Investments by tens of thousands of German investors in Russian stocks have been practically frozen for almost a year. There is a theoretical way to get the papers. But it contains almost insurmountable obstacles. Politicians could help, but they don’t, says Marc Liebscher from the protective association for investors ntv.de.

ntv.de: Investors face losses with Russian depositary receipts. That sounds exotic. What is the problem and how big is it?

Marc Liebscher: That’s a big problem. Anyone who has invested directly or indirectly in Russian companies, for example via funds, is affected. It’s about big international corporations like Gazprom or Lukoil. We estimate that this affects more than 50,000 investors in Germany, with amounts ranging from hundreds to several million euros for institutional investors.

In order to understand the problem of these investors, it is necessary to know that, as a rule, they do not own shares in Russian companies, but depositary receipts. What does that mean?

Having its shares traded on a stock exchange involves a great deal of effort for a company. It has to meet many regulations, from issuing a securities prospectus to balance sheet figures. As a rule, a company does this once for the respective national stock exchange, i.e. Russian corporations on the Moscow stock exchange. Depository Receipts, known as American Depository Receipts (ADR) or General Depository Receipts (GDR), allow these companies to find investors in other countries. For this purpose, the shares are deposited in a pool with a custodian in their own country. A paper is issued for each share, a depository receipt that can be traded abroad much more easily and with fewer regulatory hurdles. Investors can therefore participate in price development and dividends without directly acquiring the shares.

That sounds complicated. Shouldn’t investors have been careful with such papers?

The system of depository receipts has been established and proven worldwide for more than 100 years. Problems comparable to the current one with the Russian papers have never existed in the past.

So what happened to the Russian papers after the attack on Ukraine?

After the start of the war and the subsequent sanctions by the West, Russia wanted to gain control over who owns the shareholders of such strategically important companies as Gazprom or Lukoil. This is not visible with the shares behind the depositary receipts. So it was decided that all depositary receipts must be exchanged for regular shares. This is a challenge that German investors can hardly solve.

Why?

First you need a deposit with a Russian bank. You have to open it in person. But there are no flights to Moscow. So you have to try to hire a Russian lawyer. He needs a power of attorney to do this. This must be certified by a notary, then confirmed by the district court with an apostille and translated into Russian. Once you have successfully completed this, the actual exchange of the depository receipts begins. This already complex process is made even more complicated by the financial sanctions against Russia. The Russian banks and other bodies involved are supposed to process the exchange free of charge, so that foreign investors in the West do not violate sanctions with corresponding payments or – for example as a notary – participate in them. But the legal uncertainty among all those involved is very high.

What should investors do? Are there no alternatives or is it perhaps worthwhile to simply wait and see?

Doing nothing and waiting is a risky option. Russia wants to sell all remaining shares in the custodian pool after the exchange period expires in the summer. The proceeds will go to trust accounts for the owners. This naturally raises the question of the price at which such sales take place and what discounts investors have to accept. I can imagine that oligarchs close to the Kremlin will use this opportunity for very cheap stock purchases.

There are providers who are willing to take over the processing of the exchange. The investors have to transfer their papers to them and, if they are successful, they will share in the proceeds. You should take a close look at the conditions. I advise anyone who has invested a significant sum in Russian depositary receipts to contact an experienced lawyer and go through the process, no matter how complicated it may be.

Did you expect more political support?

Yes, politicians could easily help those affected if it were expressly confirmed that the necessary steps to exchange the depositary receipts in this process, in which no money flows to Russian institutions, do not violate the sanctions. Even if that is already the case in fact, there is a great deal of uncertainty among many involved, from the employees in German bank branches to the notaries. That could be eliminated. Among other things, we approached the Finance Committee of the Bundestag. It was said that this had to be done at European level. But in the European Parliament, the Commission and the European Council there is apparently no interest whatsoever in addressing the issue. Investor losses are being shrugged off as collateral damage from sanctions against Russia. Russia does not benefit at all from the exchange of papers, but rather from the fact that it does not take place.

Shouldn’t investors who have invested in Russian companies, especially state-owned companies, be accused of having financially involved themselves with this regime, which has been accused of serious human rights violations since the invasion of Ukraine? That could explain the lack of willingness to help on the part of politicians.

However, this accusation against investors is not justified, especially in Germany. As a consultant on financial regulation, I myself dealt intensively with Ukraine years ago. I had been aware of Russian politics and the danger of such a war for a long time. But most people in Germany did not have such insights. On the contrary: you saw how the government continued to cooperate with Russia even after the occupation and annexation of Crimea. That was the consensus in the people’s parties Union and SPD. It would be unfair to point the finger at small investors who have bought Russian stocks.

Max Borowski spoke to Marc Liebscher