How to Get Out of Russia Safely

Global businesses that have been operating in Russia until recently have now found themselves in a very puzzling situation. Governments around the world imposed unprecedented measures to put economic pressure on Russia. The sanctions that were put in place against Russia have forced foreign companies to either stall their operations in Russia, or completely withdraw from the Russian market and terminate their businesses in Russia. This leads to substantial financial consequences. The companies are losing revenue and assets and face the risk of falling in breach of their contractual obligations. At the same time, their Russian business partners and employees are facing the risks of losing jobs and potential retaliation by the Russian government as a result of the company’s withdrawal from Russia.

On the one hand, foreign companies operating in Russia face legal and reputational pressure from their own governments, including criminal liability, reputational risks, and significant fines for non-compliance with sanctions.

On the other hand, the Russian government is imposing their own countermeasures on the companies leaving the market and breaching their contractual and employment obligations. The Russian countersanctions may include export bans on certain goods to certain countries, restrictions on the persons for ‘unfriendly’ states (i.e., the states that imposed sanctions on Russia), and restrictions on foreign currency transactions. In particular, the Russian parliament (Duma) is considering draft bills imposing external administration, ultimately leading to the nationalisation of the assets of the leaving companies, as well as introducing aggravated criminal liability of the local management for compliance with foreign sanctions.

There are different scenarios that companies may consider, each involving certain risks as well as legal and financial consequences. A careful legal analysis is required when considering further actions, and we identified three possible scenarios of choices available to foreign companies.

Scenario 1. Insolvency

Generally, there are two ways of terminating the company’s business, according to Russian law: voluntary liquidation and insolvency. The latter can be initiated by either the company itself or its creditors. In case of insolvency, there should be ‘reasonable and objective’ grounds, otherwise, the company could be accused of deliberately concealing its funds or of a ‘fictitious bankruptcy’, which could lead to heavy penalties and potential criminal liability of the management.

In our opinion, the insolvency procedure in Russia is highly risky, it could take several years, and it involves restrictions on operating the company’s business and managing its assets. As part of insolvency proceedings, the company’s previous transactions could be challenged. The company’s management and, in some cases, even the holding company’s shareholders could face criminal prosecution with a potential custodial sentence of up to five years for failing to effectively manage the company in a way that it could fulfill its contractual obligations. In addition, the holding company might be made liable for the subsidiary’s debts.

Scenario 2. Buyout

First of all, in Russia, a buyout would usually mean a transfer of shares rather than a sale of a business division or the company’s assets. The process of transferring contracts and authorisations would often be unpracticable, and, for this reason, the seller would rather transfer their shares in the company, for example, to their Russian partners or local management teams who can take the company as a going concern.

If foreign shareholders are willing to sell their shares and there is a prospective buyer, this option seems like an efficient exit strategy. In theory, it could be less complex and time-consuming to complete. If completed successfully, it could potentially shift some risks from the previous shareholders to new registered owners. However, in practice, the buyout is likely to become a highly complex process. First of all, it is necessary to conduct due diligence on the prospective buyer to ensure that the sale is compliant with sanctions. Similarly, there are likely to be serious difficulties in transferring purchase money from Russian bank accounts due to the restrictions on the financial transactions in Russia. Finally, the Russian authorities are closely monitoring any withdrawals from the Russian market, and there may be delays, additional audits, and further perplexities to register a share transfer to the new owner.

If there is a plan to return, the current shareholder will need to consider the mechanism of buying the shares back. It would be essential that the new shareholders maintain the company in a solvent state and comply with the contractual and regulatory obligations.

Scenario 3. Winding-up

The company terminates its business in Russia, closes down offices, and makes its Russian employees redundant.

The companies that are trying to wind down their Russian businesses should consider the following risks:

• Commercial. Contractual relationships should be terminated without a breach. Currently, there is uncertainty about whether a contract could be brought to an end by frustration;
• Employment. The company should  consider unfair dismissal claims or challenges to the redundancy;
• Compliance. A governmental agency must oversee the formal winding-up procedure, which could draw extra attention from the authorities and lead to a potential audit. If the audit reveals a breach of contractual or employment obligations, the company and its officers could face administrative and, in some cases, criminal liability.
• Compliance with the new laws. A number of recently passed laws introduced new rules related to requirements about the language that could be used regarding the actions of the Russian government.
• Reputational. The formal winding-up procedure takes approximately one year to complete, although it can be extended. The company may face reputational risks for its decision to continue operating in Russia.
• Financial. There is a draft law under consideration that could lead to the nationalisation of foreign companies.

In this scenario where the company decides to withdraw, there are steps to be taken to reduce the risks and potential losses.

1. The company should make sure that it is not in breach of any contractual obligations to the maximum extent possible. This could be achieved through planning budgets for the Russian subsidiaries so they do not face insolvency. One of the options available could be to contribute to the assets to keep the company afloat. If the breach is inevitable, frustration as one of the legal grounds to terminate the contract should be considered carefully as it is now interpreted by the Russian authorities in a specific way. Our recommendation would be to negotiate a mutual termination whenever it is available, it allows for more control over the process and leaves fewer opportunities for further disputes.
2. The employees or authorities might challenge the dismissal. To reduce this risk, we would suggest negotiating a mutual termination. An important step before terminating employment in Russia would be to carry out an internal audit to make sure that the employment files are compliant with regulations as even a missed deadline could lead to penalties.
3. The risks to the local team and the potential aggravated prosecution for the compliance with foreign sanctions could be mitigated by issuing resolutions of intentions by the company’s shareholders.

As you will note from the above, it would be desirable in any case to negotiate the termination of commercial and employment contracts. An internal audit is also crucial regardless of the option, in particular in relation to compliance with the employment law and data privacy regulations. An important step is to ensure that the company has enough assets to pay its obligations and wind the company up in accordance with the law. It is always important, before taking action, to consider a detailed plan based on the actual circumstances including the strategy of termination of contracts. We have been continuously helping our clients throughout the past two months to develop legal strategies customised to their particular situation.

As a last resort and only if the company has no assets to pay its debts and fulfill its obligations, the company could consider insolvency. We reiterate that insolvency is a highly risky and complicated process in Russia. We advise refraining from it, especially in the current climate where the Russian authorities pay increased attention to the foreign companies they suspect of leaving the Russian market. If insolvency is inevitable, it is essential to strictly follow the prescribed legal procedure, and the company should take detailed prior legal advice.

By Svetlana London, CIS London, a Transatlantic Law International Network Firm. 

For further information or for any assistance, please contact inquire@transatlanticlaw.com

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