Navigating local responses

Tobias Cohen Jehoram + 1 other experts

Expropriation of property in Russia, recovery options and levies, suspension of IP rights and State Aid & Compensation

Expropriation of property in Russia

The Russian Federation may well proceed with the expropriation of investments of companies of "unfriendly" countries, including the US, UK, all EU member states including the Netherlands, Japan, Singapore and South Korea. On 10 March 2022, Russia announced that the assets of foreign investors that have suspended operations in Russia could be transferred to third parties. Such transfers may constitute uncompensated expropriation, for which investors could seek compensation under bilateral investment treaties (BITs) concluded by the Russian Federation.

Recovery options and levies

The war in Ukraine and the international response thereto has created an uncertain situation as to whether Russian counterparts will be allowed, willing and able to continue to comply with their obligations vis-a-vis counterparts in 'unfriendly states' as the Russian regime has been vocal about protectionist measures it is taking and intends to take. This creates the need for companies doing business with Russian counterparts to assess the risk that such counterparts will not comply with contractual obligations and the risk that the company may not be able to procure specific performance or recover any claims for non-performance.​

Suspension of IP rights

On 3 March 2022, a judgment was issued by a Russian court of first instance where an infringement claim brought by a UK trademark owner was denied, solely on the basis that the plaintiff was domiciled in the UK, a country that had imposed sanctions on the Russian Federation. According to the court, invoking an IP right by a UK company would automatically constitute “an abuse of right”. This is an example of how the Russian Federation, through its courts, could allow intellectual property right infringements against anyone from countries that are deemed "unfriendly" towards the Russian Federation, de facto expropriating IP rights.​

State Aid & Compensation

As we have seen in the COVID-19 crisis and the financial crisis in the zeros, there will be a push for compensation or financial support of companies particularly affected by the current situation.

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In its BITs, including the 1989 NL-USSR BIT that is currently in force between the Russian Federation (as the USSR's successor) and the Netherlands, Russia has committed, among other things, to treat investors from the relevant countries in a fair and equitable manner, not to discriminate against such investors on the basis of nationality, not to expropriate their investments except under certain conditions and upon payment of adequate compensation, and to guarantee their right to freely transfer payments related to their investments out of Russia. ​

Russia’s recent retaliatory measures on their face appear at odds with several of these commitments undertaken by Russia under its respective BITs and may be actionable in international arbitration. The 1989 NL-USSR BIT for example provides that compensation for expropriation should amount to the actual value of the investment which should be paid out without unreasonable delay in acceptable currency. The arbitration clause provides that disputes regarding the amount in compensation can be subjected to arbitration. This implies that questions on whether expropriation took place falls outside it ambit. However, as the Russian Federation in the current cases is quite unambiguous about its measures and the fact that this is an expropriation, such smaller ambit does not prevent any claims for compensation to be brought in arbitration.​

Apart from BITs, the Russian government has been known to use its bankruptcy law to seize assets and oust management of entities ultimately owned by foreign persons. We have seen this in the infamous Yukos-case, where the Russian tax authorities fabricated a claim on Yukos, resulting in its bankruptcy. Subsequently, its management was removed and most of its assets were transferred to Rosneft, the oil producer with close links to the Kremlin.

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Broader considerations on RECOVERY OPTIONS AND LEVIES​

Companies need to assess whether outstanding debts for which Russian counterparts are the debtor, have sufficient collateral assets as security located in jurisdictions where the enforcement of any security rights is not impeded by the current Russian measures and/or sanctions.​

In addition, payables to Russian counterparts could be a potential subject of conservatory attachments. European bank accounts of Russian counterparts can be frozen both by national courts as well as by courts in other EU member states by operation of a European Account Preservation Order (i.e. a Dutch court could also order the attachment of bank accounts in other EU member states). Conservatory attachments are made ex parte , i.e. without informing the debtor in advance. This ensures that debtors do not conceal assets when confronted with claims. Conservatory attachments can also be levied upon other assets such as shares and real estate.​

Another option to assess is whether the current relationships with Russian counterparts would allow for the set off and/or suspension of payables to Russian counterparts. Setting off against payables to Russian counterparts is possible under Dutch law when a corresponding claim on that counterpart is due and payable and is of the same currency as the corresponding payable. The Russian counterpart must be notified, either orally or in writing, of the exercise of the right to set off. If such requirements are not met, it can be considered whether the payable to Russian counterparts can be subject of a conservatory attachment under the same company (eigenbeslag) allowing these payables to be preserved as recovery for separate claims against Russian counterparts. ​

Payments to Russian counterparts can be suspended under Dutch law if, in short, the Russian counterpart is in default with a corresponding obligation that is sufficiently connected to the payment that is suspended. Suspension of payments is only permitted in case the Russian counterpart is still in a position to fulfil its obligations. Here, too, the option of conservatory attachments on any payables under the company itself may be considered.​

Article 9(b) DCCP provides that a Dutch court can assume jurisdiction in cases where legal proceedings outside of the Netherlands are impossible. This is the case if, briefly put, there is no other suitable forum for the claim of which it can be reasonably required from the claimant to present its claim elsewhere. If claims against a Russian or another foreign counterpart should, according to applicable private international law rules, be brought in Russia (or Ukraine) [or possibly in countries more lenient towards the Russian regime], it could be argued in the current circumstances that it is impossible to bring legal proceedings there and that therefore, a Dutch court is competent to hear such claims.​

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Broader considerations on STATE AID & COMPENSATION ​

As we have seen in the COVID-19 crisis and the financial crisis in the zeros, there will be a push for compensation or financial support of companies particularly affected by the current situation. The Temporary Crisis Framework for state aid to support the economy in context of Russia's invasion of Ukraine has been launched by the European Commission, but this is only a first step– the room for government support is further to be explored. In addition, specific compensation will come into play in case governments decide to intervene in the market, e.g. by putting caps on retail prices (for commodities or other vital goods). ​

If a company (I) has received support further to the Ukraine crisis or (ii) is seeking such support, it is crucial to check whether the support has or will be notified to the European Commission – or is exempt. In addition, the conditions for such support need to be closely adhered to,. Non-compliance with the state aid rules or subsidy conditions may lead to a requirement to pay in full – the onus is on the company receiving the support and enforcement can be strict, ​