Russian Government Commission Approval for Transactions with Persons from Unfriendly Countries

January 31, 2023.

BRACE Law Firm ©

Rapidly changing political and economic circumstances have necessitated adjustments to legislation not only in currency regulation but also in foreign investment, particularly involving persons from "unfriendly" countries.

Considering the evolving global situation, the President of the Russian Federation adopted relevant decrees regulating this sphere of activity:

• Decree of the President of the Russian Federation No. 79 dated February 28, 2022, On the Application of Special Economic Measures in Connection with the Unfriendly Actions of the United States of America and Foreign States and International Organizations Joining Them (the "Decree No. 79");
• Decree of the President of the Russian Federation No. 81 dated March 1, 2022, On Additional Temporary Economic Measures to Ensure the Financial Stability of the Russian Federation (the "Decree No. 81");
• Decree of the President of the Russian Federation No. 618 dated September 8, 2022, On the Special Procedure for Conducting (Performing) Certain Types of Transactions (Operations) Between Certain Persons (the "Decree No. 618").

These decrees established additional restrictive measures for foreign counterparties, including the requirement to obtain permission from the Government Commission for Monitoring Foreign Investment. [1] Notably, in execution of Decree of the President of the Russian Federation No. 95 dated March 5, 2022, On the Temporary Procedure for Fulfilling Obligations to Certain Foreign Creditors, the government approved a list of foreign states and territories committing unfriendly actions against the Russian Federation, Russian legal entities, and individuals. [2]

Decree No. 618 established a special procedure for transactions (operations) that directly or indirectly result in the establishment, modification, or termination of rights to own, use, or dispose of participation interests in the charter capitals of limited liability companies (excluding credit organizations and non-credit financial organizations) or other rights allowing for the determination of the management terms of such limited liability companies or the conditions of their business activities. Parties may conduct (perform) such transactions based on permissions issued by the Government Commission for Monitoring Foreign Investment in the Russian Federation, which may, if necessary, contain conditions for the execution of such transactions (operations). [3]

Regarding the implementation of Decree No. 618, the Ministry of Finance of Russia provided official clarifications in Letter No. 05-06-14RM/99138 dated October 13, 2022, Official Clarifications No. 1 on Issues of Applying Decree of the President of the Russian Federation No. 618 dated September 8, 2022. For the purposes of Decree No. 618, transactions requiring Government Commission permission include:

• The transfer of a participation interest in the charter capital of a limited liability company to one or more members of the company or to a third party;
• The acquisition by a limited liability company of a participation interest in its own charter capital;
• The withdrawal of a member from a limited liability company through the alienation of its participation interest to the company or a request for the company to acquire the interest;
• The transfer of a participation interest in a limited liability company to an investment fund;
• An agreement with a commercial organization or an individual entrepreneur on the transfer of powers of the sole executive body of a limited liability company;
• An agreement on the exercise of rights by members of a limited liability company;[4]
• A convertible loan agreement; [5]
• A participation interest pledge agreement concerning a limited liability company;
• An agreement on the management of a participation interest pledge in a limited liability company;
• Voluntary reorganization of a limited liability company in accordance with Russian legislation;
• A simple partnership agreement (joint venture agreement) concluded by a limited liability company;
• A trust management agreement, agency agreement, or other agreement the subject of which is the exercise of rights certified by participation interests in limited liability companies;
• Other transactions (operations) directly or indirectly resulting in the establishment, modification, or termination of rights to own, use, or dispose of participation interests in the charter capitals of limited liability companies or other rights allowing for the determination of the management terms of limited liability companies or the conditions of their business activities.

Additionally, the letter notes that Decree of the President of the Russian Federation No. 520 dated August 5, 2022, On the Application of Special Economic Measures in the Financial and Fuel and Energy Spheres in Connection with the Unfriendly Actions of Certain Foreign States and International Organizations (the "Decree No. 520") prohibited the performance of transactions (operations), including those directly or indirectly resulting in the establishment, modification, termination, or encumbrance of rights to own, use, or dispose of participation interests in the charter capitals of Russian legal entities until December 31, 2022,[6] provided that such interests belong to persons from foreign states committing unfriendly actions. One must consider that the Government Commission does not issue permissions for such transactions.

The rules for obtaining Government Commission permission were approved by Decree of the Government of Russia No. 295 dated March 6, 2022, [7] (the "Government Commission Permission Issuance Rules"). Section 1 of the Government Commission Permission Issuance Rules lists the full range of transactions subject to these requirements.

To obtain permission, a resident, a person from a foreign state committing unfriendly actions, a person associated with such a state, or a foreign person not associated with such a state must submit an application to the federal executive body responsible for state policy and legal regulation in the sphere of budget, tax, insurance, currency, and banking activities. To unify approaches when considering appeals, the Subcommittee of the Government Commission for Monitoring Foreign Investment in the Russian Federation recommended a specific application form in Extract from Protocol of the Meeting No. 9 dated March 14, 2022. [8] The application must include the following documents:

• An appeal for the issuance of a transaction permission containing information on the purpose, subject, content, and material terms of the transaction, as well as the planned duration of such permission, addressed to the Commission and drafted in free form (if the transaction directly or indirectly establishes, modifies, or terminates the right to own, use, or dispose of shares or participation interests in the charter capital of a business entity or partnership, or the votes attributable to such shares or interests, the appeal must specify the number of such shares, interests, or votes);
• A document confirming the state registration of the applicant as a legal entity or an individual entrepreneur under the laws of the relevant state, or another document confirming the creation of the applicant legal entity;
• An identification document of the applicant (if an individual);
• A document confirming the establishment of the applicant as a foreign organization that is not a legal entity under the laws of the state where it was established;
• Constituent documents of the applicant legal entity;
• A document containing information on beneficiaries, beneficial owners, and the person controlling the party to the transaction (operation) from an unfriendly foreign state or associated with such a state, including signs of control in accordance with Article 5 of the Federal Law;[9]
• The resident's balance sheet as of the last reporting date preceding the application date, if such balance sheet is absent from the state information resource of accounting (financial) statements provided for by Article 18 of the Federal Law On Accounting (in cases involving transactions for the acquisition of ownership rights to a resident's real estate);
• Information on the book value of the resident's assets as of the last reporting date preceding the application date (in cases involving transactions for the acquisition of ownership rights to a resident's real estate).

The application and documents must be in Russian. If the original documents are in a foreign language, the applicant must provide a certified translation into Russian (with an apostille from the competent authority of the state where the document was drafted). Documents must be bound and certified by the applicant's seal (if any). If the applicant is an individual, the documents must be signed by the individual, and the signature must be notarized. An authorized representative with a notarized power of attorney or other document confirming authority may submit the application. The application must include an inventory of the submitted documents. Applicants may submit the application and documents to the authorized body and federal executive bodies in hard copy or electronic form, including as electronic documents signed with an enhanced qualified electronic signature.

As an example where the absence of Government Commission permission led to the termination of a transaction, one may cite the Decision of the Arbitration Court of the Murmansk Region dated May 16, 2022, in Case No. A42-1905/2022. The court satisfied the plaintiff's claims and declared a gift agreement for 50% of the participation interests in an LLC's charter capital void (ab initio) from the moment of its execution.

A decision of the subcommittee constitutes the Government Commission's permission to conduct a transaction, permission containing conditions, or a refusal. This subcommittee includes one representative each from the Presidential Administration, the federal executive body responsible for state policy and legal regulation in socio-economic development analysis and forecasting, and the Central Bank of the Russian Federation, and is headed by the chief of the authorized body (the "Subcommittee"). [10]

Permission for foreign buyers to fulfill obligations to Russian suppliers for natural gas payments without following the procedure established by Decree of the President of the Russian Federation No. 172 dated March 31, 2022, On the Special Procedure for the Fulfillment by Foreign Buyers of Obligations to Russian Suppliers of Natural Gas (the "Decree No. 172"), is a Subcommittee decision issued based on a recommendation from the federal executive body responsible for the fuel and energy complex.

Permission from the Commission to transfer funds to a right holder's bank or other account (including those outside Russia) that were transferred by a debtor to a special "O" type account as part of obligations related to the use of intellectual property by the Russian Federation, its subjects, municipalities, or residents, is a Subcommittee decision issued based on recommendations from federal executive bodies.

The Subcommittee also issues decisions determining the volume of mandatory foreign currency sales by residents participating in foreign trade in accordance with point 2 of Decree No. 79, based on proposals from the Central Bank of the Russian Federation.

A Subcommittee decision also serves as the Commission's decision to introduce restrictions on residents' depositing foreign currency into their accounts (deposits) opened in banks and other financial market organizations located outside Russia, as well as on transferring funds without opening a bank account using electronic means of payment provided by foreign payment service providers.

The Subcommittee may determine the duration of the Commission's permission for transactions or for natural gas payments under Decree No. 172. If necessary, permissions for transferring funds from "O" type accounts may contain specific conditions. Notably, the Subcommittee may issue permissions to conduct (perform) transactions (operations) to an indefinite group of persons.

Despite all the circumstances listed in Resolution No. 295 regulating the permission process, the Resolution does not specify a timeframe for obtaining such permission. Given the wide range of transactions and operations requiring this permission, parties should account for this and submit documents in advance. Engaging qualified and experienced lawyers in this field will help obtain the necessary permission with minimal costs and time. This is due not only to the experience of specialists interacting with executive authorities but also to the continuous monitoring of ever-changing legislation.

The response measures introduced against countries committing unfriendly actions are, in most cases, temporary. Consequently, monitoring regulations governing foreign investment and currency regulation remains a critical aspect of obtaining necessary Government Commission permissions for such transactions.

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References

[1] Subparagraph "b" of point 1 of Decree No. 81.

[2] Order of the Government of the Russian Federation No. 430-r dated March 5, 2022, On Approval of the List of Foreign States and Territories Committing Unfriendly Actions Against the Russian Federation and Russian Legal Entities and Individuals.

[3] Point 2 of Decree No. 618.

[4] Clause 3 of Article 8 of Federal Law No. 14-FZ dated February 8, 1998, On Limited Liability Companies.

[5] Article 19.1 of Federal Law No. 14-FZ dated February 8, 1998, On Limited Liability Companies.

[6] Decree of the President of the Russian Federation No. 876 dated December 5, 2022, On Amending Decree of the President of the Russian Federation No. 520 dated August 5, 2022, extended the term until December 31, 2023.

[7] Decree of the Government of Russia No. 295 dated March 6, 2022, On Approval of the Rules for the Issuance of Permissions by the Government Commission for Monitoring Foreign Investment in the Russian Federation for the Purpose of Implementing Additional Temporary Economic Measures to Ensure the Financial Stability of the Russian Federation and Other Permissions Provided for by Certain Decrees of the President of the Russian Federation, as well as the Implementation of Other Powers for Said Purposes and Amending the Regulations on the Government Commission for Monitoring Foreign Investment in the Russian Federation.

[8] Extract from Protocol of the Meeting of the Subcommittee of the Government Commission for Monitoring Foreign Investment in the Russian Federation No. 9 dated March 14, 2022. Communicated by the Ministry of Finance of Russia on March 17, 2022, No. 05-06-10/VN-12520.

[9] Federal Law No. 57-FZ dated April 29, 2008, On the Procedure for Making Foreign Investments in Business Entities of Strategic Importance for Ensuring National Defense and State Security.

[10] Point 13 of Resolution No. 295.