In response to sanctions adopted by the United States, the European Union, and other countries in relation to Russia’s operations in Ukraine, the Russian government is taking steps to adopt measures affecting foreign investors’ rights, from nationalization of assets to non-protection of intellectual property rights.
Since February 24, 2022, more than 300 foreign companies have suspended or withdrawn from the Russian market in response to Russia’s operations in Ukraine. Currently, the Russian government and president are considering countermeasures aimed at companies leaving the Russian market. Some of these measures have already been adopted and more severe measures are expected to be implemented shortly.
The Russian government has approved draft legislation on the nationalization of assets of foreign investors originating from so-called “unfriendly states,” which include all jurisdictions that imposed sanctions against Russia (for example, the United States, Canada, the European Union, Switzerland, the United Kingdom, Japan, South Korea, Australia, New Zealand, and Singapore). Nationalization would encompass the forced replacement of a company’s management by “special external management” and the subsequent sale of its assets. The draft law was approved by the Russian Central Bank on March 16, 2022. It is now pending adoption by the Russian Parliament and signature by the president, which could happen within days.
The draft law targets any company in Russia that is controlled or owned at least 25% (directly or indirectly in the aggregate) by a foreign investor originating from an “unfriendly state.” However, there is information that Russian authorities are considering imposing the outlined measures only on the specific companies that abandoned the Russian market in response to the Russian operations in Ukraine. The precise list of possibly affected companies remains uncertain as of now.
The special external management will be initiated when a member of the affected company’s board of directors or the Russian tax authorities file an application to the Russian Arbitrazh (Commercial) Court.
The special external management would be conducted for 3-6 months by the Deposit Insurance Agency for financial institutions or by VEB.RF, a Russian state development corporation, for the remaining companies. After that period, the external manager can conduct a “spinoff” of a new company and transfer all the assets to a newly established company. The shares of the new company will be put up for auction. The new buyer should ensure a one-year continuation of the business and employment of two-thirds of the employees. If no buyer is found, the Russian Federation becomes the sole shareholder. The original company is then liquidated. Foreign investors from “unfriendly states” would not receive any compensation.
For more detailed information on the special external management, please see our LawFlash, Russia Considers Imposing Special External Management Over Certain Foreign-Owned Companies.
On March 14, 2022, President Putin signed a law allowing Russian companies to register foreign-leased jets and aircraft in Russia. According to the explanatory note, new measures are directed to secure the fleet of foreign aircraft with the Russian operators to keep the uninterrupted functioning of activities in the field of civil aviation within the framework of so-called “Russian anti-sanction measures.”
The measures were adopted as a response to Ireland and Bermuda’s statements that they were suspending certificates of airworthiness. By bringing registration and certification of the aircraft within Russian borders, the new law will allow Russian airlines to continue operation of the aircraft in the territory of Russia. The decision to register the aircraft in the name of the Russian operators will be adopted on a case-by-case basis by the Russian government.
Decision No. 299, adopted on March 6, 2022, stipulates that the Russian government may use foreign patents without the consent of the patentholders and without the payment of royalties if it is required to ensure the defense and security of the state and to protect the life and health of citizens. Before the adoption of this decision, the Russian state could use foreign patents in the same circumstances but was required to pay the mandatory royalties. The decision is directed at patentholders originating from “unfriendly states.”
Further, the Russian Ministry of Economic Development is considering temporary measures to lift restrictions on the use of intellectual property for certain goods whose import was prohibited on the territory of the Russian Federation by foreign sanctions. Reportedly, new measures can affect patents as well as trademarks.
The Russian Parliament proposes to create a register of unreliable companies that left Russia or suspended commercial activities. Such companies could then face less favorable treatment in case of a return to the Russian market, including additional taxes.
Decree No. 95, titled “On Temporary Order of Discharge of Obligations Towards Certain Foreign Creditors” (the Decree), was issued and took effect on March 5, 2022. Pursuant to the Decree, a Russian debtor may opt to repay a hard currency debt owed to a foreign creditor in rubles. The exchange rate will be the official exchange rate of the Central Bank of Russia (CBR) rather than the market rate.
If the debt is owed to a creditor from an “unfriendly state,” a Russian debtor may pay in rubles to a special type “C” account opened in the name of a foreign creditor or a foreign nominee holder of securities. Such account may be opened with a Russian or non-Russian bank (although it remains unclear as to how a foreign bank will be able to operate such an account) or—with respect to obligations related to the issue of securities—with the National Settlement Depository.
The special debt discharge procedure stipulated by the Decree shall not apply to persons directly or indirectly (including through creditors from “unfriendly states”) controlled by Russian residents or the Russian state if the ultimate beneficiaries of the payments are Russian citizens and companies and this information has been disclosed to the Russian tax authorities.
For a more detailed information on the Decree, please see our LawFlash, Update: Russia Adopts Decree on Repayment in Russian Rubles of Debt to Foreign Creditors.
Foreign investors affected by Russian measures may be protected under bilateral investment treaties concluded with the Russian Federation. These treaties provide rights and guarantees to foreign investors. The measures outlined above may violate these investor rights, especially the provisions on protection against expropriation and the free transfer of capital.
Claims by foreign investors against the Russian Federation may be brought under these treaties before an independent, international arbitral tribunal, including under the auspices of the Permanent Court of Arbitration in The Hague. Investors may claim full compensation for the measures enacted by Russia in violation of its treaty obligations. For example, measures concerning the forced currency exchange and currency conversion of existing obligations have already resulted in a series of successful arbitrations against other countries such as Argentina.
An arbitral award rendered by the arbitral tribunal will be enforceable under the UN Convention on Recognition and Enforcement of Arbitral Awards (New York Convention), which is in force in 169 state parties. Enforcement against sovereign assets may be a lengthy process, but enforcement against planes as well as real estate has been successful in the past. Specialist services are available for such enforcement.
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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Ukraine Task Force
Giovanna M. Cinelli
Kenneth J. Nunnenkamp
Carl A. Valenstein
Jiazhen (Ivon) Guo
Katelyn M. Hilferty