Analysis: Western investors spooked as Moscow mulls compulsory share purchase plan

A traffic jam in front of skyscrapers at the Moscow International Business Centre. File: AFP

A traffic jam in front of skyscrapers at the Moscow International Business Centre. File: AFP

Published Nov 19, 2023


Western investors in Russian companies are bracing for a new presidential decree under consideration in Moscow which they fear could force them to sell their shareholdings to the Russian government at big discounts.

The potential decree, which could give Russia a “super pre-emptive right” to buy shares in strategic companies from foreign shareholders, marks the latest blow to investors holding Russian assets that were worth several billions of dollars before February 2022.

Russia has been trying to cut foreign ownership and influence over its biggest listed companies since President Vladimir Putin ordered troops into Ukraine, triggering sweeping Western sanctions.

The methods include cancelling special investment programmes originally designed to increase the flow of international capital into Russian companies and bypassing global banks in the supervision of those schemes, resulting in losses for some investors and the disappearance of some shares they owned.

Ivan Chebeskov, the head of the finance ministry’s financial policy department, said amendments to a presidential decree were under way and that possible changes could give Russia’s government a “super pre-emptive right” to buy shares in strategic companies from exiting foreigners.

“This super pre-emptive right will work only in specific cases, with specific companies,” Chebeskov said on the sidelines of a financial forum in Moscow on November 14. “The exact list has still not been approved.

“The idea was that this concerns only those strategic companies in which the state already has a share. That is to say, this is a rather narrow list of companies.”

Chebeskov said the decree would probably not be be published before the end of the year.

The lack of clarity and an uncertain timeline highlights the unpredictable nature of regulatory changes facing investors and businesses seeking to adjust their exposure to Russia.

When the decree is passed, investors from countries considered hostile to Russia could face an even bigger challenge to recover value in their Russian holdings, five international investment advisers said.

The decree, once published, would affect how deals are approved and whether discounts would apply when being purchased, resold on the market or both, said Nato Tskhakaya, a partner at law firm Rybalkin, Gortsunyan, Dyakin and Partners.

The decree could make clear “whether the seller has the right to withdraw their application and not close the deal, if they are not satisfied with the final parameters”, Tskhakaya said.

Anxious sellers’

Moscow’s purchases were expected to reflect a discount of at least 50% on the market value of the company stock, the investment advisers said.

“This arrangement does not explicitly qualify as asset appropriation, but it effects the same result for anxious sellers,” said Thomas Brock, a financial consultant at US-based Kaiser Consulting, one of the investment advisers who are worried about the impact of the proposed decree on investors holding Russian assets.

Last month, Danish brewer Carlsberg’s CEO sad Russia had “stolen” its business, refusing to enter a deal that would make Moscow’s seizure of its assets look legitimate. Russia said it had appointed temporary management.

Investors also have reason to doubt that Moscow will pay in US dollars. Putin signed a decree in October, forcing some exporting firms to convert a significant portion of their foreign currency revenue, in an attempt to shore up the rouble.

But Russian retailer Magnit has managed to buy back some of its shares held abroad, paying in dollars and euros after obtaining Russian government approval. Its latest buyback is under way.

Latest estimates from Morningstar Direct show global funds it tracks, which report exposure to Russian equities had around $42 million (R795m) in aggregate net outflows in September, up from around $37m in August and around $6.5m in July.

This compares with net outflows of around $48m in March 2022 and $69m in February this year.

Fund-raising tool

Two of the advisers described the latest initiative as a fund-raising tool for Russia, amid signs the country was feeling financial strain.

Moscow was pouring resources into the military, had raised taxes on business and was relying on optimistic budget revenue forecasts, Russian analysts said, while the central bank was keeping interest rates in double digits to battle high inflation.

A report by the Interfax news agency on July 25 said Putin had instructed officials to work out an arrangement to give Russia’s Federal Property Agency pre-emptive purchasing rights.

Assets bought “at a significant discount” would be prepared for “subsequent sale at a market price”, with the transfer of proceeds to the federal budget, Interfax said, without identifying sources.

Western investors have struggled to get assets out of Russia.