Update on Russian countermeasures against so-called “hostile states”
Last week, Russia announced and implemented several countermeasures against so-called “hostile states”, i.e. states that have recently imposed sanctions against Russia in response to aggression. Russian military against Ukraine.
Below is a brief update on Russian countermeasures, which may affect any ongoing trade/activity in/with Russia. It is particularly interesting to note that Russian debtors can now, in certain cases, fulfill their payment obligations for credits, loans and other financial instruments towards companies linked to “hostile states“by opening a special deposit account with a Russian financial institution in the name of the creditor or a foreign agent holding securities, and then paying the amount due in rubles. The Russian government has also announced that the export and/ or the import of certain goods and goods from/to Russia will soon be prohibited and/or restricted. The list of goods and goods subject to these restrictions has not yet been published.
List of “hostile states”
On March 5, 2022, the Russian government released a list of “hostile states“, (in Russian) which all these counter-sanctions seem to be aimed at. The following states are included in the list:
- EU member states
- Great Britain (including the island of Jersey and the British overseas territories – the island of Anguilla, the British Virgin Islands, Gibraltar)
- New Zealand
- Republic of Korea
- San Marino
- North Macedonia
- United States
Currency control measures for legal entities and citizens of Russia
On February 28, 2022, President Putin issued Executive Order No. 79 (in Russian), which, among others, provides that from February 28, 2022, persons subject to Russian exchange control measures (which include Russian legal persons and citizens, but apparently not local branches of non-Russian entities) are required to sell 80% foreign currency received by them as a result of the supply of goods, works, services or intellectual property abroad from 1 January 2022. This also applies to 80% of the foreign currency that they will receive as a result of the supply of goods, works, services or intellectual property abroad, starting from February 28, 2022. The further procedure for selling foreign currency will be determined by the Central Bank of the Russian Federation . In addition, as of March 1, 2022, persons subject to Russian currency control measures are prohibited from lending foreign currency to non-residents, placing foreign currency in such persons’ foreign accounts, as well as make payments through foreign processing systems without opening a bank account. . However, these operations can now be carried out subject to the approval of a special government commission, in accordance with Decree No. 81, cf. the next paragraph below.
Divestment by foreign investors from Russian assets
On March 1, 2022, President Putin issued Executive Order No. 81 (in Russian), which, among othersprovides that from March 2, 2022, certain transactions involving Russian residents and legal persons that are either established in “hostile states“, carrying on substantial activities therein or obtaining substantial profits, as well as entities, wherever established, which are “control” by entities meeting these conditions, for example, subsidiaries, can only be carried out if approved by a special government commission. Such transactions include the lending of rubles to foreign investors and the transfer of ownership of real estate or securities securities, and are subject only to limited exemptions. The Special Governmental Commission is empowered to approve foreign currency lending to non-residents and placement of foreign currency in foreign accounts of Russian residents (i.e. transactions that are otherwise prohibited by Executive Order No. 79).
Temporary procedure for payment of Russian debtors to foreign creditors
On March 5, 2022, President Putin issued Decree No. 95 (in Russian), which establishes a temporary procedure for payments from Russian debtors to foreign creditors. From March 5, 2022, Russian debtors can fulfill their payment obligations for credits, loans and financial instruments to foreign creditors related to “hostile states” by paying the amount due to a special deposit account (account type “C”) opened in the name of a foreign creditor or a foreign agent holding securities, in rubles. It appears that these accounts can be opened in at the request of the debtor alone, without the consent or involvement of the foreign creditor.It is particularly worth noting that the holders of these deposit accounts are apparently not allowed to convert the rubles credited to these accounts into foreign currencies and/ or to transfer amounts from such accounts outside of Russia to The more detailed regime of such accounts will be determined by the Central Bank of the Russian Federation.
This special payment procedure applies to all payments of credits, loans and financial instruments exceeding 10 million rubles (approximately 78,000 EUR / 86,000 USD) in one calendar month by Russian debtors to legal persons who are either established in “hostile states“, carrying on substantial activities therein or obtaining substantial profits, as well as entities, wherever established, which are “control” by entities fulfilling these conditions, for example subsidiaries. However, controlled entities headquartered in the Russian Federation are expressly exempted from the payment procedure. Although advance payment under export contracts is not not explicitly mentioned in this decree, it is not clear whether the procedure will apply to debts resulting from commercial operations of early repayment.
The decree also affects payments of credits, loans and financial instruments by Russian debtors to other foreign creditors in general (i.e. foreign creditors unrelated to the “hostile states“). Russian debtors may fulfill their obligations to such creditors by transferring the amount due in rubles, equivalent to the value of the obligation in the relevant foreign currency (regardless of the currency in which the value is expressed), converted according to the official rate of the Central Bank of the Russian Federation from the date of payment In these cases, payment to a special deposit account is not required, and the foreign creditor can convert funds into foreign currency and transfer out of Russia. This method of conversion also applies to payments to foreign creditors related to “hostile states“. To this end, we note that the official exchange rate of the Central Bank of the Russian Federation is likely to be lower than the market exchange rate.
Potential avoidance of the rule by the assignment of a debt of a foreign creditor related to “hostile states“to a Russian creditor or to other foreign creditors is limited by the decree. The Russian or foreign creditor concerned will be treated as a related creditor”hostile states“, if the sale takes place after March 1, 2022.
However, this only seems to be a temporary payment procedure, since the decree empowers the Central Bank of the Russian Federation (with respect to credit institutions and non-bank financial institutions) and the Ministry of Finance of the Russian Federation (with respect to other debtors) to establish an alternative procedure, which will presumably replace and/or supplement the temporary procedure once implemented. In addition, until such an alternative procedure has been established, the Central Bank or the Ministry of Finance may individually authorize Russian debtors to fulfill their obligations through an alternative payment procedure.
Restrictions on the export and/or import of certain goods and merchandise
On March 8, 2022, President Putin issued Executive Order No. 100 (in Russian), which directs the Russian government to ensure that (i) the export and/or import of certain goods and commodities are prohibited until December 31, 2022, and that (ii) the export and/or import of other goods and merchandise are limit until December 31, 2022. The purpose of these measures is allegedly to ensure the security of the Russian Federation and to prevent interruptions in the operation of the domestic industry.
According to the decree, the Russian government must draw up a list of goods and commodities that will be subject to export and/or import restrictions, as well as a list of states to which the export restrictions and/or or import will apply within 48 hours. hours. It is uncertain whether this is the list of “hostile States” already published, or whether a new list will be drawn up specifically for this purpose. The Russian government is further authorized to establish more precise details of export and/or import restrictions concerning certain types of goods and goods, and in relation to certain specific legal entities.
The decree provides an express exemption for the export and/or import of goods and merchandise by natural persons (Russian citizens, foreigners and stateless persons), for their personal use.
It was reported on March 9, 2022 that the list of goods and products subject to export and/or import restrictions will be published by the Russian government shortly.
Possible nationalization of assets held by companies that left the Russian Federation
On March 9, 2022, the Russian Governmental Commission on the Bill approved an initiative of the Russian ruling party, United Russia, aimed at the possible nationalization of the assets of foreign companies that left the Russian market. The bill would allow external judicial administration of companies, in which more than 25% of the shares are controlled by foreign entities of “hostile states“, if they have ceased to do business in Russia. The aim would be to prevent bankruptcy and maintain employment. According to the draft law, the owners of the company will be able to refuse external administration only if the activity resumes in Russia, or if the shares are transferred under conditions of maintenance of activity and maintenance of employees If the owner does not accept any of these conditions, the company will be placed under guardianship for three months, after which the shares of the company will be placed on the market The potential buyer must undertake to keep at least 2/3 of the working capital and to continue the activity of the old company for at least one year.
While approval by the relevant government committee is only one of several steps in the legislative process in Russia, we note that the initiator, United Russia, has an overwhelming majority in the Federal Assembly of the Russian Federation (i.e. the State Duma and the Federation Council). It was also reported on March 9, 2022 that the Ministry of Economic Development supports the bill. Under the given circumstances, it is therefore likely that the bill will eventually pass (although it may be subject to further changes in the future).