Recently, a new decree from Russian President Vladimir Putin sent shockwaves through Russia’s financial markets. The decree states that Russian companies must move to delist from international exchanges. This may not sound like great news, but the delisting of Russian depositary receipts from foreign indexes may actually benefit certain stocks. It could also benefit some U.S. financial institutions.
Because the early March trading halt placed on Russian companies still holds, this news won’t mean much for U.S. investors. However, if their holdings include global banking stocks, it could be an important catalyst that serves to boost share prices. Per Reuters, “the potential windfall is due to the fees that bank issuers of depositary receipts can contractually charge investors when they cancel the product.”
While the news hasn’t helped many Russian stocks, it is certainly pushing several U.S. banks with global reach into the green. Right now, both JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) are up slightly on the day. Additionally, Bank of New York Mellon (NYSE:BK) and Deutsche Bank (NYSE:DB) are up more than 1%.
Russian Stocks, U.S. Banks and Why It Matters
Under Putin’s new decree, companies have until May 5 to delist from international exchanges. This also applies to depository receipt trading on all foreign exchange platforms. As noted, though, most prominent international exchanges maintain their halts on Russian stock trading. So, Putin’s decree should only affect investors who purchased shares on Russian companies on foreign indexes prior to March 2022.
It’s not immediately clear how much profit banks stand to glean from the windfall noted above. They also run the risk of angering investors who may claim high charges are not fair due to the extreme circumstances. However, it’s unlikely that banks will not charge at least fairly high fees. According to Reuters, they could generate “hundreds of millions of dollars” in fee charges.
The delisted depository receipts will be converted into Russian securities, which highlights the underlying truth of this situation. Really, Putin’s decree is a clear maneuver to reduce the control of foreign investors over Russia.
The move is far from unexpected. The damage inflicted upon the Russian economy has been severe so far — and it’s only worsening. A chief economist of the International Monetary Fund recently noted the following:
“Russia’s economy will not recover anytime soon from sweeping sanctions imposed by Western nations over its war in Ukraine, and could see further damage if those sanctions are expanded to hit energy exports.”
What It Means
This is one of the only moves left for Putin to try to ease Russia’s economic woes. However, Putin may also have inadvertently paved the way for powerful U.S. institutions to profit as well.
Reuters notes that there are “more than 30 depositary receipts on Russian companies” including Gazprom (OTCMKTS:OGZPY), Rosneft (OTCMKTS:OJSCY), Lukoil (OTCMKTS:LUKOY) and Norilsk Nickel (OTCMKTS:NILSY) issued by prominent U.S. and European banks. These include the four aforementioned U.S. banks whose stocks are trading up today. The outlet’s calculations reveal that “an investor in Rosneft with 150 million depositary receipts representing the same number of shares in the company could be on the hook for $7.5 million in cancellation fees.”
Apply that logic to all investors holding large amounts of depository receipts from Russian companies and the huge profit margins for global banks comes sharply into focus. All told, it’s not clear what this decree will mean for Russian stocks. But it is likely to boost shares for U.S. banks in the process.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.