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1. The Regulatory Context: No Single Answer

Since 2022, the Russian counter-sanctions regime has developed through a combination of:

• Presidential decrees,
• regulatory guidance of the Central Bank of Russia (as mega-regulator),
• administrative practice of registrars and depositories,
• and evolving court decisions.

Taken together, these sources form a complex framework. However, they do not provide uniform or predictable answers in a number of situations.

Judicial practice, while relevant, is not always a reliable predictor. Many court decisions enumerate multiple arguments in support of a conclusion, even though only one of them may have been decisive. The remaining arguments often function as supplementary reasoning and may not actually determine the outcome.

As a result, it is difficult to extract rigid rules from case law. Each factual combination produces a potentially different legal result.

Here we would address one of the multiple questions arising when Russian counter-sanctions are considered:

If a company located in the “unfriendly” jurisdiction (for example, incorporated in the British Virgin Islands) is owned by a beneficiary from a “friendly” jurisdiction, will it be treated as a friendly entity? And, if not, will its Russian securities be credited to a Type “C” account?

Basically, our analysis is applicable to conversion of the ADRs (depositary receipts) into shares, however, it can also be important in many other cases where type “C” accounts are used.

2. Why the Type “C” Question Is Structurally Critical

Before addressing friendly status, it is important to understand why the classification matters so significantly.

A Type “C” account is not a label that can later be removed. It is a legally distinct type of account.

This distinction is often misunderstood.

Changing a Type “C” account into a regular account is impossible. It can be illustrated as follows from the example in the baking sphere: one cannot simply “convert” the deposit account type into a regular account: one may only close one account and transfer funds to another – but the account category itself cannot be re-qualified.

Similarly:

• A Type “C” account cannot be redesignated into a regular account.
• Assets can only be transferred out if specific regulatory grounds exist.
• The Central Bank has exhaustively enumerated permissible transfer grounds.
• Loss of “unfriendly” status is not listed among them.

This has significant consequences.

Even if a company later proves that it was not unfriendly – or that its status changed – the asset may remain structurally locked.

In theory, one could challenge the original decision through court proceedings, arguing that the registrar or issuer incorrectly classified the investor at the moment of conversion. This would be a retroactive challenge to the initial administrative decision.

However, absent an error in the original assessment, courts are unlikely to intervene merely because additional documents were produced later or the investor’s status evolved.

For this reason, the classification decision at the moment of conversion is often determinative.

3. The Core Question: Does Friendly Beneficial Ownership Neutralise an Unfriendly Jurisdiction?

Let us assume a BVI company is directly owned by an individual from a friendly jurisdiction.

In theory, one could argue that the company should be regarded as friendly due to ultimate control by a friendly person.

However, several complications arise.

(i) Multiple Citizenship

Even a “friendly” individual may hold dual or multiple citizenships, including citizenship of an unfriendly jurisdiction.

Russian state commercial courts’ practice suggests that courts are generally reluctant to require proof of the absence of a second citizenship. This would amount to proving a negative fact, which is typically impossible. Where no contrary evidence is presented, courts have in some instances accepted the friendly citizenship at face value.

However, if evidence of an unfriendly citizenship emerges in proceedings, this may materially affect the outcome.

(ii) The Meaning of “Control”

The Central Bank has suggested, for certain purposes, that the notion of control may be interpreted with reference to the Federal Law on Strategic Investments (Federal Law No. 57-FZ).

Although that law concerns foreign investments in strategic assets rather than sanctions classifications, its concept of control may influence interpretation.

At the same time, a broader interpretation of control is sometimes advanced in practice.

There are positions suggesting that if directors of the company are residents or nationals of unfriendly jurisdictions, the company itself may be treated as unfriendly, even if the ultimate beneficiary is friendly.

(iii) The Corporate Director Problem

In offshore structures, it is common for the company to have a corporate director or managing entity (for example, a corporate service provider in the same jurisdiction). That managing entity, in turn, has its own directors who act on behalf of the company.

Under the Strategic Investments Law, specific provisions address situations of indirect control via managing organisations. While the law itself does not concern “friendly” status, the Central Bank’s interpretative approach may allow similar logic to be applied.

As a result, the presence of a corporate director in an unfriendly jurisdiction may be regarded as an element of unfriendly control – even where the economic beneficiary is friendly.

4. The “CFC-Only” Interpretation

There is also a restrictive market view that a company incorporated in an unfriendly jurisdiction may be treated as friendly only if it qualifies as a controlled foreign company (CFC) under Russian tax law and is controlled exclusively by Russian individuals who have properly notified Russian tax authorities.

Under this interpretation, friendly beneficial ownership alone would not be sufficient.

This view is not universally accepted, but it is present in the market.

5. No Rigid Doctrine – Only Structured Risk Assessment

The regulatory framework does not contain an explicit rule stating that beneficial ownership automatically overrides place of incorporation.

Nor does it clearly establish that jurisdiction alone is decisive.

Instead, outcomes depend on:

• structure of ownership,
• evidence of control,
• composition of management bodies,
• citizenship profiles,
• documentary disclosure,
• and, ultimately, the institutional interpretation applied by the registrar or issuer.

Judicial review remains possible, but it is not a predictable corrective mechanism. Russian court decisions in this area are often heavily fact-specific and contain extensive reasoning that may not always be strictly necessary for the result.

Accordingly, each structure must be analysed individually before initiating conversion or asset transfer procedures.

6. Practical Implication for DR Conversions

This issue is particularly acute in the context of conversion of depositary receipts into Russian shares.

If shares are initially credited to a Type “C” account, reversing that classification is extremely difficult. Therefore, strategic preparation of the documentation package before filing is essential.

The objective is not merely to obtain shares – but to obtain them under the most favourable regulatory status available under the circumstances.In practice, careful structural analysis prior to submission often determines whether an investor’s position remains flexible or becomes structurally constrained for the foreseeable future.

In our recent projects, we have successfully achieved the result when the shares were credited to a regular account after the conversion of the ADRs.

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