Overview of Current Legislative Initiatives on the Regulation of Reverse Asset Buyouts in Russia

The issue of regulating the return of foreign investors to the Russian Federation remains a topical and actively debated subject. Below is an overview of key proposals originating from the State Duma Committee on Property, Land, and Property Relations, as well as proposed legislative amendments that aim to restrict the ability of former foreign owners to buy their assets in Russia back.

The Draft Law No. 1059849-7 (“Bill”) was introduced to the parliament in 2022 and has undergone its first discussion; however, its further substantive review is still ongoing. Currently, the text prepared for the third hearing is available, but, according to open sources, the exact date of its hearing has not yet been determined.

The overview of the latest available version of this draft law, with a focus on the return of foreign investors to Russia, is presented below:

Refusal of the Acquirer to Perform the Obligation to Transfer Assets to a Foreign Investor

The Bill provides that the acquirer1Russian Federation, Russian legal entities or citizens, in favor of whom a foreign investor previously transferred assets, has the right to unilaterally refuse to fulfill the obligation to transfer assets to the foreign investor under the following conditions:

• The foreign investor is a person associated with a foreign state undertaking unfriendly actions against Russia;

• The agreement for the transfer of shares/interest involved a sale below market value and granted the seller the right to purchase these assets under predefined conditions over a period of three or more years;

• More than two years have passed since the conclusion of the share/interest transfer agreement and any related agreements (options, etc.);

• The Russian legal entity properly fulfills its obligations toward employees (including former ones) and creditors.

Compensation in the Event of Refusal to Exercise the Buyback Right

The Bill envisages that the foreign investor can, no later than one year after the refusal, demand compensation due to the termination of the buyback right. This indicates a notification procedure, though the mechanisms for seeking compensation (judicial proceedings, negotiations, etc.) and the method for determining its amount are not yet detailed.

According to the Bill, the acquirer may require a proportional reduction or denial of compensation if the foreign investor’s transfer of assets involved unfavorable conditions, such as:

• The refusal to exercise rights and/or the bona fide performance of shareholder duties in the Russian legal entity;

• The emergence of threats of such refusal;

• Obstructions to management of the Russian legal entity or to conducting normal business operations, which could lead to cessation, suspension, liquidation, or bankruptcy.

Prohibition on Foreign Investor’s Right to Buy Back Assets

Furthermore, the relevant federal executive authority responsible for regulation in the sector where the Russian legal entity operates may impose a ban on the foreign investor’s exercise of the buyback right if the Russian entity exerts significant influence on Russia’s socio-economic development or under specific circumstances determined by the authority — provided certain conditions for unilateral asset transfer refusal are met.

The practical effect of such a ban is that compensation must be paid to the foreign investor, making the consequences of the acquirer’s refusal to transfer assets and the prohibition itself similar.

In addition to initiatives regulating the return of foreign investors to the Russian economy, changes have been proposed in other sectors of legislation. Notably, these primarily concern the regulation of public-private partnerships (PPP) and activities of economically significant organizations (ESOs) in Russia.

It is expected that mechanisms and procedures for determining compensation in cases where buyback cannot be implemented will be further developed and formalized at the legislative level in the future. An essential aspect for investors is conducting retrospective analyses of their activities, assessing current market conditions, and understanding the return procedures, which will help in evaluating prospects and formulating strategic decisions related to potential re-entry into the Russian market.

We will continue to monitor the status of these initiatives and keep you informed of any developments and updates in this area.

Russian Federation, Russian legal entities or citizens