New Russian Law Takes Corporate Hostages

Starting Sept. 4, when a new Russian law comes into effect, investors from so-called unfriendly states risk having their Russian assets seized and given to their Russian co-owners. The legislation is guaranteed to frighten Western companies active in Russia—but they were already frightened. Instead, the legislation is a signal to Western governments that the Kremlin can punish Western companies still in Russia and there’s nothing their governments can do about it—unless they bend the knee to Moscow.

On Aug. 4, Russian President Vladimir Putin signed the new law, boringly titled “On the Specifics of Regulating Corporate Relations in Business Entities That Are Economically Significant Organizations.” Amid all the other news from Russia, including Yevgeny Prigozhin’s death and the increasing number of mysterious drones targeting Moscow, the law flew under most people’s radar. But Russia’s remaining international businesses paid attention because it was directed against them.

The law “permits the exclusion of foreign holding companies associated with ‘unfriendly’ countries from holding corporate rights in significant Russian businesses. Russian indirect shareholders or beneficial owners of those businesses will be able to apply to a Russian court to exclude foreign investors from the chain of ownership, transferring the foreign shareholdings to them,” Robert Bradshaw and Anna Korshunova of the Swiss law firm Lalive wrote a few days after the law’s signing.

Once the law enters into force, that will be the reality for investors from countries that have sanctioned Russia over the Ukraine war, including Australia, Britain (including British Overseas Territories and Crown Dependencies), Canada, European Union member states, Japan, Singapore, South Korea, Switzerland, the United States, and Taiwan. If your fellow shareholders in a Russian entity want to get rid of you or simply want your stake in the company, the new law allows them to apply to the government for a legally sanctioned theft. All they need to do is file an application with a designated court in Moscow stating that you’re undermining the company’s operations. The court then places you on a de facto blacklist, which allows your co-owner to take over your stake.

“[N]on-Russian persons are not allowed to do the same,” Morgan Lewis lawyers Vasilisa Strizh and Valentina Semenikhina noted in an explainer. And the Western owners won’t just lose ownership: Once they’re added to the court’s list, they are not allowed to sell the stake to another entity, they lose their voting rights, and they are even banned from participating in shareholder meetings. Although the law concerns only “economically significant organizations,” the bar for that is set rather low: The law covers Western outfits with a stake of more than 50 percent in companies with annual revenues of at least 75 billion rubles (about $782 million) or 4,000 or more employees.

The law is an invitation for Russian minority owners to easily get rid of Western majority owners and be rewarded with their stake. And the legislation is not the only commercial shot the Kremlin has fired at Western companies in recent months. In April, Putin signed a decree that allowed the Russian government to seize the Russian operations of the German energy firm Uniper and Fortum, the state-owned Finnish energy company.

Three months later, the Kremlin seized the Russian operations of the French yogurt-maker Danone and the Danish beer-maker Carlsberg, too. When Western governments banned Western-owned aircraft from being used by Russian airlines, Russia seized all 400 of them. In an astonishing fashion, the Kremlin has also increased the hurdles for Western companies seeking to leave. First, the paperwork involved grew. Then departing companies had to make a mandatory donation of 10 percent of the sale price to the Russian Treasury. And all along, the government had to approve the sales—which forced companies to stay longer than they wanted.

“Nobody knows how I can make it work,” Philip Morris CEO Jacek Olczak exasperatedly told the Financial Times in February. Danone and Carlsberg, too, were trying to leave—and found their assets seized. It’s as if Putin takes pleasure in making Western business owners’ lives so hard that they try to leave—and then enjoys thwarting those efforts, too. No wonder Russia tops the current ranking of the countries where companies suffer the biggest politically linked losses. “This is beginning to look like what the Bolsheviks did,” said René Nyberg, a former Finnish ambassador to Russia who subsequently advised Finnish companies on Russia. “It’s a step towards nationalization: You force companies to sell their assets at a low price.” Or none at all.

Last month, the Russian government floated a proposal: Western companies in Russia would be able to get their assets back in exchange for Russian outfits getting their frozen assets back from Western governments. With that, the Kremlin made clear what its hounding of Western companies is about: It knows that it has made Russia extraordinarily unattractive to Western companies, so it’s using their misery to signal to Western governments that unless they ease sanctions, their companies in Russia can expect even more misery and losses. The Kremlin has pioneered corporate hostage diplomacy.

That matters because just as globalization brought a world where countless Westerners could live in countries outside the safe confines of Western Europe and North America (as well as Japan, South Korea, Australia, and New Zealand), it also opened new, exciting, profitable, and less stable markets to lots of businesses.

A 2011 press release by BP offers a snapshot of that world. The British energy giant was announcing a new strategic alliance with Russia’s state-owned oil company Rosneft, through which the two companies were going to drill for oil on Russia’s Arctic continental shelf. “Global capital and Russian companies are clearly ready to invest in world class projects in Russia; and Russian companies are quickly emerging at the forefront of the global energy industry,” Russian Deputy Prime Minister Igor Sechin declared in the press release, while BP CEO Bob Dudley explained that “this unique agreement underlines our long-term, strategic and deepening links with the world’s largest hydrocarbon-producing nation.” In 2021, 48,216 foreign companies were operating in Russia.

Three days after the invasion of Ukraine, BP announced its departure from Russia—at a loss of $25 billion. And because the oil and gas behemoth acted quickly, it at least managed to leave. Today, lots of CEOs face Olczak’s predicament—and starting Sept. 4, many other companies will face a similar situation.

When Soviet leader Mikhail Gorbachev visited East Germany for its 40th-birthday celebrations in 1989, a reporter asked him whether he thought the situation in the country was dangerous. “I believe dangers only wait for those who don’t react to life,” Gorbachev responded. Many Western companies remained in Russia after its invasion of Ukraine because they wanted to wrap things up or because they wanted to find a suitable buyer or new jobs for their staff. They didn’t react to life. Starting Sept. 4, many more of them will be lashed by the Kremlin’s whip. The Kremlin is certain to think up new kinds of lashes.

But while matters are grim for Western companies stuck in Russia and will become grimmer still, in the end Russia may lose. “The Russians have to realize that this will have consequences for many years,” Nyberg said. “The war will end, but the idea that anyone will invest in Russia after this? Western companies are going to invest in Ukraine.”