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 shares of 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.

Conversely, this also means that shares of 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. Partly this is already the case. Investors affected must therefore convert their depositary receipts to shares as quickly as possible. Otherwise, they risk the total loss of their own investment.

In fact, all conversion periods for Russian depositary receipt programs have already expired. Accordingly, the responsible banks will probably try to sell the deposited securities that have not been converted by their owners in a timely manner.

Fortunately, no case of such a forced sale has been reported so far. Therefore sometimes it is still possible to exchange depositary receipts for common shares again, although the respective ADR programs have already expired. However, it is completely unclear how long this will be the case. Therefore, affected investors should act quickly to protect their securities from forced sale.

In any case, if there were a forced sale of the deposited shares, many securities would 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 because of such a forced sale, investors from countries such as Russia or China could buy securities of German investors cheaply and benefit from the forced sale.

Chart 1: The deadlines for the conversion of depositary receipts of selected Russian companies