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Profits ‘falling from the sky’ of many Russian companies and global banks

Russian companies and global banks including BNY Mellon, Deutsche Bank, Citigroup and JPMorgan could benefit unexpectedly if the Russian Government decides to remove depository certificates based on shares of Russian companies from foreign transactions.

Russian companies and global banks including BNY Mellon, Deutsche Bank, Citigroup and JPMorgan could benefit unexpectedly if the Russian government decides to phase out stock-based certificates of deposit from foreign exchanges, according to sources familiar with the matter.

The unexpected gain comes from a fee that the depository issuing bank can contract with investors when they cancel the product.

In the midst of a series of sanctions from the West, the Russian Government is preparing to delist securities depository certificates based on shares of Russian companies from foreign exchanges, then convert them into domestic securities. The goal is to reduce foreign control over these companies.

A certificate of deposit is a bank-issued certificate that represents the shares of a foreign company that are traded on a local stock exchange. They allow investors to search for stocks abroad according to their own geographies and time zones.

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There are more than 30 share custody certificates of Russian companies including Gazprom, Rosneft, Lukoil and Norilsk Nickel issued by BNY Mellon, Deutsche Bank, Citigroup, JPMorgan… are being traded on the US and European markets.

It is not clear how much companies and banks can earn or whether banks will charge this fee. Because if they did, they would upset investors, who might say the move is unfair under the current circumstances.

Under standard agreements, depository certificates can be revoked by the issuer or investor. When that happens, the investor usually receives cash from the sale of the underlying stock, although they also have custody of the shares.

Banks will charge an administration fee, usually around $0.05 per certificate. This fee can be shared with companies.

If the Russian government delists the above depository certificates, the banks will have to delist these products. However, banks can still charge investors even though they are forced to.

A calculation by Reuters news agency based on data provided by sources shows charges can run into the hundreds of millions of dollars. For example, an investor in Rosneft with 150 million margin certificates representing the same number of shares in the company could have to pay $7.5 million in certificate cancellation fees.

Some investors said banks should not charge the fee. A global asset manager told Reuters news agency that if Russia passed the delisting law, no fees would be charged because investors would have no choice in the matter. However, the other two sources said that banks still have to cover the costs themselves.

BNY Mellon, Deutsche Bank, JPMorgan and Citigroup as well as Russian companies declined to comment for this story.

Here's a look at U.S. banks' exposure to Russia-tied financial turmoil

When Western sanctions hit the Russian stock market at the end of February, the Moscow Exchange closed and the Central Bank of Russia banned foreigners from moving shares out of their custody accounts. The bank also banned foreigners from selling Russian stocks.

The restrictions make it nearly impossible for banks to cancel certificates at the request of investors. With the recent lifting of the custodial bank restriction, BNY Mellon, Citi and JPMorgan have resumed processing de-custodial requests.

But since foreign banks are still unable to sell shares, investors have to do the depository themselves. To do that, investors need an account in Russia – something many people do not currently own.

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