are permitted under item 9 of Decree 844 as opposed to all transactions with foreign securities.