Countersanctions: Russia is preparing a new statute that will allow the confiscation of foreign assets

We would like to draw your attention to the development of a legislative act that will regulate confiscation of foreign property in Russia.

Recently, the Ministry of Justice of the Russian Federation has prepared a legislative Bill on Confiscation of Western Assets in Russia (“Bill”) setting forth the procedure for compensation of the damage caused to the Russian Federation or the Central Bank of the Russian Federation (“Bank of Russia”) by other countries. According to the latest news, the Bill has been approved in principle by the Bank of Russia, the Ministry of Foreign Affairs of the Russian Federation and the Ministry of Economy and Development of the Russian Federation.

The Bill has been developed following the approach set forth in Decree No. 442 of the President of the Russian Federation dated May 23, 2024 “On Special Procedure for Compensation of Damage Caused to the Russian Federation and the Bank of Russia by “Unfriendly” Actions of the United States of America” (“Decree No. 442”). The Bill is expected to use a similar procedure for the confiscation of the assets of persons from “unfriendly” countries.

Even though the Bill has not been made public yet, it is possible to predict even at this stage the changes it will bring to the current set of Russian countersanctions. Please find below our general overview:

1. Background

The Minister of Finance of the Russian Federation, Mr. Anton Siluanov, noted that the sanctions imposed by the US and other Western countries have led to inter alia the freezing of a part of the gold and foreign exchange reserves of the Bank of Russia. Particularly, as of March 2022, about USD 300,000,000,000 (three hundred billion) worth of Russian sovereign assets were kept frozen.

Moreover, in April 2024, the US President signed into law the Rebuilding of the Economic Prosperity and Opportunity for Ukrainians Act (REPO for Ukrainians Act) allowing the seizure of Russia's sovereign assets under the jurisdiction of the US (including assets of the Bank of Russia). The REPO Act provides that a decision on such a seizure of Russian sovereign assets is not subject to any judicial review (with certain limited exceptions).

In August 2024, the income generated by Russia's frozen reserves was for the first time delivered to Ukraine. The rhetoric dominating in the EU political circles seems to condone the expropriation of income that has “unexpectedly” been generated by the frozen Russia sovereign assets because such “unexpected” income does not have the status of sovereign assets. That step was, however, not accepted by the Russian authorities who decided to take retaliatory action in response to the freeze of its sovereign asset and the expropriation of the income generated by these assets and to provide for similar confiscation options with respect to foreign assets within Russian jurisdiction.

The confiscation of foreign assets would be a new measure in the Russian legislation. Up until now there were only restrictions on the use of foreign-owned assets in Russia. For instance, monetary funds and securities of foreign investors from “unfriendly” countries were technically blocked in “C”-type bank accounts and “C”-type securities accounts with rigid limitations on the use of such assets1. Also, certain prohibitions were introduced on the alienation by foreign persons of certain types of assets without an approval from the Russian authorities (the Bank of Russia, the Sub-commission of the Government Commission for Control over Foreign Investments in the Russian Federation and other authorities).

Finally, external management was introduced over some assets of persons from “unfriendly” countries. The shares of such foreign shareholders of Russian companies were temporarily transferred to the Federal Agency for State Property Management (Rosimushchestvo) for management or transferred to other Russian persons specifically nominated by the relevant Presidential Decrees.

2. Main concepts of the Bill

The Bill has not been made publicly available yet. It is still being discussed and it may take a while before the Government finalizes it and submits it to the Russian Legislative Assembly. Judging from the announcements in the Russian press, the Bill will most likely follow the approach of Decree No. 442 expanding its scope. Therefore, it may be useful to offer you below a summary of the terms of Decree No. 442.

Decree No. 442 sets forth the procedure under which Russian persons may assert to a Russian court that they suffered damages from an unlawful expropriation of their assets by the US government authorities or courts. Having verified the validity of the damage claim, the court submits a request for compensation to the Government Commission for Control of Foreign Investment in the Russian Federation (“Commission”)2 from property of the US and US persons that may be used to compensate such damages incurred by the respective Russian person who initiated the proceedings. Assets that may be used for this include movable and immovable property in Russia of the US or of US persons (companies and citizens), securities, shares and other property rights of such persons in Russia.

The amount of damage incurred by the Russian person due for compensation is determined by the court based on the principle of proportionality.

The Russian authorities have decided that the legal mechanism of Decree No. 442 may also be used against other “unfriendly” countries and their persons if they unlawfully deprive the Russian Federation or its institutions of their sovereign property.

Based on information published in the Russian press, the Bill provides that a claim for the compensation of such damages must be filed with the Arbitrazh (Commercial) Court of Moscow Region. Only the Russian Federation, the Bank of Russia, certain Russian federal executive bodies determined by the Government of the Russian Federation and the Prosecutor General's Office have standing to file such claims against a foreign country as a defendant. If the list of property that will be used to compensate the alleged damages includes property of a foreign individual or legal entity, such individual or legal entity may join the proceedings as co-defendants.

According to the Bill, if the court renders a decision in favor of the plaintiff it will come into force immediately and will become enforceable right away.

3. Consequences of adoption of the Bill

The Governmental Legislative Commission appears determined to proceed at a quick pace with the consideration of the Bill and to finalize it in the coming weeks. At the same time, the Russian authorities understand that the adoption of such a Bill into law will inevitably trigger reciprocal measures by the Western countries affected by the Bill.

It is clear that the Bill will be an important legislative act for the Russian Federation. We will, therefore, continue to closely monitor all information that is made available about it in the press and will continue to periodically summarize it and circulate it to you in our newsletters.

Funds credited to such bank accounts can only be used, for instance, for payment of taxes, duties, fees and other mandatory payments payable to the budget; transfers for the purchase of federal loan bonds; payment of commissions to the authorized bank servicing the account etc.

The Government Commission for Control of Foreign Investments in the Russian Federation (i.e. the existing Government Commission responsible for FDI, strategic and countersanction filings).