German Zakharov

On August 23, 2023, the extracts from the minutes of the meeting of the Sub-commission of the Government Commission for Control over Foreign Investments in the Russian Federation No. 182/5 dated August 09, 2023, were published. (“Extracts No. 182/5”). The said Extracts No. 182/5 show that the Russian Ministry of Finance and the Bank of Russia have decided to ease the previously established restrictions on payment of dividends to foreign persons provided they make investments in the Russian economy. Under the terms of the Extracts No. 182/5, the payment of dividends (distribution of profits) to foreign persons can be carried out without any restrictions, but its volume may not exceed the amount of investments made by such persons in Russia. In addition, one of the prerequisites for payment of dividends is that foreign creditors make investments in the Russian economy after April 01, 2023, including expansion of production volumes in Russia and development of new technologies. Previously, the dividend payment could not exceed 50% of the total net profit for the previous year provided that the certain set KPIs have been fulfilled. The full version of Extracts No. 182/5 could be found on the website of the Ministry of Finance (in Russian only) with translation attached1. You can read the translation of the Extract by clicking here.

On July 27, our firm held a webinar dedicated to the comprehensive summary of the most recent regulatory risks that foreign investors from “unfriendly jurisdictions” encounter in Russia. At the webinar our team provided participants with valuable practical advice and clarifications, shared their expertise on the example of Unipro, Fortum, Carlsberg and Danone cases and covered the following topics: {{•}} Regulatory update; {{•}} New presidential decrees on interim administration; {{•}} New requirements of Governmental Subcomission. The speakers of the webinar were: German Zakharov, Partner and Head of Competition/Antitrust Practice, Andrey Zharskiy, Partner and Head of Corporate / M&A Practice, Margarita Egiazarova, Senior Associate in the Labour and Employment Parctice. More information on the services and expertise of ALRUD's team can be found here.

On July 16, 2023 the President of the Russian Federation signed Decree 'On Amendments to the List of Movable and Immovable Property, Securities, Shares in the Authorized (share) Capital of Russian Legal Entities and Property Rights, in respect of which Interim Administration is introduced, approved by the Decree of the President of the Russian Federation dated April 25, 2023 No. 302' No. 520 (“Decree No. 520”)1. Decree No. 520 comes into force immediately as of the date of its publication. By Decree No. 520 shares in the Russian divisions of the brewing company Baltika Brewing Company LLC (“Baltika”) and Danone Russia (“Danone”) held by foreign companies were transferred under the interim administration of the Federal Agency for State Property Management (“Rosimushchestvo”). In April, control over Unipro and Fortum similarly changed (see for more details on news and practical implications of mechanism ). According to Decree No. 520, Rosimushchestvo receives into temporary management: 98.56% share in the charter capital of Baltika owned by Carlsberg Sverige Aktiebolag; 1.35% share in the charter capital of Baltika owned by Hoppy Union LLC; 0.09% share in the charter capital in Baltika owned by Carlsberg Deutschland GmbH about 83.3 billion ordinary shares of Danone owned by Produits Laitiers Frais Est Europe; 85,000 ordinary shares of Danone owned by Danone Trade LLC. Interim Administration mechanism means that Rosimushchestvo has all property rights to the assets placed under the Interim Administration. At the same time, Rosimushchestvo only operates and exploits the assets and has no right to dispose of them. In other words, the original shareholders will be temporarily deprived of the rights of possession and use over the affected assets but will keep the legal ownership title to them. Revenues received as a result of asset administration are used to compensate the expenses incurred during Interim Administration. Rosimushchestvo is also responsible for ensuring the inventory and safekeeping of the assets handed over under the Interim Administration. Interim Administration can only be terminated by a relevant act of the President of the Russian Federation. Although formally any assets under control of persons associated with “unfriendly” states can be targeted by the Interim Administration mechanism, the current application of this mechanism to four companies from the top 50 foreign companies playing significant role in the security of the state and economy in Russia indicates that this mechanism is likely to affect only some foreign businesses taking into account their potential impact on these areas. You can read the Decree by clicking here. In Russian only.

We would like to inform you that the Extract1 from the decision of the Sub-Commission No. 171/5 as of July 07, 2023 was published on July 12, 2023. In accordance with the Sub-Commission's decision, the following amendments are made to the conditions for carrying out transactions (operations) aimed at alienating securities, including shares, participatory interests (contributions) in the authorized (share) capital of Russian companies (“Assets”) by foreign persons associated with unfriendly foreign states or persons under the control of such foreign persons (“Unfriendly persons”), which should be fulfilled in order to obtain the Sub-Commission's approval: Voluntary contribution to the federal budget (“Exit tax”) must be paid within 3 months from the date of implementation (execution) of the transaction (operation); In case of acquisition of shares constituting the authorized capital of a public joint stock company, public offering of up to 20% of the acquired share, provided that: {{✓}}date of commencement of such offer may not exceed 1 year from the date of execution of the transaction (operation), and the term of such offer may not exceed 3 years from the date of commencement of such offer; {{✓}} in case of reorganization of a company in the form of merger with a public joint stock company - public offering of shares of the public joint stock company in the amount of up to 20% of the shares of the merged company, taking into account the exchange ratio of the shares of these companies in case of merger, within 3 years from the date of implementation (execution) of the transaction (operation). In case of termination of public status of a joint stock company or liquidation of such company as a result of implementation (execution) of a transaction (operation) - public offering of up to 20% of shares of a public joint stock company (newly established or as a result of obtaining public status of the joint stock company), with the term of obtaining public status of the joint stock company and implementation of such public offering not exceeding 3 years from the date of implementation (execution) of the transaction (operation). Establishment of KPIs for the acquirer and/or the acquired company, which should provide, inter alia, for the preservation of the technological potential and the main type of economic activity of such company, preservation of jobs and the fulfilment of obligations under contracts concluded by it with other entities, with a recommendation to the federal executive body to exercise control over the achievement of such indicators. Buy back of asset at the market value on the day of exercising such option, existence of economic benefit for the resident owner of the asset and limitation of the term of validity of the permit (as a general rule, not more than 2 years from the date of implementation (execution) of the initial transaction (operation))- for a transaction (operation) providing for the possibility of buy back of the asset. Transfer of funds in the course of transactions (operations) with unfriendly persons to 'C' type accounts, or settlement of transactions (operations) in RUB in the banking system of the Russian Federation without transfer of funds outside the Russian Federation, or in case of transfer of funds in the course of transactions (operations) with foreign persons to accounts of such persons opened in banks and other financial market organizations located outside the territory of the Russian Federation, the availability of installment payments. Presence of other approvals granted to the applicant provided for by the legislation of the Russian Federation, necessary for the implementation (execution) of the transaction (operation), the information on which is provided by the applicant. The extract also introduces a new condition for the payment of profits (dividends) to foreign creditors in cases established by counter-sanctions decrees of the Russian President, which supplements previously existing conditions that should be met to obtain the approval of the Sub-Commission: Fulfillment by the applicants of their obligations to achieve KPIs, confirmed by federal executive bodies (Bank of Russia). Separately, please note that the Extracts from the previous minutes of the Sub-Commission’s meetings No. 118/1 of December 22, 2022 and No. 143/4 of March 02, 2023 are no longer in force. You can read the Extract by clicking here.

We are pleased to share with you the following updates related to liquidation of companies. 1. Simplified liquidation procedure On 07 June 2023 the Russian parliament approved the draft law1 allowing the shareholders of small and medium-size enterprises to liquidate their business within a simplified procedure. Suggested changes: Timing. The whole liquidation process under the new procedure will take 3 months instead of usual 7-12 months as per the existing liquidation rules; Liquidation process is expected to be simplified for certain entities. Shareholders will need to sign and submit a single application instead of 3 applications under standard procedure. All other steps (such as notification of liquidation in mass media) will be made by the registration office. Who is eligible? According to the draft law, any legal entities matching all the following criteria simultaneously will be able to apply for the simplified liquidation: Included in the register of small and medium-size enterprises; Not paying VAT or exempt from its calculation and payment; Not in bankruptcy and no signs of bankruptcy from the Russian law perspective; All payments due to dismissed employees are made in full; Settlements with creditors are made in full; No unsettled tax and other state-related obligations; There are no records2 on non-reliable information about the company in the register; No real estate or vehicles owned; Not in already launched standard liquidation reorganization or administrative exclusion from the register. When to expect? According to the draft law, the new provisions shall come into effect starting from 1 July 2023. 2. Counter-sanctions regime impact on standard or simplified liquidation Decree of the President No. 618 dated Sep-tember 08, 2022 (“Decree 618”) introduced the obligation to get approval of the Government Commission for the control of foreign investment in the Russian Federation (the “Government Commission”) when persons from so-called “unfriendly” states3 (states that introduced or supported sanctions against Russia) or under control of persons from “unfriendly” states cease to own shares in a Russian company. Another decree of the President No. 737 dated 15 October 2022 (“Decree 737”) introduced the obligation to get approval of the Government Commission for distribution of the liquidation proceeds to shareholders in case the sum exceeds 10 million RUB per month. Possibility to launch liquidation without approval of the Government Commission As of today, we see that it is practically possible to launch liquidation without approval of the Government Commission under Decree 618 in case liquidation proceeds do not exceed 10 million RUB (otherwise, approval under Decree 737 is required). We also see that there are different interpretations regarding the necessity to get approval under Decree 618, and we cannot exclude the risk that there may arise certain difficulties with launching the liquidation (due to the position of the Russian notaries and authorities), or that the Russian authorities can issue clarifications stating that the approval under Decree 618 is required in all cases. As of today, though, we have many successful cases when liquidation without approval under Decree 618 was launched with no issues. The main risk we see here is that in the middle of the liquidation the necessity of getting the approval may arise, and in that case it would be necessary to either get the approval or cancel the liquidation. № 164662-8 on amendments to the Federal Law 'On state registration of legal entities and individual entrepreneurs' and article 3 of the Federal Law 'On limited liability companies'. Record made by the registration office meaning that certain information in the register is not actual or is fake/non-reliable. Including USA, European Union Member States, UK, Japan. Please refer to the full list via the below links: http://static.government.ru/media/files/wj1HD7RqdPSxAmDlaisqG2zugWdz8Vc1.pdf, and http://static.government.ru/media/files/0s7FsWoReCQYAOhYkh0iM9U3QJLmHHKo.pdf

We would like to inform you that today the President of the Russian Federation signed the Law dated April 28, 2023 No. 139-FZ significantly amending the Federal Law dated April 29, 2008 No. 57-FZ Federal Law “On Procedures for Foreign Investments in Companies having Strategic Importance for the National Security and Defense” (hereinafter – the “Strategic Investments Law”). The following amendments establish the consequences of transactions and actions made in violation of the requirements of the Strategic Investments Law: {{1.}} Transactions and actions made in violation of the requirements of the Strategic Investments Law entail the consequences of invalidity established by Clause 2 of Article 167 of the Civil Code of the Russian Federation. {{2.}} The court is entitled, if the intentional guilt of the parties is established, to recover to the federal budget: shares (participatory interest) that constitute the authorized capital of a strategic company, or property that belongs to the main production assets of a strategic company, as well as income received as a result of such a transaction (action). {{3.}} Moreover, a strategic company is also entitled to file a claim in a court against a foreign investor to recover losses in connection with the unfair exercise of the rights acquired by foreign investors as a result of transactions or actions performed in violation of the requirements of the Strategic Investments Law. Separately, the above amendments establish the fact that the citizens of the Russian Federation with a residence permit of a foreign state will be considered as foreign investors along with citizens of the Russian Federation with foreign citizenship. Such persons, having control over strategic company, who receive a residence permit or other valid document confirming the right to permanent residence in a foreign state, is required to file an application to the Governmental Commission for obtaining approval to establish control over a strategic company.

On April 26th, the event “Crisis Update: Sanctions and Countermeasures. New in Presidential and Government Approvals” organized by Association of European Businesses was held. German Zakharov, ALRUD Partner, participated in the event as a speaker and spoke on the topic “Risks and liability for violating countermeasures”. Experts focused on update on regulatory and practical developments in Presidential and Government approvals and risks and liability for violating countermeasures, as well as OFAC view on exit tax. This AEB’s event aims to inform member firms on the current sanctions and countermeasures, as the sanctions affect most of the business in Russia. More information about the event can be found here.

On April 25, 2023 the President of the Russian Federation signed Decree No. 302 “On the Interim Administration of Certain Assets” (“Decree No. 302”)1, introducing a new mechanism for interim administration of certain assets in Russia (“Interim Administration”). Decree No. 302 became effective immediately on April 25, 2023. {{1.}} Grounds for and scope of Interim Administration {{1.1}}In accordance with Decree No. 302, the Interim Administration can be established in case of: {{(A)}} deprivation of ownership and (or) property rights to the assets; OR {{(B)}} limitation of ownership and (or) property rights to the assets; OR {{(C)}} a threat of such deprivation or limitation; OR {{(D)}} a threat to national, economic, energy, or other types of national security or to the defense capability of the Russian Federation. The Interim Administration may be applied in case said ownership and (or) property rights to the as-sets belong to the Russian Federation and (or) Russian individuals and (or) legal entities, while the assets are located in the territory of “unfriendly” states (being foreign countries that imposed sanc-tions against Russia, its citizens, or legal entities)2. {{1.2.}} Interim Administration may be implemented over the following assets: {{(A)}} movable and immovable property; {{(B)}} securities and shares in authorized capital of Russian legal entities; and {{(C)}} property rights. {{1.3.}} To be exposed to the risk of implementation of Interim Administration the assets must simultaneously comply with all the following criteria: {{(i)}} to be located within the territory of the Russian Federation; and {{(ii)}} to belong to or to be under control of a foreign person associated with an “unfriendly” state3. NB! The assets are subject to Interim Administration upon inclusion in a special list approved by the President of the Russian Federation. We understand that the Interim Administration is introduced up-on entrance into force of such list (i.e. effective date of the Presidential Decree with the relevant list of assets4). Note that in contrast to, for instance, federal laws, the Presidential Decrees usually be-come available to the public at the date of their official publication. Thus, it is extremely important to monitor the changes regularly to be aware of imposition of the Interim Administration in respect of any new assets. {{2.}} Interim Administration mechanism {{2.1.}} According to Decree No. 302, the Federal Agency for State Property Management (“Rosimush-chestvo”) is appointed as the institution performing functions of an interim administrator. Rosimush-chestvo may be replaced by any other person by a separate Presidential Decree5. {{2.2.}} Rosimushchestvo has all property rights to the aforementioned assets. At the same time, Rosimush-chestvo only operates and exploits the assets and has no right to dispose of them. In other words, the asset owners will be temporarily deprived of the rights of possession and use over the affected as-sets. {{2.3.}} Expenses incurred during Interim Administration are compensated only from revenues received as a result of asset administration. {{2.4.}} Rosimushchestvo is responsible for ensuring the inventory and safekeeping of the assets handed over under the Interim Administration. {{2.5.}} Interim Administration can only be terminated by a relevant act of the President of the Russian Fed-eration. {{3.}} Assets under Interim Administration The Interim Administration has been already established over the following companies listed in De-cree No. 302: 83.73% of shares of Unipro PJSC, owned by Uniper SE; and 98.2295‬% of shares of Fortum PJSC, owned by Fortum Russia B.V. and Fortum Holding B.V., which are subsidiaries of Fortum Oyj. Please note that the list of assets subject to the Interim Administration is expected to be monitored and updated by Russian authorities from time to time. {{4.}} Impact and risk assessment {{4.1.}} The criteria for introduction of Interim Administration are quite vague, so that the mechanism can be utilized by the Russian state authorities as an urgent measure in response to any deprivation or even threat of deprivation of any property rights of Russia or Russian persons to the assets abroad. {{4.2.}} It is relatively hard to expect how the assets subject to the Interim Administration will be chosen. Formally speaking, the wording of Decree No. 302 allows to establish Interim Administration over any assets belonging to any foreign persons from “unfriendly” states (or even foreign states themselves) or persons under their control. {{4.3.}} Meanwhile, so far Decree No. 302 is applied point-by-point only to certain assets which are under control of governments of “unfriendly” states (Germany and Finland). The analysis of the current cir-cumstances allows us to conclude that the following issues might be taken into account by the Russian authorities while choosing targets for Interim Administration: {{(A)}} Unipro and Fortum are companies which are important for the economy and energy security of Russia , which is also confirmed by the fact that they were already included in the list of companies the transactions with shares of which are subject to prior presidential approval under Decree No. 520 of August 05, 2022 (which is, in fact, the most complicated clearance procedure); {{(B)}} Unipro and Fortum are controlled by the governments of “unfriendly” states; {{(C)}} “unfriendly” states nationalized or took control over the companies being the shareholders of Russian companies, or their assets (e.g. Uniper SE was nationalized by Germany earlier in 2022); {{(D)}} the shareholders of the companies publicly announced their exit from the Russian market and (or) suspended management and (or) control over Russian assets. {{4.4.}} We think that the risk of introduction of Interim Administration over a particular asset should be as-sessed taking into account the abovementioned complex of factors (most of which have purely discre-tional nature). However, it should also be kept in mind that formally any assets under control of per-sons associated with “unfriendly” states can be targeted by the new Interim Administration mecha-nism. You can download English translation of the Decree No. 302 following the link. The list of “unfriendly” states was approved by the Russian Government Decree No. 430-r on March 05, 2022. Means any foreign citizen / foreign legal entity related to “unfriendly” states (i.e., that has citizenship or is a resident of at least one of such states, or place of their registration, place of preferential conduct of economic activities, or place of pref-erential extraction of profits from activities is at least one of these states), as well as any other foreign person that is under control of the above-mentioned foreign citizen or foreign legal entity. In practice, the Presidential Decrees providing for restrictive measures are effective from the date of their official publica-tion that is expressly stated therein. To date, it is not clear who such person may be. Probably, it can be a state corporation VEB.RF as proposed in 2022 during discussion of similar draft law “On External Administration for Entity Management”.

Starting from February 2022, the President of Russia has adopted several decrees restricting conclusion and performance of transactions involving foreign entities and individuals. In most cases such transactions now require approval from a special governmental commission. Today the Russian Ministry of Finance published draft law No. 02/04/03-23/00136901 on making amend-ments to the Russian Code of administrative offences that introduce liability for breach of counter-sanctions measures aimed at ensuring of financial stability of the Russian Federation (hereinafter the “Draft law”). Please find below a brief overview of the Draft law. 1. Consequences of violation of the counter-sanction measures in accordance with the Draft law As follows from the Draft law, in case of non-compliance with the counter-sanctions measures (e.g. in case of conclusion of transactions in breach of the counter-sanctions), (1) citizens, (2) individuals car-rying out entrepreneurial activities without establishing a legal entity, and (3) legal entities will be fined in the amount from 20% to 40% of the transaction amount carried out in breach of the measures (failure to conclude transactions in breach of the counter-sanctions measures is proposed to be treated on the same basis as the transaction carried out in non-compliance with the measures). It is also proposed to extend similar liability to officials (including company officials), but to limit it to RUB 30,000. In cases when non-compliance with the counter-sanction measures does not have monetary value (e.g., making a gift), it is proposed to impose an administrative fine on individuals in the amount from RUB 4,000 to RUB 5,000, on officials - in the amount from RUB 40,000 to RUB 50 000, and on legal entities - in the amount from RUB 800,000 to RUB 1,000,000. 2. Persons and entities that cannot be brought to administrative liability in accordance with the Draft law The annotations to the Draft law specify that the administrative liability established by this article shall not apply to Russian residents which are credit institutions and entities engaged in insurance business. The Draft law also provides several exceptions when liability shall not apply. According to the text of the Draft law, if it is adopted, it becomes effective from 01 January 2024. We would like to draw your attention to the fact that this Draft law is a very early version. Between 22 March 2023 and 11 April 2023 it will be under public discussion, with several more stages of consideration ahead, so by the final stage of consideration the Draft law may change significantly. Please kindly let us know if you have any questions about this Draft law and its impact on your business.

Dear Ladies and Gentlemen! In the course of regular updates on Russian counter-sanctions, we would like to provide you with information on Decree of the President of the Russian Federation dated March 3, 2023 No. 138 “On Additional Temporary Economic Measures Related to Circulation of Securities” (“Decree No. 138”).