Proposed Russian law puts ‘unfriendly’ assets at risk

The Russian parliament is currently considering a federal law amending part 1 of article 235 of the Russian Civil Code, which, if signed, would allow the nationalising of foreign assets belonging to a state, entity or individual, and their beneficiaries, from a country which is exercising ‘unfriendly measures’ against Russia, Russian entities or individuals, regardless of the place of their registration or their principal business activities.

The draft law defines assets widely, to include movable and immovable property, cash, bank deposits, securities, corporate rights and other intangible assets such as data.

Assets would be subject to seizure if they were located within Russian territory on 24 February 2022 – the date Russia invaded Ukraine. There would be no compensation for assets seized.

Enforcement expert Slava Tretyak of Pinsent Masons said: “Although it will be difficult to mitigate the risk in relation to some assets, such as immovable property, those individuals and organisations who face potential exposure should undertake a review of what assets are potentially at risk, and whether it is feasible or safe to remove those assets from the jurisdiction.”

“Clients who have data such as any internal or external records, contracts, accounting records, any ledgers, business forecasts, HR data and so on in Russia that is still accessible should move or copy it as soon as possible to make sure it is secure in case access to it ceases, given the general risk of the Russian government restricting access but also the risk of this law meaning that intangible assets such as data can be seized,” Tretyak said.

The draft law does not define ‘unfriendly measures’, but Tretyak said it would likely be applied to the list of ‘unfriendly’ states defined in a 5 March 2022 decree. This includes Albania, Andorra, Australia, Canada, the EU and member states, Iceland, Japan, Liechtenstein, Micronesia, Monaco, Montenegro, New Zealand, North Macedonia, Norway, Singapore, San Marino, South Korea, Switzerland, Taiwan (the Republic of China), Ukraine, the UK, and the US.

“It’s interesting to see that the new federal law covers not just the assets of foreign ‘unfriendly’ states, but also people who are associated with those unfriendly states,” said disputes expert Michael Fletcher of Pinsent Masons.

“In the light of some recent decisions it’s very likely that the Russian courts will interpret those ‘associated’ as broadly as possible in order to increase the scope of those people and organisations who are covered by the new law,” Fletcher said.

Fletcher said it would be unlikely that foreign parties would be able to protect their rights through Russia’s domestic court system, and the investor-state dispute resolution route would therefore be the best recourse. Assets belonging to non-Russia entities and individuals would be likely to fall under the definition of ‘investment’ under Russia's bilateral investment treaties (BITs). An investor would generally be able to bring an arbitration against the Russian state as BITs normally prohibit seizure of assets without compensation.

“However, it remains to be seen how practically useful this right will be in the current circumstances, and therefore the imperative for businesses right now is to take steps to mitigate their exposure, rather than hoping to rely on legal remedies in the future,” he said.