Explainer: How Russia Could Use Bankruptcy Law To Punish Foreign Companies

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March 18 (Reuters) – As foreign companies seek to leave Russia because of the war in Ukraine, they face the prospect that Russia’s bankruptcy law could be used to seize assets and even attract criminal penalties .

Here’s how it could work:

HOW DOES BANKRUPTCY LAW IN RUSSIA DIFFER FROM BANKRUPTCY LAW IN THE UNITED STATES?

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In the United States, bankruptcy laws aim to give indebted companies a fresh start.

Distressed companies in the United States usually go bankrupt of their own free will and the law allows them to retain existing management and control over assets.

Russian law, however, generally prioritizes the needs of creditors who are owed money. This means that creditors, including the Russian government, can force a company into involuntary bankruptcy and oust its management.

Some legal experts said foreign companies fear Russian creditors could abuse this process to install executives willing to sell their assets to rival companies or companies aligned with the Russian government.

“In the late 1990s and early 1990s, this was often used as a way to loot businesses” in post-Soviet Russia, said Paul Stephan, a professor at the University of Virginia School of Law and expert in Soviet and post-Soviet law. systems.

CAN A BANKRUPT COMPANY ENCOURAGE CRIMINAL PENALTIES IN RUSSIA?

Yes. In the United States, bankruptcy is purely civil. But Russian law provides criminal penalties for certain bankruptcy-related offences, such as hiding assets.

The maker of Camel cigarettes and Lucky Strike British American Tobacco Plc (BATS.L) has expressed concern that its exit from Russia could be seen as a criminal act leading to bankruptcy charges for local management.

It would not be the first time that the Russian government has threatened criminal charges against foreign companies and investors. Russia has repeatedly asked Interpol to arrest fund manager Bill Browder, alleging charges against him including willful bankruptcy and tax evasion.

Browder said the “bogus warrants” were part of a vendetta by corrupt Russian state officials. Interpol did not accede to Russia’s arrest requests.

HAS RUSSIAN BANKRUPTCY LAW BEEN USED IN THE PAST TO PUNISH COMPANIES FOR POLITICAL REASONS?

Yes. Tax debt has been used to push companies into bankruptcy in Russia, in a way that penalizes foreign investors, according to an international arbitration tribunal.

Yukos Oil was forced into bankruptcy in 2006 after its former chief, Mikhail Khodorkovsky, fell out with Russian leader Vladimir Putin and the Russian government demanded billions in back taxes.

Most of Yukos’ assets have been absorbed by Kremlin flagship oil producer Rosneft, but international shareholders have argued that Russian tax demands are illegitimate. The Permanent Court of Arbitration in The Hague agreed, finding in 2014 that the Kremlin had manipulated the court system to bankrupt the company and take Khodorkovsky’s assets.

Since the Russian government owns large energy companies, it could use energy bills as well as taxes to force a company out of business, experts said.

“If the government were to use this power strategically, it may well have the ability to sway local courts, influence local managers and force a sale of the business that would oust foreign owners,” Jason Kilborn said. , professor of law at the University of Illinois Chicago.

IS THERE A SAFE WAY FOR COMPANIES TO LEAVE RUSSIA?

For companies wishing to leave Russia, Russian officials have suggested a “fast-track” bankruptcy procedure that would put local managers in charge of their assets and operations.

Still, some companies fear Russia’s bankruptcy law could be used to retaliate against companies that leave, experts said.

“If the hammer really does fall, you’re just hoping you’ve gotten as many people out of the country as you have and minimized the risk to your assets in the country,” Stephan said.

Russia’s ruling party recently proposed legislation that would allow the government to nationalize the assets of certain companies intending to leave Russia. Read more

The proposal would rely on the bankruptcy law procedure for installing court-appointed outside management, but could be used against debt-free companies, experts said.

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Reporting by Dietrich Knauth; Editing by Noeleen Walder and Daniel Wallis

Our standards: The Thomson Reuters Trust Principles.


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