Conversion of ADRs- and GDRs
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Because of the present sanctions against Russian companies there is a high degree of uncertainty concerning private and institutional investments in so-called ADRs and GDRs. Anyone who does not exchange their depositary receipts for Russian companies into shares soon will be faced, in the worst-case scenario, with the total loss of their whole investment. But such an exchange currently presents enormous challenges. We of the international business law firm Goldenstein have therefore developed solutions for the existing problems and successfully support investors with the conversion of their DRs for Russian companies.
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This is how investing in Russian ADRs and GDRs works
Russian shares may only be traded on the Moscow Stock Exchange. For this, however, investors require a depositary account in Russia. In order that investors from all over the world may nonetheless be able to invest in the Russian stock market via their domestic banks and brokers, many Russian companies launched so-called Depositary Receipt Programs in the past few years. Depositary receipts are receipts for shares that may be traded on international stock exchanges without any significant regulatory effort or expense.
Anyone who, in the past few years, has invested money in Russian companies from a base in Germany or any other country, has thus, in the normal case, purchased not Russian shares but such depositary receipts. In Europe it is essentially American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs) and, in part, also European Depositary Receipts (EDRs) that have been issued.
Until recently, such investments posed no challenges to investors. However, since the Russian war against the Ukraine and the western sanctions connected therewith, uncertainty prevails. This is because many Depositary Receipt Programs of major Russian companies such as Gazprom or Lukoil had to be stopped due to a new Russian law. DRs that have been issued must therefore be exchanged for shares within just a few months. This is currently not so simple, however.
Normally, the conversion of ADRs or GDRs to shares works as follows: the investor informs their broker or their bank that they wish to exchange their depositary receipts. This bank then approaches the European custodian of depositary receipts. This, in turn, passes this information on to the Russian custodian – the National Settlement Depositary (NSD). There, the deposited shares are then transferred to the Russian depositary account of the investor, which must be opened beforehand.
Until recently, the conversion of their depositary receipts was not attractive for international investors as the opening of a Russian depositary account involves a lot of bureaucratic effort for Europeans. The ending of many Depositary Receipt Programs now renders such an exchange indispensable, however. Due to the sanctions against Russian companies, this process is now also much more complicated than before.
These Russian Companies are ending their ADR and GDR Programs
In April 2022 Russia passed a law that is forcing many Russian companies to cease trading in depositary receipts within the coming months. The Russian legislator thus wishes to achieve that Russian companies, in the future, are tradable only in Russia.
It is indeed the case that Russian companies still had the option of applying for the continuation of their Depositary Receipt Programs. But many companies did not exercise this option. So far it is only known that shares in the following companies will also be globally tradable in the future: Polyus, Tatneft, Severstal, Surgutneftegas, PhosAgrom, Sistema and Novatek. In addition, Rosneft, Rostelecom and Magnitogorsk have also applied for the continuation of their DR programs. However, no final decision has yet been taken regarding these applications.
Conversely, this also means that major companies such as Gazprom, Magnit, Lukoil, Mobile TeleSystems, RusHydro, the LSR Group and the Federal Grid Company of Unified Energy System (FGC UES) will, soon already, only be tradable on the Moscow Stock Exchange. Investors affected must therefore convert their depositary receipts to shares as quickly as possible. Anyone who does not manage to do this by the end of the applicable conversion period risks the total loss of their own investment.
Some Russian depositary receipts still can be converted into shares until August 2023 by European investors. If investors fail to exchange their depositary receipts until then, their credit institution in question will attempt to sell the depositary receipts. Whether this will be possible, and at what price, cannot currently be predicted, however.
Should there be a forced sale of the deposited shares, many shares would in any case come onto the market at the same time. This will most likely lead to enormous price slumps. While German investors must reckon with uncontrollable losses as a result of such a forced sale, investors from countries such as Russia or China could buy German securities cheaply and benefit from the forced sale.
| Company | Deadline for Conversion |
| Magnit | 26/08/2022 |
| RusHydro | 29/11/2022 |
| Federal Grid Company of Unified Energy System (FGC UES) | 09/12/2022 |
| LSR Group | 27/12/2022 |
| Lukoil | 30/12/2022 |
| Mobile TeleSystems | 13/01/2023 |
| Gazprom | 03/08/2023 |
Chart 1: The deadlines for the conversion of depositary receipts of selected Russian companies
This is how the conversion of Russian Depositary Receipts works despite sanctions
Some European investors still have time until August 2023 to convert their Russian depositary receipts into shares. Nevertheless, quick action is required, because the conversion of Russian DRs is currently extremely complicated.
The European custodian for depositary receipts – Clearstream – has namely refused until recently to initiate the conversion of Russian Depositary Receipts until Summer 2022. This is because its Russian counterpart – the National Settlement Depositary – has recently had sanctions imposed upon it by the European Union.
Therefore the Russian National Settlement Depository (NSD) had initially announced that it would not collect any fees for converting Russian depositary receipts until July 31, 2022 and has now extended this measure until the end of 2022. As a result, the European custodian is in principle again able to work with the Russian NSD until December 31, 2022. Until then, the NSD will no longer profit economically from this cooperation. However, the European custodian is currently partially blocking the conversion of corresponding securities. On October 6, Clearstream announced that it would accept conversion applications again in the future. However, the depositary revised this on the same day.
Namely, Russia has passed a law that provides, among other things, for automatic conversion of ADRs and GDRs traded by Russian citizens. In this automatic conversion the western issuers of ADRs and GDRs see a violation of the applicable Depositary Receipt agreements by Russia. Therefore, the conversion of depositary receipts for Russian shares is currently often not possible in the conventional way.
In addition, however, Russia allowed foreign investors since mid of July 2022 to exchange their Russian depositary receipts for 90 days without the help of their own bank or the European or American custodians but private and institutional investors have only been able to benefit from this law until November 11, 2022. The Russian banks now have time until further notice to examine the conversion applications that have been received. Only after this process has been completed will Clearstream presumably accept conversion requests again.
Since it is currently unclear when this will be the case, investors should at least collect all the documents needed to convert their securities in the traditional way. The commercial law firm Goldenstein advises affected investors in this regard free of charge and without obligation and informs them as soon as the conversion of the Russian securities is possible again.