In a concerning development for global investors, Deutsche Bank, Germany's largest financial institution, recently cautioned its clients of potential difficulties in recovering their investments in Russian companies. The bank revealed that it might not be able to provide full access to clients' Russian stocks.
According to an internal document dated June 9 and obtained by Reuters, Deutsche Bank indicated it had discovered a discrepancy in the stocks underpinning the depositary receipts (DRs) it had previously issued before the crisis in Ukraine erupted. These shares are currently held by another depositary bank in Russia.
The bank attributed this anomaly to Moscow's decision to enable investors to convert some of their DRs into local stock. The conversion occurred without Deutsche Bank's input or supervision, leading to an inability to match company shares with corresponding depositary receipts.
This is the first instance of a leading bank officially notifying depositary receipt holders of a potential failure to claim the full quantity of shares they are entitled to, according to two sources advising investors still in possession of Russian DRs.
DRs, which are certificates issued by a bank representing shares in a foreign company traded on a local stock exchange, are usually exchanged for shares in the Russian company as an initial step to recoup investments. Affected shares include those in Aeroflot, LSR Group, Mechel, and Novolipetsk Steel. Of these, only Mechel offered a response, choosing not to comment.
Western sanctions, compounded by Russian countermeasures, have trapped assets held by individuals and corporations on either side of the political chasm. Russia is demanding a 10% contribution to its federal budget, an "exit tax," as termed by Washington.
A wide spectrum of investors, including small hedge funds and major global asset managers, continue to hold depositary receipts, sources reveal. While most investors have written off Russian assets, a few remain hopeful of eventual recovery.
Irina Tsukerman, president at geopolitical risk consultancy Scarab Rising, emphasized that all forms of financial assets in Russia, from DRs and equities to real estate, are vulnerable.
Now, Deutsche Bank is allowing investors to trade DRs for shares as part of its strategy to dissolve all business in Russia. The bank has also hinted at clients potentially being in a better position if they could partially convert their DRs.
Despite the daunting challenges, Deutsche Bank committed to returning more shares to their rightful owners if it manages to reconcile its books in the future. However, it warned that the net proceeds from share sales may fall significantly below the current market price, given Russia's requirement to sell these shares at a minimum 50% discount off their appraised market value.
