^{The news comes shortly after a law was passed permitting Russian airlines to seize aircraft owned by foreign companies who had terminated contracts due to sanctions.}

Russia has passed legislation to place foreign companies which have exited Russia under “external management”. Under the new rules, any company of which more than 25% is owned by foreigners can be brought under temporary administration if the management takes decisions that could lead to an “unjustified” cessation of activities. This includes public announcements on withdrawing from Russia which don’t cite an economic rationale.

Companies can be placed under external management for up to six months, in which time the process of closing their operations in Russia can be reversed. Shareholders owning more than 50% of the company can apply to the courts to have the external management removed, or they can sell their stake to “suitable new owners”.

Since Russia’s invasion of Ukraine on February 24, a flood of western companies have suspended their operations in the country. These include tech giants like Apple, Oracle, Microsoft, IBM, and internet service provider Cogent, food majors like Unilever and McDonald’s, and clothing companies H&M, Inditex and Uniqlo.

The new law for imposing external management on foreign companies withdrawing from Russia represents the “first step towards nationalising foreign-owned organisations leaving the Russian market,” according to ruling party United Russia.

In practice, this law means that state-appointed managers will be granted full powers to run the companies. Managers will be appointed from Deposit Insurance Agency or development bank VEB.RF, depending on whether or not the company is a financial institution. Managers will be given unfettered access to the company, including commercial secrets.

The plans appear to favour an approach whereby the existing company’s Russian branch is liquidated through a bankruptcy process, and a new organisation is set up using its assets. Shares in the new companies will be auctioned off, with priority given to established industry players. New owners will be obliged to retain at least two-thirds of the company’s workforce.

The news will likely breed concern among investors that Russia is damaging its own standing as an investment destination which protects property rights. It comes at the same time as Putin signed a law allowing Russian airlines to continue operating foreign aircraft on loan from lessors who have terminated their contracts due to sanctions. These planes will be kept on domestic routes so that they cannot be re-claimed by the lessor in foreign airports.

Although the two laws will likely help Russia’s financial and aviation industries to keep operating in the short term, they are likely to lead to decreased investments in Russia in the long term, as foreigners become more wary of committing capital to Russian companies and airlines.

Bne