Russia: Expropriation fears rising as companies exit

Ruth Green, IBA Multimedia Journalist

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.

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

Mozambique: War in resource-rich region threatens $25bn foreign investment

Pat Sidley, IBA Southern Africa Correspondent

A war in the northern-most province in Mozambique – Cabo Delgado – that has killed almost 4,000 people and forced close to 800,000 to flee their homes, has barely made the news, though it has been on the boil since 2017. The Mozambique government itself did not acknowledge it for several years, even after pressure was exerted on it to do so.

Cabo Delgado province is rich in resources and has attracted much foreign investment though its people remain very poor, and when the war reached the town of Palma, killing scores of people and forcing thousands to flee, the French company Total found the war was threatening their $25bn investment. The company was developing a large gas deposit near the town and was going to begin shipping Liquefied Natural Gas (LNG) in 2024. It was the largest foreign investment on the continent of Africa.

However, many of its workers and contractors lived in the town and have been forced out by the conflict, along with many deaths.  

In 2021, when the gravity of the situation became clear to Mozambique and its neighbours, troops from several countries (South Africa and Zimbabwe among them) joined a contingent from Rwanda which was already operating to restore order.

The situation had been deteriorating throughout 2020 and in April 2021 Total said it was suspending operations and declared force majeure. At the time, Total’s CEO Patrick Pouyanne said the company would only return if staff and residents of the area were able to do so in safety and security. It is a tall order and may not be entirely accomplished.

Rumours of a return to the development have waxed and waned with the movements of the insurgents. Until a month ago, violent attacks had calmed down, but within the past month, the violence has been on the increase again with reports that it has come perilously close to Pemba – the provincial capital. Despite this, it is hard to imagine Total not returning – but under different terms from those it has sought.

Claudia Santos Cruz, head of Oil & Gas at MDR Advogados in Mozambique, points out that violence in the area is not new. It goes back many decades to when Mozambique was plunged into a protracted civil war involving the ruling party Frelimo and the rebel movement Renamo, who controlled the mineral rich North. In more recent years and given the gas discoveries, the insurgency has been driven by many factors, including the region's political and economic marginalisation from the national government, external conflict forces and the displacement of local communities. She, too, remarks that this has produced many grievances which need to be adequately addressed to secure stability in the region. 

In the era of transition, gas has a significant role to play as a ‘bridge’ energy as we move to reduce carbon emissions. Mozambique is well placed given its abundance of both gas and renewable energy resources. Santos Cruz’s personal view is that Total is here to stay and apart from currently still investing in renewable energy projects, will also return to its LNG Area 1 project.

Alex Vines, Africa Programme Director at Chatham House, also believes Total will be back. The gas is of international grade, he says, and is not the only valuable deposit in Cabo Delgado which has other deposits of gas, minerals and gems. He says the war is ‘not all about gas’ but it is an exacerbating factor and has produced a sense of grievance among many who had hoped to see the fruits of the operation trickle down in their direction.  He says the operation would be the seventh largest producer of LNG in the world and ‘is truly transformative’.

Vines says there are several theories about who the insurgents are and what motivates them, including that it involves a regional jihadi group and that poverty in the local areas has produced the grievances and some have taken to the war in a popular uprising. Among the groups fighting there are militant Islamic insurgents from outside the country as well.

Longtime Mozambique observer, academic and author, Joe Hanlon, believes it is largely about resources, poverty and related grievances. He describes it as a ‘civil war’ and while ‘all civil wars are different, they all have a grievance’ present. Hanlon does not believe the grievances of the impoverished community in Cabo Delgado will disappear and thinks that the civil war will remain for the long term.

Hanlon says that as many as 24 countries have sent troops to Mozambique in addition to training operations by the US and EU.

Among the killings in Mozambique are scores of beheadings with locals forced to watch this at times. This is in addition to killings of unarmed civilians, rapes, gender-based violence and kidnappings. The human rights organisation Human Rights Watch says the situation deteriorated in 2020 and as well as reporting on the atrocities perpetrated by the insurgents, reported that the security forces ‘were implicated in serious abuses including arbitrary arrests, abductions, torture…and extra judicial executions’.  

In some areas, humanitarian organisations have had to stop operations because of the deteriorating situation. One of the reasons the war has been able to avoid any of the glare of publicity has been the fact that journalists have been harassed, at least one has disappeared and now before the president is a bill which would stop journalists from reporting on the war.

IBA President Sternford Moyo has called on the international community ‘to protect the people of Mozambique as they have in other regions’. He says: ‘The war in North-Eastern Mozambique resulted in thousands of civilians being killed, hundreds of women and girls being abducted, civilians being prevented from fleeing fighting in Cabo Delgado province, use of child soldiers by ISIS, allegations of aid for sex, and loss of a key town which fell under the control of “bandits”.’

He points out that the African Union only acknowledged the violence after a full year.

Image credit: Flag of Mozambique on military uniform/Adobe Stock