New Russian law risks seizing ‘hostile’ assets

Businesses that still have assets – including property, money and data – in Russia are urged to move or shield as much as possible as Russia moves to enact legislation that could lead to the seizure of assets, Pinsent Masons said in an April 27 briefing note.

The new bill does not define “hostile measures,” but Pinsent Masons said it would likely apply to the list of “unfriendly” states defined in a March 5, 2022 executive order.

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 nationalization of foreign assets belonging to a state, entity or individual, and their beneficiaries, of a country that exercises “hostile measures” against Russia, Russian entities or individuals, regardless of their place of registration or their principal business activities.

“It’s interesting that the new federal law not only covers assets of ‘hostile’ foreign states, but also people associated with those hostile states.”

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

The assets would be seized if found on Russian territory on February 24, 2022 – the date Russia invaded Ukraine. There would be no compensation for seized property.

Law enforcement expert Slava Tretyak of Pinsent Masons said: “Although it is difficult to mitigate the risk associated with certain assets, such as real estate, the people and organizations who may be exposed should undertake a review of potentially risky assets, and whether it is possible or safe to remove those assets from the jurisdiction.”

Individuals and organizations potentially at risk should undertake a review of potentially at-risk assets and determine whether it is possible or safe to remove those assets from the jurisdiction.

“Customers who have data such as internal or external records, contracts, accounting records, ledgers, business forecasts, HR data, etc. in Russia that are still accessible should move or copy them as soon as possible to ensure that they are secure in case access to it ceases, given the general risk that the Russian government will restrict access, but also the risk that this law will mean that intangible assets such that data can be entered,” Tretyak said.

The list of “unfriendly” states defined in a decree of March 5, 2022 includes Albania, Andorra, Australia, Canada, EU and member states, Iceland, Japan, Liechtenstein, Micronesia, Monaco, Montenegro, New Zealand, North Macedonia, Norway, Singapore, San Marino, South Korea, Switzerland, Taiwan (Republic of China), Ukraine, United Kingdom and United States.

“It’s interesting that the new federal law not only covers assets of ‘hostile’ foreign states, but also people associated with those hostile states,” said litigation expert Michael Fletcher of Pinsent Masons.

“In light of some recent rulings, it is very likely that Russian courts will interpret these ‘associates’ as broadly as possible in order to broaden the scope of people and organizations covered by the new law,” Fletcher said.

Fletcher said foreign parties would be unlikely to be able to protect their rights through Russia’s domestic court system, so the investor-state dispute settlement route would be the best recourse. Assets owned by non-Russian entities and individuals would likely 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 the seizure of assets without compensation.

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

Martin E. Berry