Update: Russia Introduces New Rules Allowing Takeover of Assets Owned by ‘Unfriendly State’ Persons

Russian President Vladimir Putin issued Decree No. 302, “On Temporary Management Over Certain Assets,” on April 25, authorizing the Russian federal agency for state property management—or any governmental agency the president may designate —to exercise external management over such assets held by foreign persons associated with the so-called "unfriendly states” as listed in the decree.

Decree No. 302 appears to be a development of the Russian authorities' idea to introduce external management over (or even nationalize) assets of "unfriendly" foreigners in Russia. There are several draft laws to that effect, but they have not been adopted to date. Previous drafts discussed in our March 13, 2022 and April 20, 2022 LawFlashes suggested that to impose external management or nationalize assets directly or indirectly owned by "unfriendly" foreign persons, there should be a federal law adopted through the usual legislative procedure or a Russian court decision.

Decree No. 302 is issued based on the president’s sweeping powers under the Russian counter-sanctions laws and under the auspices of the “need to take immediate measures against the actions of unfriendly states.”

Importantly, the Decree No. 302 list can be populated and amended by presidential decrees and does not need going through any legislative procedures or court proceedings.

WHAT ARE THE TRIGGERS FOR IMPOSING EXTERNAL MANAGEMENT?

Decree No. 302 provides for a very broad scope of triggers for imposing external management, including the following:

• Deprivation of the Russian Federation, Russian legal entities, or individuals of the right of ownership in respect of property or deprivation of their property rights by foreign states that commit unfriendly actions against the Russian Federation and/or Russian legal entities or individuals (i.e., "unfriendly foreign states")
• Restriction of property-related rights of the Russian Federation, Russian legal entities, or individuals
• Any threat of deprivation or restriction of the above rights
• Any threat to national, economic, energy, or any other security of the Russian Federation or its defensive capacity

The list of “unfriendly foreign states” is maintained by the Russian government and may be expanded if more countries impose sanctions.

WHAT ASSETS MIGHT BE AFFECTED?

To date, Decree No. 302 only lists shares in certain Russian power generation companies that belong to Uniper and Fortum. It is understood that these are entities owned by governments of countries which Russia considers “unfriendly,” and Decree No. 302 is viewed as retaliation in response to measures taken in these countries in relation to Russia.

However, the Decree No. 302 list can be populated further at any time, and the president has unlimited power to do so. The decree describes the types of assets which may be affected very broadly as the below:

• Movable and immovable property situated in the territory of the Russian Federation, if such property is owned by "unfriendly" persons
• Securities and interests in the capital of legal entities held by "unfriendly" persons
• Property rights held by "unfriendly" persons

"Unfriendly" persons include foreign persons associated with "unfriendly foreign states," including where such foreign persons are citizens or residents of such states, or the place of their registration or principal place of business or principal place of income is an "unfriendly foreign state," or any persons controlled by them.

WHAT RIGHTS CAN THE EXTERNAL MANAGER EXERCISE?

The external manager appointed in accordance with Decree No. 302 may exercise all rights available to the owner of assets, except it cannot alienate these assets. Decree No. 302 suggests that the external manager should take measures to make inventory of the assets and ensure their safekeeping. The management fees are to be covered by the revenues generated by the assets. Decree No. 302 does not specify amounts of such fees, nor does it address liability of the external manager.

DECREE NO. 139

Decree No. 302 is not the first decree authorizing the Russian authorities to obtain control over a Russian company in the current geopolitical situation.

For example, Decree No. 139, “On Certain Matters of Conducting Activity of Business Companies Involved in Performance of State Defense Contracts,” issued March 3, 2023, allows Russian authorities to take control over Russian companies that are main contractors or direct or indirect subcontractors for defense contracts in case these companies fail to perform. This decree applies regardless of whether a Russian company is owned by “unfriendly state” persons.

Given that Russian laws on defense contracts are complex and subject to interpretation, owners of assets in Russia should be mindful of Decree No. 139 as well as Decree No. 302.

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