Russian Response to Western Sanctions – Nationalization | Locke Lord LLP
Russia first invaded Ukraine in February 2014. This latest invasion began on February 24, 2022. By mid-April 2022, more than 750 international companies had publicly announced their intention to reduce or close their operations in Russia; for the most part, these withdrawal actions are in support of the Ukrainian people and are not legally required by sanctions. We note that while the sanctions of the United States and its allies against Russia are “targeted” on certain industries, the practice of international trade with Russia is seriously hampered by the sanctions imposed on Russian financial institutions transferring funds to and from Russia extremely difficult.
Russia is trying to respond to what it calls “hostile nations” sanctions by threatening counter-sanctions, which could go as far as nationalizing the assets of those hostile nations’ companies that are within Russia’s reach. Russian sources say it is the quid pro quo for freezing Russian US dollar holdings around the world. One of the effects of the freeze has pushed Russia to the brink of defaulting on its external debt. According to reports, the United States and its allies have frozen about $315 billion in Russian assets in US dollars around the world. Russia can use rubles to pay its debts. However, its inability to deliver US dollars would be a default in most of its debt agreements, and the ruble has devalued significantly since the start of the last Ukrainian invasion; noting that in mid-March 2022 the ruble recovered from part of the losses.
On April 8, 2022, the lower house of the parliament of the Russian Federation, with the endorsement of Russian President Vladimir Putin, passed a counter-sanctions bill (the “Bill”). The proposed law would grant local authorities the right to nationalize property and assets of companies from “hostile jurisdictions” that cease operations in the Russian Federation. Specifically, the bill would amend Article 235 of the Civil Code of the Russian Federation to allow for the forcible seizure of property rights and assets located in the Russian Federation belonging to companies or citizens of jurisdictions hostile to the Russian Federation, including the United States, United Kingdom, Australia, European Union, Japan and South Korea (“Hostile Jurisdictions”). While a large majority of the proposed legislation is still subject to clarification through regulatory implementation, it is clear that the potential new law would apply to Russian companies whose beneficial owners hold 25% or more, directly or indirectly, property based in Unfriendly. Jurisdiction.
So, for example, if a parent company located in a hostile jurisdiction decides to cease its activities in Russia, the members of the board of directors of the Russian subsidiary or the representatives of the government of the Russian Federation could essentially ask a Russian court to name a “. external manager” for the Russian operations and resume this activity. If you remember our previous “PublishRussia has already paved the way for intellectual property theft by Russian companies that were not already subject to contractual payment obligations for non-Russian intellectual property.
Based on our understanding of the proposed legislation, local Russian authorities would appoint a local official to take control of companies in cases where the previous owner ceased operations in Russia, thereby transferring company assets to an entity newly created Russian. This action would essentially nationalize the asset for the benefit of the Russian Federation. The original shareholders would not be compensated for the seized assets or even have the right to buy interests in the newly created Russian entity.
Russian nationalization of this nature has begun to take shape in the commercial aircraft space. The media reported that Russia took for its own use more than $10 billion worth of leased commercial aircraft. At the time of the last Russian invasion of Ukraine, Russian national airlines had leased around 515 foreign-owned aircraft, worth around $10 billion. These planes, leased from foreign owners, represent an important part of the Russian fleet. Due to US and Allied sanctions, foreign aircraft lessors are required to cancel leases with Russian airlines; but the Russian airlines refuse to return the plane. Lessors contact their insurers for coverage of the lost aircraft, which has the effect of determining whether insurance coverage exists or whether “act of war” exclusions may limit recoveries. Ask the state of relations, where will Russia get parts to ensure the safety and airworthiness of foreign aircraft, and will manufacturers be allowed to sell parts to Russia under humanitarian general licenses .
The bill recalls the actions of Cuba and Fidel Castro in 1960, when Cuba nationalized significant US assets located in Cuba. On August 6, 1960, following a stalemate with the United States, the Cuban government nationalized all US-owned oil refineries, sugar mills, and mines. The value of seized oil assets alone in 1960 was approximately $1.7 billion.
In previous Russian attempts to nationalize foreign companies, foreign investors have prevailed in arbitration. This could be the case again if Russia wants to retain a seat at the international table. However, if Russia withdraws from international trade like North Korea, Iran and Syria, the confiscation of assets from the United States and other hostile jurisdictions could have long-lasting effects. Either way, based on recent developments, foreign companies with operations in Russia or withdrawing from Russia should be careful in how they conduct their operations in Russia.
This document is intended as a guide only and does not replace specific legal or tax advice. Please contact the authors with any specific questions. We plan to continue to monitor the topics covered in this document and provide future updates to customers when useful.