Russia Enacts Legislation Permitting the Seizure of US Assets in Russian Territory in Response to US REPO Act

Overview

On May 23, 2024, Russian President Vladimir Putin issued Decree No. 442 (the “Decree”), establishing a mechanism to seize the assets of US Persons within Russian territory. The Decree establishes a framework for a special procedure to compensate the Russian Federation and the Russian Central Bank for losses caused by allegedly unreasonable deprivation of their ownership rights by US government decisions concerning Russian sovereign assets (the “US decisions”). The Decree was issued in response to the “Rebuilding Economic Prosperity and Opportunity for Ukrainians Act” (the “REPO Act”), signed by the US President Joe Biden on April 24, 2024, which created a framework for the seizure of Russian sovereign assets in the US and the transfer of such assets to a “Ukraine Support Fund.” The REPO Act creates a statutory power for the US President to seize, confiscate, transfer, or vest any Russian sovereign assets subject to US jurisdiction that currently remain frozen. We previously discussed the REPO Act in detail on May 3, 2024 in this blog post.

Persons and Property Affected

The Decree applies to US Persons holding assets within Russian territory which includes: (1) the US federal and state governments; (2) foreign persons “connected” to the US, including (but not limited to): (i) US citizens and residents; (ii) legal entities incorporated in the US; (iii) persons having their primary place of business or profit taking in the US; and (3) legal entities, irrespective of their place of incorporation, controlled by persons listed in (2) (together the “US persons”). The proposed list is notably broad. In particular, the reference in the Decree to foreign persons “connected” to the US could result in a foreign person with any US connection being considered a US Person for the purposes of the Decree, regardless of the nature and strength of that connection.

Further, the following property owned by US Persons is potentially at risk under the Decree: real and movable property located in Russia; securities, shares, and participatory interests in Russian legal entities; and any other property rights. We note that the Decree applies to US federally owned and state-owned property as well. Further, it is likely that funds held in type "C" accounts in banks in Russia (a type of account introduced in 2022 which accumulates payments from Russian debtors in favour of foreign creditors following Russian Presidential Decree No. 95) may be targeted as a result of this Decree. Media reports indicate that the funds held in such accounts are comparable to the 300B of Russian reserves frozen by the US and its allies.

Special Procedure

Following the Decree, the Russian Federation and Russian Central Bank may initiate proceedings in Russian courts to allege an unreasonable deprivation of their property in connection with US decisions. They may seek compensation for the losses suffered as a result of the alleged deprivation by providing an evaluation of such losses in a statement of claim. It is not clear whether the term "Russian Federation" will include only the state itself, or also state-owned entities. In the latter case, the number of potential applicants aiming to enforce the Decree may be significant.

Following acceptance of a statement of claim, if a Russian court finds there is evidence reasonably suggesting a lack of sufficient grounds for the Russian Federation’s or Russian Central Bank’s deprivation of their property as a result of US decisions, a Russian court will request the Government Commission on Monitoring Foreign Investment in the Russian Federation (the “Government Commission”) to provide a list of the US Persons’ property located in Russia. The Government Commission will then identify property to proportionately compensate the Russian Federation or Russian Central Bank for their alleged losses. If a Russian court approves the Russian Federation’s or Russian Central Bank’s claim, the ownership rights of the US Persons in such identified property will be terminated, and the property will be transferred to the Russian Federation or Russian Central Bank.

The Decree instructs the Russian Government, within four months, to affect the necessary legislative amendments to implement the special procedure outlined above. We note that as of June 3, 2024 no such amendments have been made.

Key Takeaways

We recommend that clients that fall under the definition of US Persons under the Decree, and hold any assets in Russia, to consider the risks of keeping such assets in Russia and contemplate possible options to minimize the risks of loss and seizure in the future. The Russian Government has until the end of September 2024 to elaborate and introduce relevant amendments to the legislation and to establish the details of the special procedure outlined in the Decree, including the specific procedures for considering a Russian court’s request for a list of US Persons’ property by the Government Commission.

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