On October 9, 2024, Russia’s Ministry of Finance issued a letter informing federal executive bodies of cost increases for businesses leaving Russia owned by persons or entities from “unfriendly” countries. While letter was not published, its validity was confirmed by reputable Russian business media. The letter clarified a prior decision made by the Government Subcommittee on Foreign Investments Monitoring.
According to the decision,
- The amount of the “voluntary contribution to the budget” by foreign owners selling their Russian business increased from 15% to 35% of the sale amount. Of this contribution amount, 25% will be required to be paid within one month after the sale has been finalized, 5% within a year, and the remaining 5% within two years.
- The mandatory discount from the market price of assets sold by foreigners increased from 50% to 60%.
- A new requirement added to the previous rules states that a transaction must be approved by the president of the Russian Federation if its amount is more than 50 billion rubles (approximately US$500 million).
These new requirements apply to future transactions as well as to applications previously submitted but not yet approved.
Reports indicate that in 2023, 97 transactions aimed at buying out foreign assets were concluded in Russia. The cost of these transactions was US$11.14 billion. During the first six months of 2024, 34 transactions in the amount of US$1.89 billion were approved.
It was also reported that the government plans to amend legislation addressing the transfer abroad of loans and dividends from Russia.
Background
Restrictions aimed at complicating the rules for the conduct of business in Russia by companies from so-called “unfriendly” states were introduced by the Russian government in spring 2022 in response to sanctions initiated against Russia after it started the war against Ukraine. The Russian government subjected foreign companies to a restricted exit from the Russian market and made their business transactions dependent on government approval.
Under a decree of the Russian president, a special procedure for making transactions with foreign residents became effective March 2, 2022. The decree prohibited nonresident entrepreneurs from taking out of Russia cash or other instruments of monetary value over the equivalent of US$10,000. It established that the Government Commission on Foreign Investments must approve all business transactions if the business owner is a resident of an “unfriendly” state. The decision-making authority for such approvals was delegated to the Government Subcommittee on Foreign Investments Monitoring. Approvals were required for all transactions related to the receipt of loans and credits in Russia or those affecting or changing property rights in real estate and securities.
The list of “unfriendly” states was defined by the Government of the Russian Federation on March 5, 2022. It includes all the member states of the European Union, as well as Albania, Andorra, Australia, the Bahamas, Canada, Japan, Montenegro, New Zealand, Norway, South Korea, Switzerland, Taiwan, Ukraine, the United Kingdom, and the United States.
Earlier Legislation
In December 2022, the subcommittee announced the requirements for approval of the sale of Russian assets by persons associated with “unfriendly” states, including a 50% discount from the asset’s market price and a lengthening of the installment payment period for up to two years. A contribution to the budget in the amount of no less than 10% of the transaction amount was suggested in addition to or instead of these requirements.
Simultaneously, it was reported that the subcommittee announced its approach to approving the payment of dividends to foreign owners of Russian businesses. The amount of dividends could not exceed 50% of net profit. Distribution of profits in the previous years and the willingness of the business owner to continue their business activities in Russia were supposed to be taken into account. The subcommittee stated that approval of dividend payments may depend on a company meeting quarterly key performance indicators. (The subcommittee’s decisions are not published officially but are usually reported by the media.)
The requirements were amended in March 2023, and a 10% payment to the Russian budget became mandatory. Later, in October 2023, the mandatory payment to the budget, which is called a “voluntary contribution,” was increased to 15% of the transaction amount.
According to the Rambler news agency, if the new rules are implemented, a business exiting from the Russian Federation will be able to receive no more than 5% of its value. This has slowed down the process of leaving the Russian market by Western companies. Requests to recall previously submitted applications for ending business operations in Russia were reported in Russian media.
Peter Roudik, Law Library of Congress
November 12, 2024
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