Russia’s New York Stocks in Peril as Kremlin Makes PleaKasia Klimasinska and Halia Pavliva
When Russia’s first deputy prime minister urged companies to delist from overseas stock markets two days ago, he made a reference to concerns about the country’s “economic security.”
While Igor Shuvalov didn’t specify what the security issues are, there may be reasons for the Kremlin to be concerned about stock trading as the U.S. and Europe threaten to step up sanctions against Russia, according to Gibson, Dunn & Crutcher LLP. The New York-listed equities of any company that the Treasury Department adds to the sanctions list would become off limits to U.S. investors, said Judith A. Lee, a sanctions lawyer at Gibson Dunn in Washington.
“If a company is designated, then any shares of that company in the control or possession of a U.S. person are blocked,” Lee said by e-mail on April 8. “Those shares could not be sold. That would really put downward pressure on the stock price.”
The Bloomberg index of the biggest Russian companies traded in New York rose 0.2 percent yesterday, capping a decline of 19 percent this year. The measure has plunged almost twice as much as the benchmark Micex gauge of Moscow-traded equities, which has fallen 10 percent. The Micex rose 0.8 percent at 1,360.24 at 9:33 a.m. in New York today.
Average daily volume in 10 of the country’s biggest stocks was 46 percent higher in the U.K. than in Moscow over the past 30 days, according to data compiled by Bloomberg. Companies including Yandex NV, VimpelCom Ltd. and Mail.ru Group Ltd. are only traded on exchanges abroad while OAO Lukoil, OAO Gazprom and OAO Sberbank, among others, have shares listed in Moscow, New York and London.
U.S. President Barack Obama imposed financial sanctions on Russian officials, including billionaires close to President Vladimir Putin, following the country’s takeover of Crimea last month.
The U.S. Treasury Department’s list includes Gennady Timchenko, who partly controls natural gas producer OAO Novatek, Yury Kovalchuk, who owns stakes in Bank Rossiya and CTC Media Inc., and Putin’s former judo partner Arkady Rotenberg, an investor in road builder OAO Mostotrest. European Union leaders agreed on March 17 to impose sanctions on 21 individuals.
Delisting Russian companies from overseas exchanges is “a question of economic security,” Shuvalov told reporters after a government meeting near Moscow on April 8. Speaking later in a telephone interview, he said the move isn’t mandatory and that companies should make independent decisions.
Chris Hamilton, a spokesman for the U.K. Financial Conduct Authority declined to comment on how deeper sanctions against Russia could affect holders of Russian stocks listed in London. Hagar Chemali, a Treasury spokeswoman, also declined to comment.
“So far sanctions have been imposed on individuals and their assets,” Charles Hecker, the global research director at Control Risks Group in London, said by phone yesterday. “What we could move to next are companies and those companies’ assets.”
State-owned Russian companies or “Russian companies that have a great deal of political exposure” could be on a new sanctions list, Hecker said.
OAO Bank Rossiya, a St. Petersburg-based lender owned by associates of Putin, is so far the only company designated by the U.S., which sanctioned 31 individuals.
Joe Ailinger, a spokesman for Bank of New York Mellon Corp., declined to comment on whether the bank is taking actions in case sanctions are imposed on stock trading of some Russian companies. The New York-based bank is the world’s largest depositary for American and global depositary receipts.
Elizabeth Rosenberg, director of the Energy, Environment and Security Program at the Center for a New American Security in Washington, agrees with Gibson Dunn’s Lee that U.S. trading in Russian companies may be at risk.
“This measure is signaling that Russia doesn’t plan to be caught unaware, should there be a ramp-up in sanctions that would target its nationals or corporations,” Rosenberg said yesterday.
It’s unlikely that a U.S. embargo of Russia would go so far as affecting the rights of overseas investors, according to Ivan Manaenko of Veles Capital in Moscow.
“I can’t imagine U.S. sanctions would hurt U.S. investors,” Manaenko, who is head of research at Veles Capital, said by phone yesterday. “That would hurt market sentiment overall, meaning that the negative impact from such a step would not be limited to the Russian segment of the market only. It makes no sense to me.”
Investors have returned to Russian stocks on prospects sanctions imposed by the West won’t go much further. A record $574 million was deposited in March in the Market Vectors Russia ETF, the largest U.S.-based exchange-traded fund investing in Russian shares, according to data compiled by Bloomberg.
Deeper Russia sanctions could resemble moves by Western governments in the past against regimes such as Iran and South Africa. America and Iran haven’t had diplomatic and relations since Islamic revolutionaries deposed the U.S.-backed shah in
1979. South Africa was under trade sanctions beginning in 1986 during the apartheid era which ended in 1994.
“Sanctions could become broader,” HSBC Holdings Plc analysts led by Garry Evans, Hong Kong based global head of equity strategy at the bank, said in an April 1 report. “The U.S. honed the use of financial sanctions against Iran -- some degree of replication is plausible.”