For the first time, Russia has taken a real step toward proportional compensation in the event of the seizure of its sovereign assets. On May 23, Russian President Vladimir Putin signed a decree outlining the process for compensating Russia and the Central Bank for damages incurred due to decisions made by US governmental or judicial bodies.
The US House of Representatives recently unanimously approved a bill authorizing the expropriation of Russian assets in support of Ukraine. About $5 billion is at stake, which US President Joe Biden can withdraw at any time to help Kyiv.
The Russian response is called asymmetrical: the Kremlin threatens to confiscate not only state property but also private property from everyone who is in any way connected with the United States.
Mutual seizure violates an international pact signed in 1992 between Russia and the US to encourage and protect investment. However, this is merely the first indicator and, most likely, a move to ensure that the European Union takes care not to confiscate assets.
Under the new policy, punitive measures are in place for the wrongful seizure of Russian assets overseas. For instance, it is now legally permissible to use American assets in Russia to pay for damages caused by the seizure of Russian property in the United States. Moreover, the rights holder in Russia has been granted the ability to sue under Russian law to establish the wrongful seizure of property by the US, a significant legal development.
“The Government of the Russian Federation is to ensure, within a 4-month period, the incorporation into the legislation of the Russian Federation of amendments aimed at implementing this decree,” the document states.
As a reminder, it has been over two years since Western countries froze Russian sovereign assets, amounting to around USD 300 billion. In early May, the US penalized dozens of Russian persons and businesses. The restrictive measures impacted 16 maritime vessels, the airline “Pobeda,” the Bryansk Automobile firm, the Ural Automobile Plant, the electronics firm “Proton,” and other companies. Restrictive measures were also imposed on Russian Ministry of Defense forces responsible for radiological, chemical, and biological protection.
How Will This Work?
According to the decree, a mechanism may be implemented to terminate property rights to American owned property and turn it into state revenue in reaction to the US’s seizure of Russian assets.
First, a Russian citizen or legal company must file a lawsuit in court to prove that the US government or judicial agencies unlawfully seized their property. If the court rules that the seizure of property was unlawful, it is sent to the Russian Federation’s Government Commission for Control over Foreign Investments. The commission proceeds to identify specific American assets in Russia that can be used to pay the rights holder for the damage.
The laws establishing the appropriate regulatory framework already exist in Russia, and the decree issued effectively outlines the method for executing these legal acts under present conditions.
Under current law, procedural legislation requires that if the court, when reviewing an application to establish a fact of legal significance, identifies a dispute over the right, further consideration takes the form of litigation.
The new decree proposes that the fact of unjustified seizure of Russian assets be established in a single judicial proceeding, as well as the issue of terminating property rights to US property and related persons and converting them into revenue for the rights holders, namely the state or the Russian Federation’s Central Bank.
As a result of the decree’s newness, a four-month transition period is provided.
What US could lose?
According to Russian media, Western assets in Russia totaled $288 billion in January 2023 and $215 billion by the end of 2023, of which Cyprus holds $98.3 billion and the Netherlands holds $50.1 billion.
As a result, the volume of prospective American assets for reimbursement to the Russian side is substantial. This is a mirror response to the potential expropriation of $300 billion in frozen Russian assets in the West.
As retaliatory actions, a precedent is being set for possible large-scale expropriation (actual nationalization) of assets owned by American firms, individuals, and the United States in Russia.
There aren’t many assets owned directly by the US government in Russia. Therefore, it’s clear that recovery may be enforced on the assets of US corporate and private holdings.
According to the Leave Russia and Yale University lists of corporations in Russia, Coca-Cola, IBM, PepsiCo, Mondelez International, Pfizer, 3M, Exxon Mobil, Caterpillar, and Johnson & Johnson are among the US companies that still have a presence in Russia in some manner.
This comprises available American assets in Russia in various ways. Specifically, those held by non-residents of Russia, such as government and corporate bonds, money invested in Russian shares, external loans, foreigner-owned assets (like real estate, equipment, transport), and cash on deposit with the Russian banking system. Foreign owners have sold foreign companies’ financial assets and are awaiting repatriation of monies. Many such assets have been ‘frozen’ in special ‘c’ accounts, such as those used by Russian financial organizations.