Russia: Expropriation fears rising as companies exit

Ruth Green, IBA Multimedia JournalistFriday 15 July 2022

International businesses in Russia face growing challenges as the government threatens to expropriate or nationalise foreign-owned assets of companies exiting the market.

In mid-May, the Kremlin proposed draft legislation that would enable court-appointed administrators to take control of the assets of foreign companies that have suspended operations in the country since it invaded Ukraine on 24 February.

More than 1,000 companies have left Russia since 24 February. Many have written off assets, while others are still on the hunt for buyers. If passed, the law will affect companies that are at least 25 per cent owned by a foreign company or individual from so-called ‘unfriendly’ states that have imposed sanctions on Russian state-owned entities.

Irina Paliashvili, founder of the Washington-based RULG-Ukrainian Legal Group, says such proposals highlight why companies must continually reassess the risks of operating in foreign markets like Russia. ‘When you are going in, you need to make sure you understand the risks because the behaviour of the Russian Federation has been increasingly erratic – they were attacking neighbours and committing war crimes,’ says Paliashvili, who also sits on the IBA’s Section on Public and Professional Interest Council and Senior Lawyers’ Committee Advisory Boards. ‘It’s very justified that at some point those companies would encounter these kinds of difficulties because the risks were very high. Now they're paying the price.’

The draft legislation targets companies where the suspension or termination of operations is deemed to pose a threat to the local economy, sector or the Russian State itself. However, there are concerns the proposals could be expanded to apply to any foreign company operating in Russia before the invasion.

Nikita Prokofiev, managing partner at Legal Search One in Moscow, specialises in placing general counsel in Russia-owned corporations. He says it’s still unclear which companies and scenarios the proposals will apply to if they do become law. ‘This is still under discussion, and it may be a bit more sophisticated than a straightforward seizure of assets,’ he says. ‘My sense is that the main purpose is to force those foreign companies to continue their operations and maintain employment rather than simply nationalise their assets.’ However, Prokofiev concedes that the legislation could lead to some ‘tricky arrangements’ for foreign investors.

It’s very justified that at some point those companies would encounter these kinds of difficulties because the risks were very high. Now they're paying the price.

Irina Paliashvili
Founder, RULG-Ukrainian Legal Group

Fears of mass expropriations increased on 1 July when President Vladimir Putin issued a decree to extract concessions from the foreign shareholders of the Sakhalin-2 oil and gas project, which supplies around 4 per cent of the world's current liquefied natural gas market. Russia’s state-owned Gazprom already owns 50 per cent of the project, while Royal Dutch Shell, Mitsui and Mitsubishi hold significant stakes.

The companies have one month to decide whether to remain shareholders in the project. Shell announced plans to sell off its stake in March. A spokesperson told Global Insight the company was still ‘assessing’ the decree’s implications and had ‘always acted in the best interests of Sakhalin-2 and in accordance with all applicable legal requirements.’

Since the invasion, Mitsui and Mitsubishi indicated their intention to retain their interests in the project. Mitsui told Global Insight it was reviewing details of the decree and was ‘in discussions with the Japanese government and various stakeholders’ regarding its future policy on Sakhalin-2. Mitsubishi did not respond to requests for comment.

Mark Dixon, founder of the Moral Rating Agency (MRA) expects to see a ‘tsunami of expropriations or blackmailed concessions’ in the next few months as the decree affects other foreign businesses still operating in Russia.

A recent report by the MRA indicated that 47 of the world’s 200 largest corporations with a presence in Russia face having their assets seized or expropriated by the State. ‘The risk of being expropriated has now put companies that were talking about getting out of Russia in the same position as those refusing to get out,’ says Dixon. ‘Both groups may now be subjected to the same pressures and risks.’

The Kremlin has issued repeated threats to take action against multinationals that neglect Russian workers as they exit the market. A number of businesses, from large corporates like McDonald’s to international law firms, have continued to pay staff salaries throughout the winding-down process.

Mark Stephens, Co-Chair of the IBA’s Human Rights Institute, says companies must ensure employees are not left in the lurch. ‘Many of these chief executives and their legal advisers have been looking at reputational risk and not looking and assessing human rights risk,’ he says. ‘If you were assessing human rights, you might well prioritise your workers and customers and supply chain over reputational risk. You have obligations to your staff and these are pretty much the same whether they're expatriate or locals. Locals may not want to leave, but you've got to make them as secure as you can after leaving.’

Stephens believes companies must ensure their businesses are in the best position possible to survive a takeover in such a volatile market. ‘If you were compliant with the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises, you're going to hand over the business in that state so that they can carry on the same practices and procedure,’ he says. ‘You can't stop them post-takeover from changing them, but obviously if you've got a business with already functioning processes and procedures, which staff are familiar with, it's in many cases easier to continue that rather than discontinue it.’

Nicola Bonucci, a litigation partner at Paul Hastings in Paris and former Director for Legal Affairs at the OECD, says the coming months will be extremely challenging for foreign businesses in Russia. ‘There will be litigation from the Russian oligarchs and Russian companies with respect to assets frozen or confiscated,’ he says. ‘There could be litigation from Western companies against any expropriation or measures tantamount to expropriations that could be initiated by Russia. There may even be litigation by Western companies against their own home states for having taken action in Russia which had an impact and affected the value of the company. This could become a total mess with claims and counterclaims all over the world.’

Image credit: Miha Creative/AdobeStock.com

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