Return of foreign business to Russia

The overall political situation surrounding Russia remains unstable. However, current peace talks have spurred discussions about the potential return of foreign businesses following their exodus in 2022. While some companies – including certain South Korean car manufacturers – have already announced plans to re-enter the market, it is still too early to draw conclusions or assert that a broader trend is emerging.

Judging from a recent trip to Japan and conversations with clients and contacts from other Asian jurisdictions, interest is noteworthy in understanding the legal aspects of a potential “what if” return to the Russian market, applicable procedures, and the position of the Russian authorities.

Scrutiny of ‘unfriendly’

On various occasions, high-ranking Russian officials have stated that the return of foreign businesses should be subject to special scrutiny, with priority given to local Russian market players that have filled the niches left by departing foreign companies.

Russian President Vladimir Putin recently initiated the development of special regulations to govern the approval of transactions aimed at the return of companies from “unfriendly” jurisdictions. These include the establishment of a special register of foreign companies that have either exited or “substantially reduced” their operations in Russia since February 2022.

Decisions on approving such transactions will most likely be made by the same government commission that has up to now decided, on a case-by-case basis, which companies are allowed to leave.

These decisions will consider:

• • The company’s conduct in Russia after 2022;
  • The need for the company to undertake financial obligations and provide assurances of good faith and responsible business conduct on its return; and
  • Priority of Russian companies that have occupied business sectors vacated by foreign entities.

In addition, the new regulations are expected to address call options that many foreign companies secured when entering into exit transactions with Russian buyers of their former assets.

While new regulations are anticipated in the near future, the authors do not expect them to differ significantly in substance from the existing Russian “counter-sanctions” framework, which comprises presidential decrees and government resolutions.

That framework is already broad enough to cover virtually any transaction involving “unfriendly” foreign companies, including the establishment of Russian entities and acquisition of shares.

Therefore, if an “unfriendly” foreign company wishes to re-establish its presence in Russia – whether through a subsidiary or a joint venture with a local partner – it will require a special permit from the government commission. Subjectively, the joint venture option may be preferred by the government commission, especially in sectors where Russian companies have developed their operations since 2022. If such a foreign company – or its subsidiary that continued limited operations in Russia – wants to acquire or repurchase production facilities from a Russian seller, this will require commission approval.

Detailing business plan

It is likely that applications for such approval will need to include and defend a detailed business plan before the government commission, outlining, among other things:

• • The volume of planned investments;
  • The transfer of technology and know-how;
  • The level of production output and localisation;
  • Financial guarantees for fulfilling obligations; and
  • Equity distribution with the Russian partner (if applicable), along with plans for profit distribution and reinvestment.

Following a review by the government commission, and by analogy with current procedure for approving dividend payments abroad, key elements of the business plan will likely be formalised as binding legal obligations for the returning foreign company. Companies that have scaled down but continued operations – including so-called “dormant” entities (statistically, the majority of Western businesses in Russia fall into this category) – should not formally require a special permit to resume full-scale activities. However, acquiring new immovable assets for business expansion or repurchasing previously sold production facilities may necessitate such approval.

Takeaway

The key question will be how the new Russian regulations define the criteria for when a company is deemed to have “substantially reduced” its activities. This will determine which companies are included in the proposed register and which are not. As of now, these criteria have yet to be defined. Overall, the authors look forward to development of the new regulations, which will confirm and clarify these outlined observations and conclusions.

Georgy Daneliya is a counsel, advocate and head of Asian initiative and Elena Andrianova is a senior associate at SL Legal

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