From Kommersant, April 12, 2022, p. 1. Condensed text:)
. . . Kommersant has learned that a new bill on external administration has been drafted, with the aim to resolve the problem of foreign companies suspending their operations in Russia. Readers are reminded that debates on how to tackle this problem started immediately after a large number of international companies ((over 1,000 – primarily retailers) decided to suspend their operations in Russia following the launch of Russia’s military operation in Ukraine [see Vol. 74, No. 8, pp. 9‑13]. The most radical proposal came from United Russia: The party drafted a bill nationalizing the Russian subsidiaries of companies that left. Some of the options proposed were so radical that almost immediately experts started comparing the current situation to the 1917-1918 nationalization campaign by the Bolsheviks. . . .
Anatoly Vyborny, deputy chairman of the State Duma security and corruption control committee and one of the bill’s sponsors, explained to Kommersant: “The purpose of the bill is to protect our national interest, and to ensure Russia’s security and financial stability, as well as the rights and legitimate interests of Russian people and businesses. At the same time, we are creating rules that offer international investors a comfortable way to ride out the storm. They can either resume their operations in Russia or sell their stake. In other words, we are offering them a way to handle this matter in a measured way, without tearing down the lucrative businesses they have built here in Russia,” The bill may be amended in time for a second reading, Vyborny said. For example, the section that defines “valid economic reasons” for withdrawing from the Russian market may see some improvements.
The bill has clearly benefited from the fact that lawmakers decided not to rush, given a rapidly changing environment. The new version of the bill available to Kommersant has addressed nearly all the concerns that businesses expressed in early March. For example, the bill will target only companies where shareholders from unfriendly countries control at least 25% of the stock (this rule will not apply to companies that are registered in unfriendly jurisdictions for tax optimization but are actually owned by Russian nationals) and which at the same time play a “significant role” for the stability of the Russian economy. This means the company must meet one of the following criteria: It manufactures essential goods (including those with prices regulated by the government); it controls a major share of the Russian market (being a “natural monopolist” or a dominant market player); it operates in a single-industry town (accounting for at least 25% of local jobs ); it has an exclusive government contract (and is listed in the government procurement database as a sole vendor for particular goods or services); or it is built into a critical supply chain (i.e., the supply chain of another company that matches one of the aforementioned criteria).
On the whole, the bill does not look as if it is intended to be used on a massive scale. According to its current version, in order for a company to become subject to external administration, it must be in a category described above and also meet one of the following criteria: The executives of the Russian subsidiary withdrew from running the business after Feb. 24 without appointing appropriate people to replace them; the company has announced that it is suspending its operations “without a valid economic reason” (to be clear, most of the companies do have them – for example, they are wary of being hit with secondary sanctions, or they have problems with logistics, being unable to import their materials and parts or export their products); the company has laid off at least one-third of its staff; the company’s quarterly sales have dropped by 33% or more versus the same quarter last year (this clause is a major risk); or the company’s actions (or failure to act) put other critical companies at risk. It seems like the bill won’t affect most international companies that have announced plans to reduce the inventory of their products sold in Russia and/or cut back on their investment programs. The Federal Tax Service (FTS), together with the regional authorities and respective ministries, will monitor the situation and assess risks.
The Ministry of Economic Development will create a special interagency commission to decide which companies should be subject to external administration. Ministries and governors will have the right to refer specific companies to the commission. Regional courts will not have the authority to put companies under external administration. If the interagency commission makes such a decision regarding a company, the FTS will file an appropriate request with the Moscow Arbitration Court. The court may freeze a company’s assets to stop it from moving its assets abroad. Out-of-court settlement procedures may start at this point or earlier.
In most cases, VEB.RF [Vnesheconombank, Russia’s Bank for Development and Foreign Economic Affairs – Trans.] will act as the administrator, but the interagency commission may appoint a different government body to do the job. There will be two administration modes. In the first one, the shares owned by foreign investors will be transferred to the administrator for 18 months (with the option of an 18-month extension). After that, the company (or, to be precise, its Russian subsidiary) will continue its normal operations as regulated by standard corporate law, except that all major deals will have to be approved by the interagency commission. In the second mode (which may be introduced if the first one does not work), the administrator acts as the company’s CEO for the same period. At any time, the owners of the company (those representing 50% or more of the stock) can reach out to the interagency commission with a request to either resume normal operations or to sell their stake in the company. A company can only be liquidated or declared bankrupt after it goes through the second mode process.
On the whole, considering the large number of caveats scattered throughout the bill and a very detailed description of all the legal procedures, it seems that one of the bill’s purposes is to create a mechanism that allows international companies to be put under external administration only when absolutely necessary. This applies to “protecting Russia’s national interests” and only under special circumstances, while minimizing the risk of a lawsuit against the company’s “nationalization” in another jurisdiction (for example, the bill does not authorize any action directly affecting the company’s assets or activities outside Russia) or even in Russia. Unlike alternative bills, this one offers foreigners much better protection against property loss or theft, and overall it is ill suited for mounting “psychological attacks” on the owners of international companies. At the same time, it is quite effective as a legal framework for putting a foreign company under Russian administration (temporarily or permanently, with a view to a future sale). Another important feature of the bill is that regional authorities are involved in the decision-making process. It is not exactly a “two-key system,” but at least it is up to provincial authorities to refer a company operating in their province to the commission.
We should also point out the limited capacity of the interagency commission and VEB.RF. Of all the companies that have left Russia, placing even a couple hundred under external administration as envisaged by the bill in 2022-2023 would put an enormous strain on the administrators. Besides, it is not even clear at this point if the arrangement will prove effective. It will only become clear after some time. And the new economic environment in which this mechanism is applied will be shaped not only by the “intransigence” of the foreign companies leaving Russia. It will also depend on the scale of Russia’s economic losses after the first six months of 2022 and the supply chain situation in the Russian economy – how quickly and to what extent they are disrupted, and how quickly and to what extent Russia can fix them.