Leaving Russia: the snowballing price of exits

In our earlier post, we outlined how the Russian government has been scrutinising foreign exits from Russia in 2022-2023, what regulatory clearances and hurdles it has introduced/updated to assess and regulate this ongoing process, and what requirements it imposes when it decides to allow those departures.

In July 2023, the Sub-Commission of the Governmental Commission for Control over Foreign Investments (the Sub-Commission), which reviews and approves the exits, further specified in its Protocol 171/5 the conditions it intends to apply to transactions seeking its clearance. This has now been further updated by Protocol 193/4 released on 4 October 2023.

Retained 50% discount and increased 15% “voluntary” contribution to the Russian budget

In summary, the Sub-Commission will now consider approving an exit (or similar transactions involving Russian entities and their assets) only if (cumulatively):

1. an independent valuation of the market value of the Russian entity/assets is obtained and provided with the application for clearance. This valuation needs to be: (a) prepared by a Russian appraiser from an approved list, and (b) verified by a self-regulating organisation of appraisers (SROs) from an approved list;
2. the Russian entity/assets are sold with a discount of at least 50% from their appraised market value as per the above valuation;
3. a “voluntary” contribution in the amount of at least 15% of the total appraised market value of the Russian entity/assets must be paid to the Russian state budget within one month of closing of the transaction; 
4. key performance indicators (KPIs) are imposed on the acquirer and/or the Russian entity to include, among others, maintaining the technical capabilities of the Russian entity, continuing its main business activity(ies), retaining the size of its current workforce, continued performance of existing contractual obligations, and appointing an executive authority (e.g. the industrial ministry) to monitor performance of these KPIs;
5. any associated option agreements must provide for the repurchase of the Russian entity/assets at market value as at the time of the option exercise, at a profit for the then Russian owner of the relevant entity/assets, with a limited duration of validity of the clearance for the exercise of such option agreements (no more than 2 years is recommended); and
6. all other Russian regulatory clearances have been received prior to the Sub-Commission’s approval.

Additional requirements apply to transactions in which the Russian entity is a public company, and where cross-border payments are involved.

This guidance in Protocol 171/5, as amended by Protocol 193/4, has now replaced previous guidance in Protocols 118/1 and 143/4. The guidance remains silent on any timeframes for the clearance process, retaining regulatory discretion and maintaining uncertainty of process and outcome for the parties.

As before, these rules are likely to be subject to further tweaks/changes in the coming months, and any advance warning of impending amendments remains unlikely.

Strategically important entities – nationalisation embedded into the law

Earlier this year the regime regulating foreign investment in strategically important entities was updated with a somewhat anticipated - but nevertheless quite aggressive - clause. Where a transaction in respect of a Russian strategically important entity or its assets was intentionally completed without a relevant clearance, and the law provides for invalidation of the transaction as a consequence, the law now allows the Russian court to transfer the relevant shares or assets to the Russian Federation rather than the previous owner along with any profits made from the uncleared transaction.

Although the law mandates the court to identify and consider any associated defense and security risks to the Russian state before this measure, the concepts of defense and security risks in the foreign investment regime are traditionally broad - often merging genuine national security concerns with commercial interests of the state and affiliated decision makers. 

It remains to be seen whether a similar measure will be introduced for transactions involving non-strategic Russian entities which require clearance from the Sub-Commission or other Russian regulators outside of the foreign investment regime.