Russian Response to Western Sanctions: Navigating Measures Designed to Support the Russian Economy and Protect Russian Companies

Pillsbury Winthrop Shaw Pittman LLP

TAKEAWAYS

  • The Russian government’s response to the introduction of Western sanctions has primarily focused on efforts to support and stabilize the Russian currency and economy.
  • In certain instances, the Russian government has targeted specific industries and companies to mitigate the impact of sanctions and the suspension and termination of operations by Western companies in Russia.
  • We expect the Russian government to take further measures that will complicate the exit strategies of Western companies.

The Russian government has taken unprecedented measures in response to the expected mass exodus of Western companies from the Russian market and the introduction by Western countries of sanctions on Russia and Russian persons. When deemed necessary, the Russian measures have had a major impact on entire industries, such as the re-registering in Russia of foreign-owned aircraft. Other measures not directed specifically at Western companies have complicated the operations of Western businesses which are restructuring in Russia or exiting the market altogether. Russia has also introduced Western-style sanctions on individuals and taken other measures targeted specifically at companies and persons from “unfriendly countries” (i.e., countries that have introduced sanctions on Russia and Russian persons).

Chart: Russian Countermeasures and Potential Impact on International Business

Countermeasures Have Been Subtle and Implemented through Private Sector Action and State-Owned Businesses

In general, the apparent goal of most of these measures has been to minimize the impact on life in Russia of sanctions and a changing economy due to the war in Ukraine. Thus far, Russia has been careful not to expropriate assets in a way that could result in easy wins by Western companies in courts and arbitration outside of Russia. The Russian government seems to recognize the limits on its resources and, when practical, has put the onus on companies and banks to enact its measures. For example, when Russia recently permitted Russian companies to continue the use of foreign intellectual property rights, it required the licensees to open bank accounts for foreign licensors in Russian banks—a measure that requires minimal involvement by Russian state agencies.

In addition to official measures, Western companies have reported an increase in inspections and requests from Russian state agencies, and in certain cases Russian-owned businesses have attempted to profit from the changing situation.

Differing Treatment on Exit: Renault versus Google

The Russian government has thus far concentrated its efforts on maintaining, as much as possible, the operations of major employers. For example, Renault, which had a reported 45,000 Russian employees, sold its two factories in Russia for a reported one ruble each to a Russian state-controlled entity and the Moscow government. Russian authorities have reported that conditions were placed on the sale, including the further use of Renault’s platform and assistance from Renault in supplying parts for the future production of cars. It was reported that Renault has an option to buy back the factories for up to six years. At the recent St. Petersburg International Economic Forum, Minister of Industry and Trade Denis Manturov spoke about discussions with other foreign-owned companies about using a similar model.

Where there is a political component or the industry is not considered important, companies should not expect to receive similar treatment. For example, Google’s bank accounts were frozen by the state commercial courts, which ruled that Google illegally blocked the YouTube channel for Tsargrad, a company reportedly owned by a specially designated national. Google explained that it took this measure due to U.S. sanctions. The Russian subsidiary of Google initiated bankruptcy procedures on May 18 due to the reported inability to make payments. The Russian government has thus far not intervened to support Google employees.

It is important for any business in or exiting Russia to work closely with legal advisors across multiple jurisdictions to understand the possible impact of their actions and navigate the highly volatile legal environment in Russia.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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