JPMorgan Emerging EMEA Securities (JEMA) has announced that it has been named as a defendant to civil proceedings being brought by VTB in the Russian courts, which were commenced on 17 April 2024. The claim has been brought against certain JPMorgan entities and relates to US$439m held in a correspondent banking account with JPMCB (NY Branch) which has been blocked due to sanctions. JEMA’s manager, which brought the issue to the board’s attention, says that it is “not aware of any nexus between JEMA and amounts owing to VTB”.

VTB has also applied for and obtained interim relief in the form of a freezing order in support of its claim. The order applies to the onshore funds in the bank accounts and securities owned by the relevant JPMorgan defendants, including JEMA, up to the value of VTB’s claim. All such assets must remain frozen until further notice from the court. In response to the claim, JPMBI, the firm’s Russian subsidiary, has applied to the court for the freezing order to be lifted and JPMCB has obtained an urgent order from the New York courts (the contractually agreed forum) requiring VTB to discontinue the proceedings. JEMA’s manager says that it will continue to monitor the proceedings and update on relevant developments.

JEMA says that the proceedings referred to above includes its holdings in 26 Russian securities and the cash held in its ‘S’ Account. As at 31st October 2023, the Russian securities were valued at £1.6m in JEMA’s accounts. However, the funds in the JEMA’s ‘S’ Account have no value in its accounts because the sum of £19.3m in the ‘S’ Account (as at 31st October 2023) is not recognised as an asset in the JEMA’s balance sheet. This is because the funds in the ‘S’ Account were ‘frozen’, following the introduction of sanctions arising from Russia’s invasion of Ukraine in 2022.

[QD comment: This latest development is a reminder that politics will determine whether JEMA is ever able to extract any material value from its investments in Russia. The current 151% premium to NAV reflects a bet by some investors that there will ultimately see some form of resolution to the conflict in Ukraine that will allow a relaxation of sanctions, so that some value can be recovered. At the margin, this just got a little harder and, even if JPMorgan is able to fend off this particular attack, there will likely be other Russian entities that also find themselves with funds blocked in JPMorgan accounts, as a result of Western sanctions, that could see these assets as a potential form of redress. In reality, with the £19.3m of funds held at zero, this element of the NAV cannot fall any more, so the the question is more one of what value to put on the £1.6m of securities that are now blocked? Some, none or all of this may be recoverable but in a worst case scenario, this wipes 3.96p of the NAV on our estimates. The assumption for now is that the manager is picking up the cost of defending this but there also has to be the question as to whether it will want to do this indefinitely.]