Russia Examines Legal Protocols For Seizure Of Foreign Assets

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Foreign companies exiting Russia could have assets auctioned off or placed under Russian administration

Russian First Deputy Prime Minister Andrei Belousov has held discussions with representatives of entrepreneurs and Business Russia, at which he announced the preparation of a decree by the President of Russia on temporary restrictions on the exit of foreign businesses from Russian assets. Prime Minister Mikhail Mishustin has also been informed about the preparation of this decree, which has yet to be signed into law.

The Russian state, according to Belousov, considers the mass exodus of foreign companies from the Russian market as a deliberate or intentional bankruptcy, entailing liability in accordance with Russian law. Since foreign companies have decided to do business in Russia, they must also be liable under the law for evading obligations. There are differing protocols being examined to deal with this situation:

Deliberate Bankruptcy leading to Assets Auction to Repay Creditors

The Russian government has taken the position that the mass, apparently coordinated exodus of Western companies from Russia has led to a deliberately induced .reduction in production volumes, a decrease in tax deductions, and an increase in unemployment. Any total exit of companies from Russia will be considered as deliberate bankruptcy. The management of these companies will be taken over by law enforcement agencies, and the enterprises themselves will be subjected to bankruptcy. Their assets and business will be sold to other companies or to the state at auction.

Operational Administration

Alternatively, the law provides for the possibility for foreign companies to delegate the authority to manage the activities of their enterprises in Russia. In this case, foreign companies remain the nominal owners of the enterprises, but will share the profits with Russian companies, who will be placed in charge of the business administration.

Normal Foreign Investor Operations

Foreign companies continuing to do business in Russia who do not stop production activities, reduce production volumes, or lay off personnel, normal operational activities and relations with the Russian Government will remain intact and support work on the same mutually beneficial terms continued. It remains unclear how business performance can be measured in terms of production having to be partially reduced due to sanctions beyond the control of the business or other previously planned operational changes. Legal advisory may be undertaken to determine this in the event the proposed decree passes into law. Decisions are expected within the next few days.

Summary

Russia will regard fleeing companies as performing a deliberate bankruptcy, especially if there are pending contracts, projects, outstanding and on-going maintenance, warranties, or missing deliveries. This means foreign investors departing Russia could have criminal verdicts imposed upon them in addition to huge fines for breach of contract. This doesn’t bode well, even to the largest companies, as it may endanger all sorts of bids/tenders/contracts in new business for them elsewhere. Insurance premiums could increase in the event of Russian defaults and bankruptcy.

There are other issues, as non-Western businesses and vendors will lose confidence in Western companies to fulfill contracts, including core telecom networks in addition to subscriber services. (Netflix just pulled out of Russia. What happened to their subscribers?) This applies to many other companies who would be considered as abandoning their customers in non-Western markets. As infrastructure companies leave Russia, how can billions worth of equipment be serviced? These companies will probably also lose the IP protection of their tech. There are lots of pandora boxes being opened. It will be next to impossible to close them.

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Russia Briefing is written and produced by Dezan Shira & Associates. During these uncertain times and sanctions imposition, our firm assists Russian companies relocate to Asia, and provides financial and sanctions compliance services to foreign companies operating in Russia. We also provide market research and advisory services to foreign exporters interested in Russia as the economy looks to replace Western sourced products. Please contact us at russia@dezshira.com or visit us at www.dezshira.com.