Update: As Russia Again Tightens Exit Transaction Rules, Can Investors Still Exit Russian Businesses?

The Russian sub-commission has imposed more drastic conditions for exit transactions, in particular the maximum consideration that can be paid to a seller and the minimum “voluntary contribution” that must be paid to the Russian federal state budget (also known as the exit tax) in connection with the exit transaction. The sub-commission has also introduced a rule that the Russian president’s consent is required for any transaction with assets whose market value is above 50 billion rubles. Investors exiting Russia should pay close attention to these updated rules, particularly given the EU Council’s latest sanctions package on Russia.

In response to Western businesses exiting their Russian investments post–February 2022, the Russian president adopted several decrees—the so-called “countersanctions decrees”—generally aimed at restricting such exit transactions by persons connected with states that Russia considers unfriendly (unfriendly persons). These states are those that have imposed sanctions against Russia in connection with the Ukraine conflict, including the United States, the United Kingdom, European Union member states, Canada, Japan, Singapore, and many others. Among other actions, a special sub-commission of the Russian government commission on control of foreign investments (the Sub-Commission) was created in February 2022 with the mandate to deal with restricted transactions.

Among the restricted transactions are transactions with securities of Russian and non-Russian issuers and interests in limited liability companies (exit transactions), and the general rule has been that any exit transaction requires the prior permission of a Russian authority (a countersanctions permission).

Such authority differs depending on several factors and could be the president himself or the Sub-Commission, subject to the underlying countersanctions decree (see, for example, Decree No. 520). In general, any party to the transaction can apply for a countersanctions permission but as a matter of practice it is usually a Russian buyer. Further, in general a transaction conducted without a requisite countersanctions permission is invalid as a matter of Russian law.

The Sub-Commission is granted broad powers to determine conditions for individual exit transactions requiring Sub-Commission countersanctions permission and also issues general conditions in the form of guidelines. While individual countersanctions permissions are not publicly available, several of the Sub-Commission rulings that set forth general conditions are. The Sub-Commission issues its rulings in the form of “extracts from minutes of a meeting” of the Sub-Commission.

KEY CHANGES TO CONDITIONS FOR EXIT TRANSACTIONS

To remind, when the Sub-Commission considers whether to issue countersanctions permission for an exit transaction it looks to whether the general conditions for transactions set up in the Sub-Commission rulings are met.

On October 18, 2024, the Sub-Commission issued an extract from the minutes of a meeting of October 15, 2024, No. 268/1 (the 15 October Extract), by which it introduced certain changes to its prior rulings concerning general conditions to the exit transactions.

The key changes introduced by the 15 October Extract are as follows:

Increased Minimum Discount

The assets—for example, stock company shares or limited liability company interests—can be sold only at a discount; such discount must be at least 60% of the assets’ market value as determined by a qualified Russian independent appraiser (i.e., an appraiser from the list approved by the Sub-Commission). Previously, such discount was at least 50% of the market value.

Increased Minimum Contribution (So-Called ‘Exit Tax’)

A contribution to the Russian federal budget (also known as the “exit tax”) must be paid in the amount of at least 35% of the market value of the assets determined by a qualified appraiser (it was previously set at “at least 15%” and before that “at least 10%”). Such contribution must be paid in three installments after the completion of the transaction as follows: 25% of the market value within one month, 5% of the market value within one year, and 5% of the market value within two years. (The applicable rules do not stipulate which party pays this contribution but as a matter of practice it is usually a Russian buyer or Russian target company.)

Consent of the President for Transactions with Assets Above 50 Billion Rubles

For exit transactions involving assets whose market value exceeds 50 billion rubles (roughly $480 million at the current exchange rate), the Sub-Commission now requires a consent from the Russian president. Notably, there is no law or presidential decree calling for the president’s consent for such transactions, and the Sub-Commission does not have authority to establish rules for the president. Further, there is no legislation or legally established procedure on how to apply for the president’s consent. Sellers must pay specific attention and be extra vigilant should their exit transaction require the president’s consent.

CONDITIONS: ADVISABLE BUT NOT A MUST

Interestingly enough, the general conditions established by the Sub-Commission rulings are not mandatory, including the ones addressed above. Rather, the Sub-Commission has broad discretion and can issue countersanctions permissions with only some conditions or amended conditions, or even permit transactions with no such conditions. While it is generally expected that the Sub-Commission will follow the general conditions established by its rulings, the Sub-Commission considers each exit transaction on a case-by-case basis.

EXCEPTIONS

Finally, there are certain exceptions whereby an exit transaction does not require a Sub-Commission countersanctions permission (for example, certain transactions with securities conducted and cleared outside Russia) or, if required, such permission can be granted without conditions attached to it (for example, certain intragroup transactions or transactions between unfriendly persons). These exemptions do not apply to transactions requiring the president’s approval. To determine if an exception is available, a detailed analysis is required, and investors are encouraged to speak with their legal counsel.

WHY THIS IS IMPORTANT

On December 16, 2024, the EU Council adopted the 15th sanctions package of restrictive measures against Russia. Among other matters, this package emphasized that EU companies must accelerate their efforts in ceasing business with and in Russia.

As per the EU Council Decision, “[o]perators should be aware that Russia is a country where the rule of law is not applied anymore, and that the Russian Federation has adopted several pieces of legislation targeting assets of companies from ‘unfriendly countries’, including Member States. That could lead to Union assets being stranded in Russia without the possibility for orderly withdrawal. Because of the risks of maintaining business activities in Russia, Union operators should consider winding down businesses in Russia and/or not to start new businesses there.”