Russia works out plan to compensate losses from freezing of state, CBR assets abroad

MOSCOW. Feb 5 (Interfax) - The Russian government has worked out a legal mechanism for placing Western assets under the control of the state as compensation for the freezing of Russian sovereign assets abroad, a source familiar with the text of the bill told Interfax.

He said the amendments to the Arbitration Procedural Code, the law on appraisal activities and on enforcement proceedings were considered at a meeting of the government's legislation commission.

Under the bill, the Arbitration Court of Moscow Region will be able to consider Russia's and the Central Bank of Russia's (CBR) disputes regarding their frozen assets abroad. If a claim is satisfied, the court will give a list of foreign assets that should be seized in Russia. The list of foreign assets will be drawn up by the government commission on foreign investment.

Lawsuit preparation

The bill would allow lawsuits to be filed by prosecutors, the CBR (in regard to its own assets), as well as a certain government agency. The plaintiff will have to simultaneously inform the government commission for control over foreign investment about the lawsuit. The defendant in the claim will be a foreign state designated based on the decision of the Russian president. Out-of-court dispute resolution procedures will not need to be followed.

The arbitration court, seeing a property-related claim in the lawsuit, will have to send a request on its own initiative to the government commission for control over foreign investment to provide a list of assets located in Russia that could be seized if the lawsuit is satisfied. If the list includes assets owned by individuals or legal entities, the court will include them in the case as codefendants.

The list of assets must indicate their value and location and information about who owns them. An amendment will be made to the law on appraisal activities under which an appraisal of obligations will not be mandatory if the list is received from the government commission for control over foreign investment. At present, appraisals of properties are mandatory if properties that are wholly or partly owned by Russia are involved in the transaction, including in the case of property nationalization (Article 8 of the law "On appraisal activities").

Asset seizure

If a lawsuit is satisfied, the arbitration court will issue a seizure ruling taking into account the "principle of proportionality," determine the enforcement procedure and indicate in the operative part of the judgement the assets to be seized for subsequent transfer to Russia or the CBR. The name of the property, its value, location and other identifying features will be stated. The court will also settle the issue of seizing the property of a debtor held by third parties.

Final act

The amendments to the law "On enforcement proceedings" describe the mechanism for nationalizing assets named in the operative part of the court's judgement. Government agencies or the CBR will be able to decline receiving the property, withdraw the writ of execution and sign a settlement with the debtor only with the consent of the government commission for control over foreign investment.

The court bailiff executing the ruling must notify the government agency or CBR about the location of the property within 10 working days of when it is found. Seizures will take place with the participation of witnesses and will be documented in an act.

In the case of money that is frozen, the bailiff issues an order for the bank to transfer the funds to the accounts of the court bailiff service, the federal budget or the CBR. The order will state the account details.

In the case of the transfer of uncertificated securities held by a professional market participant, the bailiff will demand that the recording entity transfer these securities to the accounts of the government agency or CBR.

For the transfer of an equity stake in a legal entity, the bailiff will have to ask the tax authorities to register the transfer of rights to this asset.

If the asset in question is real estate, the bailiff will have to ask the registration body to reregister the property.

Application

The bill was drafted pursuant to a presidential decree, No. 442, issued on May 24, 2024 that orders the government to establish a special procedure for compensating damages inflicted on Russia/the CBR by the decisions of U.S. government agencies or courts to groundlessly deny rights to assets. The decree calls for a legal procedure to use the assets of the U.S. or "foreign entities affiliated with the United States of America" to compensate for these damages. The movable and immovable property of these entities located in Russia, as well as securities and equity stakes in Russian companies can be used for this purpose, the decree states.

"By decision of the president of Russia, the mechanism prescribed by the bill can be applied not only to the U.S., as prescribed by the decree, but also to other foreign states if they seize Russian sovereign assets abroad," a memo attached to the bill said.

The memo also lists the grounds on which claims can be filed against unfriendly countries and their entities.

The first reason is violation of contractual obligations (Chapter 25 of the Civil Code), if unfriendly states seized from Russia their own government bonds or income from them, which according to the bill's authors can essentially be considered as these states failing to fulfill their obligations on their government debt to Russia.

The second reason is the liability of banks, depositories and other financial market participants for blocking or debiting funds from Russia's accounts due to sanctions.

The third reason is the infliction of damages by unfriendly states that led to Russia losing its assets (Chapter 59 of the Civil Code).

The fourth reason is obligations incurred by individuals involved in the seizure of Russian assets, including by disclosing information, refusing to carry out transactions with Russian assets, or carrying out transactions necessary for the assets of Russia to be transferred to the ownership, use or control of unfriendly states without its consent.

Other grounds include liability of groups of companies, if one company in a group avoids fulfilling obligations to Russia by citing sanctions; cases of unjustified enrichment (Chapter 60 of the Civil Code), if individuals benefited from the seizure of Russian assets, such as by receiving payments from funds formed with Russian money; and obligations to return an asset of Russia of which it has lost ownership or the value of this asset (Articles 301 and 1103 of the Civil Code in the interpretation of ruling No. 3605/08, dated June 24, 2008 of the Presidium of the Supreme Arbitration Court).

"The term 'compensation of damages' used in the [presidential] decree is understood in the bill to mean the whole range of compensatory measures, cited above, aimed at restoring Russia's violated rights as an owner and creditor," the memo said.

The bill has not been submitted to the State Duma yet. If it is passed, it will go into effect 10 days after its official publication.