As foreign businesses exit Russia - whether leaving completely or suspending /scaling back their activities in the country - the Russian government continues to assess and regulate the means and impact of such exits.

The government has introduced and maintains a list of foreign countries and territories which are regarded as unfriendly by having adopted or adhered to measures aimed against Russia or its citizens (colloquially referred to as ‘hostile foreign nations’), which include the US, UK, all EU countries, Japan, Canada and others, and distinguishes these in subsequent regulations from those that are not on the list (the ‘friendly foreign nations’) such as China, India and others.

New clearances and new clearance authorities

The past 10 months have brought a flurry of new clearance requirements for the sale (and acquisition) of Russian entities (affecting direct and indirect share (participation interest) deals, asset deals, allocation of rights or encumbrance of rights, etc.). The clearances were primarily introduced by Presidential Decrees, with not much warning, vague wording and little by way of commentary. Failure to obtain the clearances is likely to render a transaction null and void under Russian law, though court practice is yet to be seen.

While the matrix of clearances introduced in 2022 includes multiple variables and continues to evolve, the key ones to highlight are:

• Consent of the newly formed Sub-Commission

This is required for transactions in respect of Russian entities (all Russian LLCs and certain Russian JSCs), and where one of the parties to the transaction (or in some cases specifically the seller) is - or is controlled by - a hostile foreign nation person (defined broadly to include any legal entity which is registered in, carries out its activities mostly in or derives most of its profit from a hostile foreign nation or is a citizen of a hostile foreign nation).

The decision is taken by a Sub-Commission of the Governmental Commission for Control over Foreign Investments specifically formed to review transactions regulated by the new Presidential Decrees.

• Permit of the President of Russia

This is required for transactions in respect of Russian entities active in the fuel and energy industry (and included in relevant list), engaged in activities involving specific subsoil resources or on land plots containing such, credit institutions (included in relevant list), as well as strategic enterprises (as listed in pre-existing Decree 1009), where the sellers are (or are controlled by) hostile foreign nation persons.

Such transactions are currently prohibited entirely until the end of 2023 unless a Permit of the Russian President has been obtained. A handful of transaction-specific permits has been issued to date, but the procedure for obtaining these permits remains unregulated - which complicates matters further for those planning their exit from these sectors.

Transactions in most cases are caught irrespective of the size of the stake being sold, of any financial thresholds or any other qualifiers.

The above clearances are required in addition to any merger control, foreign (strategic) investment, and other clearances which would usually have been required in Russia for such a transaction, along with other payment-related clearances which have also been introduced since March 2022 (for purchase price payments, currency transfers, dividend pay-outs, etc.). This is leading to many exits from Russia requiring multiple clearances, with the associated burden on companies in terms of time and expense.

50% discount and ‘voluntary’ contribution to the Russian budget

On 30 December 2022 the Sub-Commission also announced it had resolved to further consider approving transactions if they meet the following criteria:

• an independent valuation of the market value of the assets is available,
• assets (i.e., the shares (interests) and other securities in Russian entities) are sold with at least a 50% discount from the market value indicated in the valuation,
• key performance indicators are set for the new owners (shareholders), and
• payment of purchase price is made in instalments over 1-2 years and/or subject to an obligation of a ‘voluntary’ contribution to the state budget in the amount of at least 10% of the deal value.

These four (cumulative) requirements raised a whole host of questions from those contemplating further transactions, where they had not completed their exits before the end of the year. It is clear those transactions now need to be adjusted to satisfy the above criteria or risk being prohibited by the Sub-Commission, though the official wording does suggest the Sub-Commission is not inescapably bound by these requirements and exceptions are possible in some cases.

Strategically important entities – a well-oiled machine

While the regime regulating foreign investment in strategically important entities is well established and has remained broadly unaffected in the past 10 months, it has been supplemented with additional requirements relevant for existing ownership over a Russian entity. The regulators now require applications for clearance or notifications to be submitted if a Russian entity becomes strategically important as a result of obtaining certain licences (permits), or if a Russian entity comes under foreign control as a result of the current Russian shareholders (owners) obtaining foreign citizenship, permanent foreign residence, or losing their Russian citizenship.

What to expect next?

We expect the regime regulating foreign investment exits will continue to evolve and adjust to the economic and political circumstances over the coming months. Predictions as to how it will develop are obviously fraught with risk, but a relaxation of the regime is almost certainly not on the cards for the time being.

There is ongoing speculation about proposals to allow the Russian government to take over companies formerly owned by exiting foreigners or to allow Russian courts to identify buyers for such assets - but these plans have not yet progressed beyond the earliest stages of the formal legislative process.