'Complete Chaos': Russia Appropriates Deutsche Bank Clients' Stocks

Germany's largest bank, Deutsche Bank (DBKGn.DE), has informed its clients that it can no longer guarantee full access to their Russian stocks, highlighting the challenges faced by global investors in recovering their investments in Russian companies.

This report comes from Reuters.

In recent documents, the bank revealed a shortage of stocks that back depositary receipts (DRs) issued by the bank prior to the invasion of Ukraine. These stocks were held in another depositary bank in Russia.

Deutsche Bank attributes the stock shortage to Russia's unilateral decision to allow investors to convert a portion of the DRs into local shares. The conversion was carried out without the bank's "participation or control," and Deutsche Bank was unable to reconcile the company's shares with the depositary receipts.

This is the first official communication of this kind from a major bank to holders of depositary receipts.

DRs are certificates issued by a bank representing shares of a foreign company traded on a local stock exchange. The exchange of DRs for shares of a Russian company is the first step in attempting to recover investors' funds.

According to Deutsche Bank, the affected stocks include those of national airline Aeroflot (AFLT.MM), construction company LSR Group (LSRG.MM), mining and metallurgical company Mechel (MTLR.MM), and Novolipetsk Steel (NLMK.MM).

Mechel declined to comment, while the other companies did not immediately respond to Reuters' requests for comments.

Furthermore, Moscow is demanding a 10% contribution to the federal budget from investors who own these stocks, which Washington refers to as an "exit tax."

In April, Russia also seized assets of the Russian subsidiaries of two European energy companies. Russians justified these actions as a "strategy to reduce foreign influence on companies that criticize its economic and political interests.

Majority of investors liquidate Russian assets, but some still hold hope for future recovery.

The Central Bank of Russia declined to comment on the situation.

The National Settlement Depository of Russia stated that the conversion of stocks was conducted in accordance with Russian legislation and that it is not an accounting institution responsible for implementing this mechanism.

Consultants and lawyers have described this 'conversion process' as 'complete chaos'.

According to sources, Deutsche Bank now allows investors to exchange DRs for shares as part of their plans to exit the Russian business. Clients are advised to convert their DRs, at least partially.

Clearstream, JPMorgan & Chase (JPM.N), Citigroup (CN), and BNY Mellon (BK.N) act as depositary banks for most other Russian depositary receipt programs.

All three banks have declined to comment on whether they have also encountered shortages, but their books remain closed due to reconciliation issues, according to statements on their websites.

Deutsche Bank has stated that if it is able to reconcile its books at a later date, it will attempt to return the shares to their rightful owners.

However, the bank has warned that the net proceeds from the sale of shares it can return to investors will likely be 'significantly lower' than the current market price.

It is worth noting that the Russian Government Commission for Monitoring Foreign Investment demands that such shares be sold at a discount of no less than 50% of their estimated market value.