Material gain. Big brother is watching you.While the lion's share of investors are tense and outraged by the calculation of material benefits, we would like to add the final touches to the reasons why the government decided to reinstate this provision in the tax code.
Undoubtedly, investors who will now have to pay for material benefits did not anticipate that blocked foreign securities would have the same status as assets available for free trading. Some investors point to delayed calculations by the broker, while others defend themselves by arguing that they were not properly informed. Determining who is right and who is wrong has become so complicated that it seems this task should be resolved exclusively by the government. The Russian stock market is constantly under pressure, making negative forms and reactions an absolute norm in such a stressful environment.
However, we are less interested in analyzing what has happened and more focused on why material benefits were reinstated specifically in 2024 and why they now apply to blocked foreign securities, even though, in theory, these assets could be blocked indefinitely.
📃Background 2022-2023
As a result of the massive sanctions imposed by Western countries against Russia's financial sector, a significant number of assets were blocked both within Russia and abroad. The sanctions paralyzed all interaction chains. Trading operations were disrupted. Shares of Russian issuers were partially blocked and sold at a significant discount. Instruments such as RUS:SBER , RUS:MDMG , $HHRU, RUS:YDEX , RUS:LKOH , and RUS:QIWI were trading at a 70-90% discount to their real value. The majority of these discounted assets of Russian issuers were held in several European banks. The effect triggered by the geopolitical conflict was one of the most dramatic, reminiscent of the U.S. stock market crash during the dot-com bubble.
📃Unexpected Outcome Amid High Risk
Unpredictability, fear, and concerns that the assets would drop to zero forced many foreign holders to sell highly valuable shares of Russian companies. It was at this moment that those engaged in purchasing discounted securities had the opportunity to earn extra profits, similar to those that could arise from buying blocked foreign securities.
Those who think this type of over-the-counter transaction was available to everyone and free of charge are mistaken. The fees for buying back discounted shares were comparable to what material benefit implies today.
At the initial stage, it was indeed possible to buy Sberbank shares for 35-45 cents, but this period was limited. Liquid securities were fully bought out by early 2023 and ended up in the hands of those waiting for their moment to sell them on the open market.
📃Lessons Learned
Unfortunately, we do not have information about who took the initiative to introduce material benefit into the Tax Code regarding blocked foreign securities, but their actions were based on a thorough analysis of processes occurring outside Russia's jurisdiction.
If EU tax authorities could go back and make appropriate adjustments, they would do the same with blocked Russian securities. Thus, in our view, material benefit essentially serves as a combined taxation tool for blocked foreign securities in scenarios where assets are withdrawn using an individual OFAC license beyond the perimeter without paying taxes in Russia.
