Tit for Tat Continues, or Further Russian Countersanctions That Allow Nationalization of Assets of Persons From Unfriendly States

On April 25, 2023, the President of Russia signed Decree No. 302 On Temporary Management of certain assets, including movable and immovable assets and equity interests in the capital of Russian legal entities, that appoints the Federal Agency for State Property Management as the temporary manager of such assets and allows the agency to exercise all the rights of the owner of such assets, other than to dispose of the assets.

Given this caveat, the official commentators emphasize, that the Decree does not authorize nationalization, it is rather a temporary measure that is to be implemented in respect of assets of persons from unfriendly states in response to actual or potential threats to the security and defense of the Russian Federation, and, in particular, in response to expropriation by such states of Russian assets on their territories.

Although the Decree does not provide for any details of the temporary management (or temporary administration) regime, it could in practice resemble Russian bankruptcy administration, where an external administrator is appointed by the court and takes over all the functions of the CEO of the company.  In particular, bankruptcy administrators can enter into and terminate agreements, sell movable and immovable assets, restructure debts and obtain financing.  Given that in Russian corporate governance system the CEO by default has all ultimate management powers and it is not the board of directors that decides to delegate such powers to the CEO, if the Federal Agency for State Property Management appoints a new CEO of a Russian legal entity over the shares of which it gets temporary management, this effectively means that full operational control over the respective entity is exercised by the Russian government.  In particular, this could result in the entity’s continued performance under any existent and new contracts with sanctioned counterparties and other contracts that have been suspended or terminated due to sanctions considerations upon instruction of the foreign controlling shareholders.  The foreign shareholders will likely not be able to continue to consolidate such Russian subsidiaries.

The only assets currently on the list adopted by the Decree are 83.75% of shares in Unipro held by Uniper SE, 69.88% of shares of Fortum held by Fortum Russia B.V. and 28.35% of shares in Fortum held by Fortum Holding B.V., but the list can be expanded by further amendments to the Decree. 

Fortum is controlled by the government of Finland, and Uniper is controlled by the government of Germany, and it is believed that Fortum and Uniper have been targeted in response to similar measures taken by German government in respect of Gazprom Germania GmbH and certain other Russian energy assets in Germany and the decision of Finnish Fennovoima to terminate a nuclear power plant construction contract with Rosatom.  Notably, both Uniper and Fortum announced their plans to exit Russia in 2022 and were reported to be in discussions with potential buyers.  It is not clear how such discussions may proceed now, after the government has appointed new CEOs of the Russian entities.  The assets of both Fortum and Unipro are strategic energy infrastructure and sale of shares in these entities was made subject to Presidential approval at the end of 2022.  It is also interesting to recall that back in 2000s, the Russian assets that subsequently were acquired by Fortum and Uniper in the course of privatization and energy infrastructure reform, were part of RAO UES of Russia, the state-owned electric power holding. 

It is expected that other assets of, and equity interests in, foreign businesses from unfriendly states may be added to the list and subjected to temporary management by the Russian government, especially if such foreign businesses have announced plans to exit Russia and if the foreign shareholders’ instructions are disruptive to the Russian economy.  The industries that are most often mentioned by commentators include oil and gas, chemical industry, machine building, infrastructure, telecom, banking and food.  A number of foreign players in such industries were able to exit in 2022 and beginning of 2023.  

To read more about sanctions imposed by the U.S., UK and EU on Russian persons in connection with the Russia-Ukraine conflict and Russian countersanctions, please visit Sanctions Developments Resulting From the Conflict in Ukraine - Russia. 

If you have any questions concerning this memorandum, please feel free to contact the authors – Yulia A. Solomakhina, Chase D. Kaniecki, Polina Lyadnova – or your regular contacts at the firm.