New Russian Presidential Decree Further Restricts Sales of Certain Russian Companies

Key Takeaways

• A new Presidential Decree has increased the level of difficulty of obtaining approval for the sale of assets in Russia, particularly where those assets are in energy, natural resources, banking and other strategic sectors.
• Investors from certain “unfriendly” countries seeking to sell their assets in Russia will need to consider whether the sale of such assets would be covered by the Decree, and, if so, be prepared to seek approval of the sale directly from the Russian President.
• The process for approval is not yet clear; a list of companies affected in the banking and oil and gas sectors should be provided by the Russian Government by August 15, 2022.

On Friday August 5, 2022, President Vladimir Putin signed Presidential Decree No. 520, which sets out further prohibitions and restrictions on the sale of certain Russian companies, directly or indirectly, in addition to existing measures adopted earlier this year. 

Under the Decree, transactions resulting in the establishment, change, termination or encumbrance (directly or indirectly) of rights with respect to securities of certain Russian legal entities; shares (participatory interests) in the charter capital of Russian legal entities; participatory interests; rights under production sharing agreements; joint activity agreements, or other agreements, on the basis of which investment projects are implemented in Russia, are prohibited if the assets ("Assets") (defined below) are owned by foreign persons connected with “unfriendly” countries or persons who are under the control of such foreign persons (the list of “unfriendly” countries includes the U.S., EU member states, UK, Canada, Japan, etc.) (“Foreign Persons of Unfriendly Countries”).

In particular, sale of the following types of assets will be disallowed, absent special authorization from the Russian President: 

• Shares in Russian strategic joint stock companies included on the list set out by Presidential Decree No. 1009, dated August 4, 2004 (“Strategic JSC”) (this Decree includes mainly state-owned joint stock companies operating in the arms industry, the oil and gas and precious metal mining sectors);
• Shares or participatory interests in Russian joint stock companies/limited liability companies having a Strategic JSC among their shareholders or participants or as controlling persons;
• Participatory interests, rights and obligations owned by the participants under the Production Sharing Agreement for the “Sakhalin-1” Project and under the Agreement on the Development and Production of Oil at the Kharyaginsky Field;
• Shares or participatory interests in Russian joint stock companies or limited liability companies which:

1. Produce equipment for the fuel and energy complex;
2. Render services on maintenance and repair of equipment for the fuel and energy complex;
3. Produce and supply thermal and/or electric power; or
4. Carry out oil refining and refining of oil-related products (the list of such companies should be prepared by the Russian Government by August 15, 2022 and approved by the President).

• Shares or participatory interests in Russian credit organizations, including banks (the list of such credit organizations should be prepared by the Russian Government and Central Bank by August 15, 2022, and approved by the President);
• Shares or participatory interests in Russian joint stock companies or limited liability companies which are users of:

1. Subsoil plots located in Russia and containing deposits of hydrocarbon raw materials (with recoverable reserves of at least 20 million tons of oil, at least 20 billion cubic meters of natural gas or at least 35 million tons of coal), uranium, pure quartz raw materials, rare earth metals of the yttrium group, nickel, cobalt, tantalum, niobium, beryllium, copper);
2. Subsoil plots located in Russia, and which are primary diamond deposits, primary (ore) deposits of gold, lithium, platinum group metals; or
3. Subsoil plots of inland sea waters, the territorial sea and the continental shelf of Russia.

(The assets listed in the above bullet points hereinafter referred to as “Assets”).

In addition to setting out the new prohibitions, the Decree states that:

1. Any transaction executed in violation of the above prohibition shall be considered null and void;
2. Any transaction falling under the above prohibition may be executed only upon receipt of a special authorization from the Russian President (however, the procedure for obtaining such permission is not clear at this time); and
3. The above prohibition is effective as of August 5, 2022 until December 31, 2022 (the Decree states that the term of the prohibition may be extended).

The Decree follows the implementation of restrictions adopted under Presidential Decree No. 81, dated March 1, 2022 which provided that certain transactions involving Foreign Persons of Unfriendly Countries and Russian residents require prior approval of the Government Commission for Control over Foreign Investment in the Russian Federation (“Government Commission”). In particular, since March 2, 2022, the following transactions have required approval of the Government Commission:

• Providing loans by Russian residents to Foreign Persons of Unfriendly Countries;
• Any transactions between Russian residents and Foreign Persons of Unfriendly Countries which would give rise to a property right to securities (including shares) and real estate;
• Any transactions between Russian residents and foreign persons (who are not Foreign Persons of Unfriendly Countries) with respect to securities (including shares) and real estate which such foreign persons bought/received from Foreign Persons of Unfriendly Countries after February 22, 2022.

Unlike these previous restrictions, the new Decree covers transactions involving indirect transfer of shares in certain Russian companies (e.g. through acquiring shares in a foreign holding company). It also makes clear that direct and indirect acquisition of participatory interests would also be covered by the Decree, which is not the case with respect to Decree No. 81.  

Thus it will now be necessary to consider the additional implications of Decree No. 520 when structuring certain transactions involving Russian Assets (whether onshore or offshore). According to Russian media, the new Decree has already led to the suspension of previously announced transactions (i.e. the sale of the Russian assets of Enel, an Italian multinational manufacturer and distributor of electricity and gas and the sale of the Russian assets of Fortum, a Finnish state-owned energy company). 

Further clarifications with respect to the Decree, in particular with respect to the list of credit organizations and companies in the fuel and energy complex covered by the Decree, will likely be made in the coming weeks. We will keep you updated. 

For further information on this new Decree, and how you may be impacted, please reach out to your usual contact at Dechert.   

The authors would like to thank Akop Tovmasyan for his contributions to this OnPoint.