A new conversion option for (large) holders of Russian ADRs and GDRs

A new conversion option for (large) holders of Russian ADRs and GDRs
12 September 2022

Tens of thousands (if not more) Western owners of Russian DRs are currently stuck with their securities.

While in theory, any holder of Russian ADRs and GDRs should have been able to convert their depository receipts into ordinary shares over the past few months, many Western banks and brokers refused to deal with the issue.

However, Russian ADRs and GDRs can currently also be converted into local shares through a legislative initiative of the Russian Federation which does NOT require the collaboration (or even consent) of Western banks and brokerage firms. These local shares will then be held in a so-called Russian "S" account, a limited brokerage account that foreigners can open without having to travel to Russia.

Anyone not converting before 12 October 2022 now runs the risk of losing everything. This deadline may be extended, but this matter is now one of real urgency.

Another option has now opened up for owners of ADRs or GDRs worth at least EUR 50,000.

The difficulty of converting DRs

Following my 2018 report on Gazprom, many of my readers invested. Many other undervalued, high-yielding Russian securities also proved popular with Western investors. When sanctions led to the effective de-listing of these securities on Western exchanges, everyone owning them scrambled to find a way to convert the securities into shares that can be traded on the Moscow stock exchange.

It's been a frustrating affair. Much as there should not have been that many difficulties, many Western banks and brokerage firms outright deserted their clients – a financial industry scandal that no one dares to address appropriately.

Maddeningly, some brokers treated different clients differently, changed course midway, or handed out contradicting information depending on which employee you spoke to. It's been a sh** show and a half, and left a huge dent in Western investors' trust in property rights.

To give Western investors an alternative, Russia's government passed legislation that allowed a forced conversion using 100% Russian mechanisms. That's the good news.

The bad news is that this procedure is quite difficult. It requires and involves international and local lawyers, consular offices, by-laws translations, notaries, the Russian custodian, and a raft of other helpers. It's not something that a private investor could handle on their own, and – sadly – it's probably not worth the expenses involved if you don't own a certain minimum amount.

Earlier this year, Undervalued-Shares.com correctly predicted that Swiss private banks were going to be the first to offer a conversion from DRs to ordinary shares. Unfortunately, even some Swiss banks subsequently proved to be somewhat challenged by the entire subject, not the least because of political pressure exerted on them and the prevailing Zeitgeist (though many did manage the conversion for their clients).

However, Switzerland is still a uniquely well-placed jurisdiction, and may yet come to the aide of at least some of the owners of Russian DRs.

A new service provider

A Switzerland-based law firm is now offering a full-service package for converting ADRs and GDRs into local shares.

The framework for this involves the following:

  • The resulting local shares will be booked into a Russian "S" account (sometimes also referred to as "C" account; both are the same thing).
  • Eligible are ADRs and GDRs of Russian firms based in Russia, such as Gazprom, Lukoil, Norilsk Nickel. Russian firms that are based abroad through a Western holding company, such as Yandex (Netherlands), are excluded.
  • Applicants can be both individual account holders and legal entities. If it's a legal entity, the usual additional information needs to be provided.
  • The applicant has to pay two fees:
    • Administrative costs in relation to the conversion payable prior to the transaction (approximately 1% of the share value).
    • A success fee of 25% of the shares converted for the law firm. No win, no fee.
  • Each case will be individually assessed. The law firm reserves the right to refuse cases. From a purely practical perspective, it will soon be absolutely inundated with applications.

The law firm that has just started to offer this service is LEOLEX. LEOLEX comprises a group of lawyers and accountants who, since 2015, have been offering services relating to the Russian Federation and international clients. The firm has a headcount of 20 and operates out of four offices in Switzerland.

As a standard procedure, I need to add a legal disclaimer:

  • Undervalued-Shares.com does not provide this information as legal advice.
  • Anyone contacting LEOLEX does so out of their own decision.
  • Undervalued-Shares.com is not liable for any of the results of this process.

I'd also like to stress that this service was recommended to me by a long-standing reader with a six-digit number of Russian ADRs and a deep level of expertise for dealing with financial matters involving Russia. The principal of LEOLEX is just one degree of separation from me, and I take this personal endorsement very seriously.

The 25% fee appears steep at first sight. However, in comparison, a Russian broker firm is currently offering to buy certain Russian ADRs at a 20% discount – a nearly similar price, and selling robs the owner of any possibility to benefit from prices recovering. (The broker in question is Zerich Securities who operates via Cyprus.)

This has become an expensive problem to resolve, and everyone will have to make a judgment on the alternatives for themselves.

Time is of the essence

12 October 2022 is just under one month away. If you haven't converted by then, you could lose everything. This deadline may yet get extended, but there is no guarantee for it to happen.

I also expect word about the LEOLEX service to spread among (Swiss) banks. I wouldn't be surprised if the firm soon had to deal with enquiries from financial intermediaries that will place a large number of client cases with LEOLEX.

If this is something you'd want to discuss with LEOLEX, my recommendation is to talk to them soon – before banks start to get serious about using their services, which I think gives you a head start of about a week.

LEOLEX's website, which includes contact details, is https://leolex.ch/en. Enquiries can be made in English, German, French, and Russian.

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