LawFlash

Update: Russia Proposes Draft Legislation Allowing Nationalizing Assets from Persons Connected With ‘Unfriendly States’

April 13, 2022

Russia proposed a draft federal law on April 8 amending article 235 of the Russian Civil Code, which would allow the compulsory seizure of assets in cases stipulated by federal laws, and containing rules about such compulsory seizure from persons from, or connected with, the so-called “unfriendly states.” If adopted, this law would create a framework permitting nationalizing assets of these persons without compensation.

Under this draft federal law (Draft Amendments on Nationalization), the procedure for seizure will be developed by the Russian regional authorities—therefore, regulations and practices may differ region by region.

There are other draft laws which, if adopted, will affect foreign investors. Morgan Lewis previously reported on these measures against foreign investors and their potential impact, as well as protections that foreign investors affected by Russian measures may seek under bilateral investment treaties.

WHO MAY BE AFFECTED

The Draft Amendments on Nationalization target assets relating to states that “commit unfriendly actions against Russia, or Russian legal entities or individuals” (“unfriendly states”), and persons from those states or connected with them. The published list of “unfriendly states” includes countries that have adopted sanctions on Russia, and may be expanded if more countries impose sanctions.

The assets located in Russia may be subject to compulsory seizure if, as of February 24, 2022, they are owned by any of the following (collectively, affected foreign persons):

  1. An “unfriendly state”
  2. A person connected with an “unfriendly state,” including by way of citizenship, place of registration, primary place of business, or source of primary profit
  3. A beneficiary of, and a person controlled by, any of the persons listed in (1) or (2) above, irrespective of place of registration or primary place of business of such beneficiary or controlled person

As currently drafted, the Draft Amendments on Nationalization appear to permit seizing assets owned directly or indirectly by Russian persons as well—for example, if a Russian national is a beneficiary of a foreign company registered in an “unfriendly state,” or a Russian entity is controlled by a foreign company from an "unfriendly state.”

AFFECTED ASSETS

The Draft Amendments on Nationalization define the term “assets” very broadly as including any of the following property or assets:

  • Movable property
  • Immovable property
  • Monetary funds
  • Bank deposits
  • Securities
  • Corporate rights
  • Any other property (assets) physically located in Russia and owned by the affected foreign persons as of February 24, 2022

Further, under the Russian Civil Code, the term “assets” allows broad interpretation and covers various types of assets, including contractual rights, intangible assets, IP rights, and digital rights.

The Draft Amendments on Nationalization use February 24, 2022, as a “cut-off date,” and arguably, if the legislation is adopted as currently drafted, compulsory seizure could be enforced even if the assets of affected foreign persons are sold or alienated to a non-affected person after February 24, 2022.

PROCEDURE FOR Seizure of assets

While the Draft Amendments on Nationalization create a general framework for compulsory seizure, the exact procedures are to be developed at a regional level.

The draft suggests that the power to make a decision on compulsory seizure rests with regional authorities (local government) of a constituent territory where targeted assets are located. After the decision is made, the transfer of title from the assets’ owner to the local government will be registered by relevant registration authorities (e.g., the tax authorities and the Federal Service for State Registration, Cadastre and Cartography).

The owner will not be entitled to any compensation. Pending development of regional regulations, other details, including requirements and timing for seizure, remain unclear.

The Draft Amendments on Nationalization are in an early stage. In order to be adopted, they would require three readings in the State Duma, a lower chamber of the Russian parliament; adoption by the Federation Council, an upper chamber of the Russian parliament; and being signed into law by the president. In practice, a draft law can significantly change as it progresses through the legislature process.

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CONTACTS

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
Joanna Christoforou
Bruce Johnston
Sabine Konrad
Grigory Marinichev
Michael Masling
Kenneth J. Nunnenkamp
Georgia M. Quenby
Christina Renner
Melanie Ryan
Peter Sharp
Vasilisa Strizh
Pierre Trippel
Carl A. Valenstein
Heather Sears
Alexey Chertov
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Nicola Kelly
Christian Kozlowski
Daniel Lopez Rus
Maximilian Pika
Charles C. Rush
Eli Rymland-Kelly
Polina Sizikova
Dr. Axel Spies