Russian Federation: Placement And Circulation Of Foreign Securities In The Russian Market

Last Updated: 14 April 2014
Article by Valentin Petrov and Petr Shevtsov

The Russian Securities Market law expressly sets specific requirement for the following actions in relation to securities of foreign issuers: (1) for placement, (2) for circulation, (3) for public placement (i.e. placement not only at the stock exchange but also to unlimited number of potential acquirers through open subscription), (4) for public circulation (i.e. circulation not only at the stock exchange but also to unlimited number of potential acquirers), as well as (5) for placement and circulation of securities among Qualified Investors (see defined in (5) below).

(1) Rules of placement , i.e. alienation by the initial owner, of securities of foreign issuers in the Russian Federation

Securities of a foreign issuer may, but not necessarily must, be admitted by the Russian securities regulator for placement in the Russian Federation by registering their prospectus provided the securities meet the following eligibility requirements:

  • Assignment of international securities identification number (ISIN) and international code of classification of financial instruments (CFI);
  • Qualification of foreign financial instruments as securities in accordance with the Russian Securities Regulator Order dated October 23, 2007 N 07-105/пн-з "On Approval of the Regulation on Qualification of Foreign Financial Instruments as Securities";
  • Compliance with one of the following criteria:
    • The foreign issuer must be incorporated in a country which is an OECD member state, a FATF member or a member of a FATF Observer body/organisation, or in a member state of MONEYVAL (which is an associate member of FATF).
      • It is however unclear whether the country in which the foreign issuer was established must be a member of all the above organizations or at least one of the organizations.
      • To circumvent this restriction imposed by the new Law, clients may wish to consider placing ADRs and GDRs of foreign issuers not established in member states of FATF, OECD or MONEYVAL in the Russian Federation, since such ADRs or GDRs are issued by depositary banks that are generally established in the member states of FATF, OECD or MONEYVAL. By having the bank issue securities in the form of ADRs or GDRs, this will meet the requirements for circulation and placement in the Russian Federation, notwithstanding that the underlying securities from the foreign corporate issuer may fail this requirement.
      • One should also note that the Federal Law "On Securities Market" does not impose a similar requirement in respect of the country of establishment of the issuer of the securities for instances where Russian Depositary Receipts ("RDR") are issued. Article 27.3 of Federal Law "On Securities Market" provides that the securities underlying of the RDRs must be accounted for by an organization included in the list of the Russian Securities Regulator, and that such underlying securities must be traded on one of the foreign stock exchanges from a list approved by the Russian Securities Regulator (unless the issuer of underlying securities and depositary bank issuing RDRs agree that the issuer of underlying securities will be bound by obligations to RDR owners). Therefore, even if a foreign issuer does not comply with the requirements for placement or circulation of its own securities in the Russian Federation, such a foreign issuer may wish to consider placing RDRs in the Russian Federation in place of its own securities.
    • The foreign issuer is from a state that has entered into a bilateral co-operation agreement with the Russian Securities Regulator. Unfortunately, Russia does not have such agreements with Western European countries;
    • The foreign issuer is an supranational financial organization included in a list approved by the Government of the Russian Federation; or
    • The issuers of foreign securities are (a) sovereign states which are members of FATF, OECD or MONEYVAL or (b) sovereign states with which the Russian Securities Regulator has entered into a bilateral co-operation agreement, or central banks of such sovereign states.
  • Registration of a prospectus. Requirements for the prospectus, as well as its registration procedure must be adopted by the Russian Securities Regulator, but there is no procedure in place as yet.

The foreign issuer must notify the Russian Securities Regulator upon completion of securities placement. The Law, however, does not provide for a form of such notice. Completion of the securities placement by a foreign issuer must also be accompanied by a disclosure on placement completion. The procedure and timeline for such disclosure is yet to be determined by the Russian Securities Regulator.

(2) Rules of circulation, i.e., entering into civil transactions not with the initial owners of securities of foreign issuers in the Russian Federation

Clause 13 of article 51.1 of the Federal Law "On Securities Market" introduced by the Law essentially provides that circulation of securities of a foreign issuer, not admitted for public placement or public circulation, may be carried out only among Qualified Investors – see clause (5) below. Eligibility requirements for securities of a foreign issuer to be admitted for circulation in the Russian are:

  • Assignment of international securities identification number (ISIN) and international code of classification of financial instruments (CFI); and
  • Qualification of foreign financial instruments as securities in accordance with Russian Securities Regulator Order of October 23, 2007 N 07-105/пн-з "On Approval of the Regulation on Qualification of Foreign Financial Instruments as Securities".

Similar requirements for placement of securities (discussed in paragraph (1) above) are not present for circulation of securities of foreign issuers in the Russian Federation.

(3) Rules of public placement of securities of foreign issuers in the Russian Federation

The procedure and eligibility requirements for public placement of foreign issuer securities, to the extent that it is not accompanied by listing on a Russian stock exchange, are similar to those for non-public placement described in (1) above. Additionally, accounting of foreign issuer securities will have to be made by a depositary bank which is a Russian legal entity. Although not expressly stated in the Law, it may be implied that if securities of a foreign issuer are not publicly placed in the Russian Federation, then the rights in respect of such securities may be accounted for by a depositary or registrar being a foreign legal entity.

Public placement of foreign issuer's securities made through stock exchange trading will be regulated by the rules for public circulation described in more detail in (4) below and a prospectus will have to be registered with the Russian Securities Regulator.

4) Rules for public circulation of securities of foreign issuers in the Russian Federation

To be admitted for public circulation in the Russian Federation, securities of foreign issuers must satisfy the following eligibility requirements:

  • Assignment of international securities identification number (ISIN) and international code of classification of financial instruments (CFI);
  • Qualification of foreign financial instruments as securities in accordance with Russian Securities Regulator Order of October 23, 2007 N 07-105/пн-з "On Approval of the Regulation on Qualification of Foreign Financial Instruments as Securities";
  • Compliance with one of the following criteria:
    • The foreign issuer must be incorporated in a country which is an OECD member state, a FATF member or a member of a FATF Observer body/organisation, or in a member state of MONEYVAL (which is an associate member of FATF).
    • The foreign issuer is from a state that has entered into a bilateral co-operation agreement with the Russian Securities Regulator. Unfortunately, Russia does not have such agreements with Western European countries;
    • The foreign issuer is an supranational financial organization included in a list approved by the Government of the Russian Federation; or
    • The issuers of foreign securities are (a) sovereign states which are members of FATF, OECD or MONEYVAL or (b) sovereign states with which the Russian Securities Regulator has entered into a bilateral co-operation agreement, or central banks of such sovereign states.

Securities of a foreign issuer are admitted for public circulation in the Russian Federation in two regimes:

(a) for securities listed on a foreign stock exchange:

The Russian stock exchange must decide to admit securities of a foreign issuer to trading. This decision will be made if such securities of foreign issuers, in accordance with their personal law (i.e. under the law of the jurisdiction where the issuer was incorporated), may be offered to an unlimited number of persons, and such securities are listed on a foreign stock exchange from the Russian Securities Regulator list.

The application for the securities to be admitted for public circulation must be filed with the stock exchange with a prospectus prepared in accordance with the Russian Securities Regulator requirements. The Law does not say that such prospectus must be first registered by the Russian Securities Regulator.

(b) for securities not listed on a foreign stock exchange:

If a Russian stock exchange decides not to admit securities of an issuer to public circulation (e.g., on the basis that such securities are not listed on a foreign stock exchange), the decision to admit them to public circulation in the Russian Federation can be taken by the Russian Securities Regulator. For such a decision to be taken, in addition to the above-mentioned general public circulation criteria, the securities must (i) be eligible, in accordance with the foreign issuer's personal law, for offering to an unlimited number of persons, and (ii) correspond to the liquidity and investment risk levels for the relevant types of securities already traded on the Russian stock exchange. The method for calculation of the liquidity and investment risk levels will be established by the Russian Securities Regulator.

(5) Rules for placement and circulation of securities of foreign issuers in the Russian Federation among Qualified Investors

The concept of a Qualified Investor under the Russian Federal Law "On Securities Market" covers Russian banks, brokers and dealers, management and investment funds, management companies of investment and mutual funds, insurance companies, the Central Bank of the RF, Vnesheconomonbank ("VEB"), supranational organizations (e.g., World Bank, IMF, EBRD) and some other entities specifically listed in the law. Other entities not specifically listed in the law may be recognized as Qualified Investors by Russian brokers if the entities satisfy certain qualitative and quantitative criteria (relating to own capital, assets, revenues, volume of trading of financial instruments). The Law sets a number of regulations which treats Qualified Investors more favorably than ordinary investors for circulation, public placement and public circulation of securities of foreign issuers.

In contrast, Qualified Investors do not enjoy facilitated requirements for placement of securities of foreign issuers and all the requirements and restrictions applied to placement of securities of foreign issuers among ordinary non-qualified investors (for details see clause(1) above) will apply.

Circulation in the Russian Federation of securities of foreign issuers not admitted to public placement and/or public circulation in the Russian Federation is only possible to Qualified Investors. For instance, the securities of foreign issuers not incorporated in the member-states of FATF, OECD or MONEYVAL are allowed to circulate only to Qualified Investors.

Clause 13 of art. 51.1 of the Federal Law "On Securities Market" as amended by the Law expressly states that foreign securities that have not been admitted to public placement and/or public circulation in Russia as well as foreign financial instruments that have not been recognized as securities may not be offered to an unlimited number of investors or non-qualified investors. The clause, therefore, creates an effective prohibition on cross-border derivative trading between non-residents and Russian entities that do not fall within the scope of qualified investors by operation of law (such as, Severstal, Lukoil, Gazprom, etc.) These entities may be recognized as Qualified Investors by Russian brokers. Therefore, one may argue that any derivative trade with the Russian counterparty that is not a Qualified Investor by operation of law shall now be structured to involve the Russian broker responsible for recognition of the Russian counterparty as a Qualified Investor.

Another point to mention is that the Law is not entirely clear whether a Qualified Investor may acquire foreign financial instruments in Russia that are not classified as foreign securities in accordance with the Russian Securities Regulator Order dated October 23, 2007 N 07-105/пн-з "On Approval of the Regulation on Qualification of Foreign Financial Instruments as Securities". If clauses 13 and 14 of art. 51.1 of the Federal Law "On Securities Market" as amended by the Law could be read without reference to the other provisions of the Law, one could imply financial instruments which are not securities can also be circulated among Qualified Investors in the Russian Federation. However, clause 1 of art. 51.1 of the Federal Law "On Securities Market" as amended by the Law prohibits the circulation of financial instruments other than securities in the Russian Federation. Accordingly, until a clarification is issued by the Russian Securities Regulator, the issue whether financial instruments (including derivatives) that are not securities can be acquired by Qualified Investors in Russia remains a pending issue.

The amendments introduced by the Law also allow securities of foreign issuers to be placed in the Russian stock exchange for Qualified Investors without having to comply public placement requirements.

Likewise, the Law provides that securities of foreign issuers meant for circulation only among Qualified Investors may be admitted to trading on the Russian stock exchange among Qualified Investors even if they do not meet the public circulation criteria described in (4) above. The decision on admittance of such securities can be made by the stock exchange itself in accordance with the rules to be developed by the Russian Securities Regulator (paragraph 2 of cl. 14 in art. 51.1 of the Federal Law "On Securities Market" enacted by the Law).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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