By Sinead Cruise and Alexander Marrow
LONDON (Reuters) – J.P. Morgan has become the latest major bank struggling to find Russian stocks linked to some client investments, adding to fears for investors still hoping to recoup some value from stranded assets in the country.
In an investor circular dated July 12 and seen by Reuters, the Wall Street bank said “it was actively seeking to recover” shares in Russian retail group Magnit, which underpinned depositary receipts (DRs) JPM had issued to investors before Russia’s invasion of Ukraine in February 2022.
Western sanctions and Russian countermeasures have marooned assets held by individuals and companies on both sides.
Moscow has rewritten rules governing foreign ownership of Russian company shares in response to those sanctions, triggering confusion among investors and increasing their risks of heavy losses.
Reforms include upending the role of global banks in the supervision of depositary receipt programs originally designed to increase international investment in Russia’s major companies, and requiring substantial discounts for so-called “unfriendly” investors’ sales of stock.
A spokesperson for JPM confirmed the authenticity of the investor circular but declined to comment further.
DRs are certificates issued by a bank representing shares in a foreign company traded on a local stock exchange. Swapping DRs for shares in the Russian company is a first step towards an effort to recover money.
MISSING SHARES
JPM said the shares in question “may be missing” after “certain holders” cancelled their DRs twice, firstly under a business-as-usual process in April last year and again in August after Moscow introduced laws on the mandatory conversion of DRs to reduce foreign influence over Russian companies.
According to JPM’s circular, the shares currently unaccounted for are estimated to be less than 1% of the shares held in custody at another financial institution.
The possible shortfall in Magnit shares held on behalf of JPM’s investors comes soon after Deutsche Bank warned clients it could no longer guarantee full access to Russian stocks belonging to them, Reuters exclusively reported in June.
“Any cash equivalent of the missing shares that is recovered will be distributed pro rata among the remaining DR holders,” JPM said in the circular, echoing a plan also pursued by Deutsche Bank.
Lawyers and other advisers contacted by Reuters have previously described the process faced by global investors seeking to convert Russian depositary receipts into the company stock belonging to them as “complete chaos”.
Deutsche attributed its shortfall to Moscow’s decision to allow investors to convert some of the DRs into local stock without its “involvement or oversight”. This meant Deutsche was unable to reconcile the company shares held at another custodian bank with the depositary receipts on its own books.
The Bank of Russia did not immediately respond to a request for comment on JP Morgan’s search for the potentially missing Magnit shares.
Krasnodar-based Magnit and Russia’s National Settlement Depository (NSD) did not immediately reply to requests for comment.
The NSD has previously said that it was not responsible for implementing Russia’s forced conversion law and had no information about its consequences.
BUYBACK OFFER
Magnit, Russia’s second-largest retailer with almost 28,000 food and home goods stores across Russia and Uzbekistan, is offering to buy back blocked shares from foreign shareholders at a 50% discount — as demanded by the Kremlin — the first proposal of its kind.
Last month, Magnit tripled the size of its offer to almost 30% of its outstanding shares on strong demand from Western investors keen to exit Russian holdings and this week extended that to include shareholders holding stakes through Euroclear.
More than 60% of Magnit’s shares are free-float, with shareholders including major global asset managers, Refinitiv data shows.
When first announcing the plans, Magnit said its voluntary tender offer was also addressed to JPM, regarding shares held in its DR program custody account.
In its July 12 circular, JPM said it intends to participate in Magnit’s tender offer, and that any GDR holders not wishing to have their shares tendered should surrender them by 2100 GMT on July 14.
Magnit has already obtained government approval, something Western executives have said is a lengthy and difficult process.
Two sources with knowledge of Magnit’s plans have told Reuters that should Magnit’s offer succeed, it could open the door for other companies to follow suit and allow Western investors to recoup more blocked funds.
(Reporting by Sinead Cruise and Alexander Marrow. Editing by Jane Merriman)
