Russian Presidential Decree No 8 paves the way for expropriation

Companies with assets in Russia now face new problems since Presidential Decree No 8 was issued on 3 January 2024. The decree removes certain frozen assets of foreign companies located in Russia from enforcement by private third parties and is therefore apparently intended to prepare for the state confiscation of these assets. This expropriation raises the question of whether compensation can be obtained from the Russian state by using the instrument of investment protection in international arbitration tribunals. There is some evidence that it can.

Backdrop: The European Union’s 12th sanctions package

In its 12th sanctions package against the Russian Federation, the European Union for the first time allowed for the option of confiscating the locked financial assets of Russian legal entities or individuals. Such confiscation could be carried out, for example, with the aim of making compensation payments to European companies whose Russian property has passed into the possession of the Russian Federation or Russian companies.

Presidential Decree No 8 enables confiscation of frozen assets

The Russian Federation responded to the new EU sanctions package with various measures including Presidential Decree No 8. Assets that are frozen in the Russian Federation are also intended to be made accessible to the state. The assets in question are primarily securities and funds belonging to foreign counterparties from “hostile countries” which are frozen in “type C” accounts in the Russian Federation.

The new Presidential Decree No 8 therefore states: “Enforcement based on writs of execution, the imposition of an attachment and other provisional measures may not be applied to the funds and securities held in a type C account.”

The decree is thus aimed at keeping funds and securities located in type C accounts with a view to possible future confiscation by the state. Up to now, the frozen funds and securities in type C accounts could be exploited in enforcement proceedings by Russian private companies wanting to enforce their claims in Russia. No compensation is envisaged for confiscated assets held in type C accounts.

In this situation, closer scrutiny of investment protection under a bilateral investment protection treaty is advisable. Owners of the confiscated assets could, for example, have a claim for damages due to expropriation under Article 4 of the German-Soviet Investment Protection Treaty. This claim will have to be filed in international arbitration courts, i.e. courts which are independent of the Russian state. This is a system that has been successful in numerous arbitration proceedings in the past, especially against Russia and hence has proven to be an effective tool.