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The following overview presents an analysis of financial and capital market-related defensive measures in the Russian Federation. These measures have been introduced through a series of decrees and ukazes by the Russian President and other relevant institutions in response to economic and geopolitical developments.
The first defensive measure, issued as Ukaz Number 79 on February 28, 2022, decreed the retroactive mandatory assignment of 80% of foreign exchange earnings from cross-border delivery and service agreements initiated by Russian contracting parties from January 1, 2022. A later decree (Ukaz Number 126, dated March 18, 2022) transferred the authority to determine the forced foreign exchange conversion to the Government Commission for Monitoring Foreign Investments in the Russian Federation (“Government Commission”). The current rate is set at 0%.
Simultaneously, initial restrictions were imposed on Russian residents. These prohibited conducting transfers in foreign currency to their own foreign accounts or making transfers without opening a bank account, which would be processed by foreign payment service providers. At the same time, granting foreign currency loans to non-resident natural or legal persons in Russia was prohibited. The above-mentioned restrictions were gradually eased through further decrees and ukazes by the Russian President, including Numbers 95 dated March 5, 2022, 126 dated March 18, 2022, 172 dated March 31, 2022, and 254 dated May 4, 2022. Currently, residents are allowed to make transfers to domestic or foreign accounts, but within prescribed limits. These limits have been gradually increased, and since July 1, 2022, stand at $1 million per month for conventional transfers and $10,000 for electronic payment services without involving a bank account.
Until September 30, 2023, transferring funds from Russia abroad by non-residents to countries with hostile relationships is prohibited. An exception is made only for wages paid for activities within Russia. The list of hostile states is compiled, regularly updated, and adjusted by the Russian government (see Regulation of the Government of the Russian Federation dated March 5, 2022, Number 430-r, “On the Confirmation of the List of Foreign States and Territories Taking Hostile Actions Against the Russian Federation, Russian Legal and Natural Persons, and Individuals”). Currently, this list includes all EU member states and 22 other countries.
According to Article 3a) of Ukaz Number 79 dated February 28, 2022, granting foreign currency loans by residents to non-residents is prohibited.
According to Decree Number 126 dated March 18, 2022, until December 31, 2023, approval from the Russian Central Bank is required for:
the acquisition of shares, deposits, or interests in the assets of a foreign legal entity, as well as the contribution of capital to non-residents to fulfill partnership agreements (joint venture agreements).
Since June 1, 2022, transactions in Russian rubles or currencies of friendly states, or in currencies of hostile states, as long as the transaction value does not exceed the equivalent of 15 million rubles at the official exchange rate of the Central Bank of the Russian Federation on the transaction day, no longer require approval (according to Decree of the President Number 81 dated March 1, 2022).
The provision of loans (in rubles) and trading in securities and real estate between residents and individuals from hostile states require the approval of the Government Commission, with the exception of transactions involving the Russian Central Bank and Russian subsidiaries with shareholders from hostile states.
However, Russian residents are now allowed to engage in real estate transactions with partners from hostile countries. Additionally, foreign real estate transactions are not subject to the above-mentioned restrictions.
The provisions of Decree Number 95 include restrictions on payments related to loans, credits, and other financial instruments to recipients from states considered hostile. This also includes dividend distributions from Russian joint-stock companies under the term “other financial instruments.”
Through an additional ukaz, specifically Number 254 dated May 4, 2022, the regulations of Decree Number 95 were expanded to include Russian limited liability companies. As a result, the payout of dividends to foreign shareholders of Russian limited liability companies and joint-stock companies is now limited. Both types of companies can fulfill their obligations to foreign shareholders from states considered hostile only by transferring the corresponding amount in Russian rubles to a newly opened “S-type” account at a Russian bank. This regulation comes into effect if the amount to be paid exceeds 10 million rubles per month or if there is no approval from the Government Commission.
For Government Commission approval of dividend payouts exceeding 10 million rubles per month, the following requirements must be demonstrated or met: The dividend distribution must not exceed 50% of the net profit of the Russian company from the previous year. The foreign shareholder must continue their engagement in Russia. Assessments from other federal institutions and the Central Bank may be sought to evaluate the company’s significance and the impact of its activities on Russia’s technological and productive independence, as well as its social and economic development. Additionally, quarterly performance indicators for the company may be established.
According to Ukaz Number 322, dated May 27, 2022, the Russian President imposes certain obligations on Russian licensees. These obligations pertain to the settlement of payments from license agreements in rubles in a dedicated account if the licensor is from states considered hostile or is controlled by such companies unless the license agreements are implemented in the traditional manner.
These payment restrictions also apply when the licensor has publicly endorsed sanctions against Russia after February 23, 2022, prohibited the use of its intellectual property rights in Russia without clear economic justification, ceased or significantly reduced the supply or production of goods or services in Russia without objective economic justification, criticized the actions of Russian armed forces or authorities abroad, or disseminated false information about the actions of Russian armed forces or authorities publicly or made offensive statements about Russian authorities on the internet.
Furthermore, the above-mentioned restrictions do not apply, among other things, to payments of user fees in the context of importing drugs, medical devices, industrial and agricultural products, and food to Russia or their production in the country. Similarly unaffected are the provision of communication services (including data transfer and internet access) and data transmission services, as well as the production and/or use of software for computer systems, databases, and information systems in Russia.
In the context of this investigation, the restrictive provisions for the repayment of loans by Russian borrowers to foreign lenders based in states classified as hostile are outlined in accordance with Clause 1ff of Ukaz Number 95, issued by the Russian President on March 5, 2022.
Restrictions have been introduced that affect the repayment of loans to foreign lenders residing in states considered hostile, by Russian residents. Liabilities exceeding the amount of 10 million rubles per month are subject to two fulfillment options: either approval from the government commission is required, or repayment is made by transferring funds to a special account, a so-called “S-account,” at a Russian financial institution. Once the payment is received in this account, taking into account the official exchange rate of the Russian Central Bank on the day of the transaction, the loan obligation is considered fulfilled. During this phase, the foreign creditor has the option to request the disbursement of funds from the Russian financial institution. No incidents have been reported so far where such disbursements were made to foreign creditors. This procedure also applies to loans where the foreign lender has assigned their claims to a third party, regardless of whether it’s a Russian resident, provided that such transfer occurred after March 1, 2022. The above regulations do not apply to Russian legal or natural persons based in states considered hostile or to entities controlled by Russian individuals.
The wording indicates that the aforementioned restriction exclusively targets loans from foreign lenders and has no impact on other cross-border trade and service agreements. However, obligations related to the issuance of foreign securities (such as Eurobonds) by Russian legal entities are also affected by these measures.
In a significant measure, the Russian President introduced import and export bans on specific goods through Decree No. 100 dated March 8, 2022. This measure was subsequently refined by three ordinances dated March 10, 2022, with export restrictions issued and further adjusted by additional government ordinances. These regulations remain in effect until December 31, 2023.
Government Ordinance No. 311 dated March 9, 2022, defines restrictions on the export of various categories of goods, including medical and pharmaceutical products, optical and electronic devices, industrial and household items, as well as various types of manufacturing and craft materials.
Exceptions have been considered, such as for transit through Russia or for goods originating from the Russian Federation, provided a Certificate of Origin ST-1 or other approved evidence is attached, including confirmations from the Ministry of Industry and Trade of the Russian Federation. Additional exemptions apply, among others, to deliveries to countries of the Eurasian Economic Union, Abkhazia, or South Ossetia. Moreover, areas such as transit through Russia, origin from other Eurasian Economic Union member states, goods in special economic zones manufactured using foreign goods, and goods with specific export licenses from the Federal Service for Technical and Export Control, the Federal Service for Military-Technical Cooperation, the Ministry of Defense, or the Ministry of Industry and Trade of the Russian Federation are exempt from these restrictions.
The export of goods listed in Annex 2 of the government ordinance – currently limited to inert gases – requires the approval of the Chairman of the Russian Government, their Deputy, or the Minister of Industry and Trade, based on proposals from the Ministry of Industry and Trade, as stipulated in Section 1.1 of the ordinance.
Government Ordinance No. 312 allows the export of specific listed agricultural machinery, vehicles, industrial products, telecommunications equipment, and medical products to the Eurasian Economic Union only with corresponding permissions, with similar exceptions to those partially applied in Government Ordinance No. 311.
Finally, Government Ordinance No. 313 dated March 9, 2022, except for certain exceptions, prohibits the export of processed or untreated timber, wood chips, wood-based panels (Annex 2 of the ordinance), steel and metal scrap, as well as ceramics to countries classified as unfriendly according to Annex 1. The ban also applies to the export of explosive substances listed in Annex 3, firearms, cartridges, selected chemicals, helicopters, helicopter components, spare parts for other aircraft, additional aircraft equipment, and components listed in Annex 1 of the ordinance, with some specific exceptions.
As part of Decree No. 81, an approval requirement for securities transactions, including shares of Russian joint-stock companies, has already been introduced.
Decree No. 618 dated September 8, 2022, signed by President Putin, stipulates that transactions between individuals from unfriendly states and Russian individuals, between individuals from unfriendly states on both sides, or with individuals from friendly states involving shares in Russian limited liability companies (“OOO”) require approval by the government commission. This phrasing is broadly construed and thus includes repurchase agreements, liens, and potentially shareholder agreements.
The details of the approval process are defined by Government Ordinance No. 295 dated March 6, 2022, whose scope was expanded by Government Ordinance No. 1651 dated September 19, 2022, to include transactions with OOO shares under Decree No. 618.
To obtain approval, an application must be submitted to the Russian Ministry of Finance using the current template form provided by the Ministry of Finance. In addition, the involvement of the relevant specialized ministry is required. The application must cover the purpose, subject matter, content, and essential terms of the transaction subject to approval. Submission of relevant draft contracts is recommended.
The application must include the following documents and comply with the formal requirements of Government Ordinance No. 295 (including certified translations into Russian, notarized powers of attorney, foreign documents with apostille, etc.): proof of the applicant’s registration or identity of the applicant (natural person), founding documents (especially articles of incorporation) of the applicant, if a legal entity, information and evidence regarding the economically beneficial owner or controlling shareholder from an unfriendly country (shareholder list / excerpt from transparency register), and an evaluation / valuation report on the Russian company.
Approval requires an independent assessment of the market value of the assets of the Russian company. This assessment must then be confirmed by the relevant self-regulatory organization.
Approval for the sale is only granted if it occurs with a discount of at least 50% of the determined market value. There is also the possibility to set performance indicators for new shareholders regarding the target company.
Finally, a “voluntary” payment to the Russian state must be made, amounting to at least 10% of half of the appraised market value of the assets (i.e., 5% of the market value) or at least 10% of the appraised market value of the assets, if the sale occurs with a discount of more than 90% of the determined market value.
According to Decree No. 520 dated August 5, 2022 (in its current version), all transactions are prohibited until December 31, 2023, which directly or indirectly involve the creation, modification, termination, or encumbrance of property rights, the use and/or sale of securities of Russian legal entities, shares in the share capital of Russian legal entities, interests, rights, and obligations under Production Sharing Agreements, joint venture agreements, or other agreements within the framework of which investment projects are conducted. Exceptions can be granted by the Russian President, not by the government commission.
The ban extends to transactions involving:
Shares of joint-stock companies listed as strategic enterprises and strategic joint-stock companies under Decree No. 1009 dated August 4, 2004, Shares or stakes in economic entities in which the joint-stock companies mentioned in (a) are directly or indirectly involved, Interests, rights, and obligations of the parties to the Sakhalin-1 Production Sharing Agreements (oil and gas fields Chayvo, Odoptu, and Arkutun-Dagi off the coast of Sakhalin Island) and the agreement on the development and production of the Kharyaga oil field, Shares or stakes in specifically listed economic entities manufacturing equipment for the fuel and energy sector and providing maintenance and repair services for this equipment generating and supplying heat and/or electricity, refining oil and crude oil, and producing oil products, Shares and stakes in specifically listed Russian credit organizations, Shares and stakes of economic entities that are users of the following (subterranean) natural resources in Russia: Hydrocarbon deposits (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, high-purity quartz, rare earth elements of the yttrium group, nickel, cobalt, tantalum, niobium, beryllium, and copper, Diamond (ore) deposits of gold, lithium, and platinum group metals, Subterranean areas of inland waters, the coastal sea, and the continental shelf of the Russian Federation. Transactions violating the above provisions are null and void.
When conducting transactions prohibited by this decree, shares, stakes, or other interests do not confer corresponding legal rights to their holders.
The Russian government was required to submit proposals for the listing of Russian credit institutions to the President within 10 days. The President confirmed those subject to this prohibition in Decree No. 357-rp, issued on October 26, 2022.
Similarly, the Russian government was required to submit proposals for the listing of entities in the fuel and energy sector to the President within 10 days, and the President confirmed those subject to this prohibition in Decree No. 372-rp, issued on November 9, 2022.
Special regulations apply to legal relationships covered by Decree No. 416 dated June 30, 2022 (concerning the agreement on the oil and gas production of Piltun-Astokhskoye and Lunskoye dated June 22, 1994, i.e., Sakhalin II) and Federal Law No. 320-FZ dated July 14, 2022, “On Amendments to Federal Law on Privatization of State and Municipal Property.” The latter amendment concerns the transformation of branches of foreign companies in Russia into an OOO if Russian individuals are involved in the foreign company and certain other conditions are met.
