Russia to confiscate Western companies that want to leave the country

The Russian government is working on a new law that will allow the state to take control of the local businesses of Western companies that decide to leave Russia because of the invasion of Ukraine, increasing the risk for multinationals trying to leave.

The law, which could go into effect in a few weeks, will give Russia broad powers to intervene where there is a threat to local jobs or industries, making it harder for Western companies to break free quickly unless they are willing to take a big hit. financial.

The law to confiscate property from foreign investors follows the exodus of Western companies like Starbucks, McDonald’s and AB InBev brewery, and increases pressure on those still in Russia.

This comes as the Russian economy, increasingly isolated by Western sanctions, plunges into recession amid double-digit inflation.

Italian lender UniCredit, Austrian bank Raiffeisen, the world’s biggest furniture brand IKEA, fast food chain Burger King and hundreds of smaller companies still do business in Russia. Anyone who tries to get out will face that tougher line.

IKEA, which has suspended all operations in Russia, said it was closely monitoring the development. Raiffeisen said it is evaluating all options, including a carefully managed exit. UniCredit declined to comment, while Burger King did not immediately respond to a request for comment.

The bill paves the way for Russia to appoint interveners for foreign-owned companies in “hostile” countries that want to leave Russia as the conflict with Ukraine cripples its economy.

Moscow typically refers to countries as “hostile” when it has imposed economic sanctions on Russia, meaning any European Union or US company is at risk.

The European Commission proposed to toughen its own stance on Wednesday to make violating EU sanctions against Russia a crime, allowing European governments to seize assets of companies and individuals that break restrictions against Moscow.

Meanwhile, in a move that could push Moscow to the brink of default, the Washington government announced it would not extend an exemption that allowed Russia to pay US bondholders.

economic difficulties

The departure of Western companies angered Russian politicians. Former President Dmitry Medvedev, who is now deputy chairman of Russia’s Security Council, has been a particularly vehement critic of Western companies that have left, attacking “enemies who are now trying to limit our development and ruin our lives”.

“The government is interested in preserving jobs and tax revenue,” said Sergej Suchanow, an attorney at risk management and compliance consultancy RSP International.

“First, the government will apply the rules to large companies. To avoid an intervener, companies will have to show that they are not abandoning their Russian business.”

Ulf Schneider, a consultant who works with German companies in Russia and an expert in the region at German midsize industrial group BVMW, said he and others are working on proposals to allow foreign companies to voluntarily hand over control to a trustee of their choice.
This could convince Russia that they are being responsible and, at the same time, distance themselves.

“Sale is an option, but conditions are not good,” Schneider said.

The bill outlines how Russia could appoint an intervener for companies where at least 25% of the shares are in “hostile” foreign hands.

It sets out a wide range of intervention criteria, such as when a company plays a critical role as a local employer or provides important services. This makes it clear that the state can justify taking control for many reasons.

The draft cites the example of companies that make medical devices, but it also lists a number of other sectors, such as transport and energy, and any companies whose closure could raise prices in the trade.

The state-appointed administrator would also be allowed to sell the confiscated company, while its former owners would be barred from doing business in Russia.

A court or the Ministry of Economic Development may decide to put in charge a trustee such as Russian development bank VEB.

The bill passed a first reading in the lower house of parliament, or Duma, this week, but it still faces two more readings and a review in the upper house before being signed into law by President Vladimir Putin.

This can take several weeks. Russia’s Economy Ministry has said it will choose companies only in “critical cases” where it is necessary to protect production or jobs.

Dozens of foreign companies have announced the temporary closure of shops and factories in Russia since Putin launched what he calls a “special military operation” to demilitarize and “denazify” Ukraine, dismissed by Ukraine and its allies as an unfounded pretext for war. .

“Russia was already isolated and was no longer of interest to investors,” said Michael Loewy of the Federation of Austrian Industries. “This law can only make it worse.”

Translated by Luiz Roberto M. Gonçalves