Nationalisation in Russia:
a new problem for companies

Danone and Carlsberg have had their shareholdings in their Russian subsidiaries confiscated and transferred to the Russian state shareholding agency by a decree signed by President Putin on 16 July. This is effectively a nationalisation of the assets held by these groups in Russia.

The background to this nationalisation: Russia’s war in Ukraine

This conflict has justified economic sanctions against Russia by the European Union.

As a result of these European sanctions and public pressure, Western groups with operations in Russia were given the choice of staying and continuing their local activities or leaving. 

Companies that have continued their activities have not had their assets confiscated but companies that chose to leave the country were subject to confiscation measures, even though they were often in the process of negotiating a buyout of their assets by a local company which was not subject to European sanctions. Other groups that negotiated directly with the public authorities, such as Renault, which sold its shares in Renault Russia and Avtovaz to Russian public entities, suffered significant losses – either selling for a symbolic rouble or at a knock-down price and subject to taxation – but were not expropriated.

This context of nationalisation is fairly new

Other asset confiscation examples in the past had different rationales:

• Resumption of the exploitation of a country’s natural resources, such as the oil company PDVSA in Venezuela in 1976, or the nationalisation of the copper and cobalt mines of Katanga by the government of the Congo in 1967.
• Social policy to meet the basic needs of the population, such as the nationalisation of Aguas de Argentina in 2006 by the Argentine government, or the recent nationalisation of 13 energy plants by Mexico. 
• The desire of a new government to change its partner company, as in the case of the unilateral termination of the concession for the port of Conakry by the new president, Alpha Condé, in 2011.

Until now, companies have analysed the risks to their investments on the basis of these historical precedents. Before investing in a country, they have assessed the political and social stability, the state of public finances, the quality of relations with national and local authorities, and potential conflicts of interest. Specific insurance policies cover the risk of asset losses resulting from political or financial crises, or a change in the host country’s policy.

The Russian case highlights a new and growing risk: the political fragmentation of the world and the widespread use of economic sanctions in a context of political and economic rivalries.

For a company, the loss of an investment in a country can be disconnected from the country’s economic and political situation and from the relationship the company has with the political authorities. This loss may be linked solely to a one-off or lasting conflict between that country and the company’s home country, or it may be linked to the imposition of sanctions by a third country, such as the United States, which is capable of imposing extra-territorial economic sanctions. This situation has already been experienced by companies operating in Iran, which were required to halt their activities after the US authorities re-imposed sanctions on that country in 2018.

It is therefore prudent for companies analysing the risks associated with their international business to consider the risk of sanctions being applied in the countries in which they operate. The decision to take out insurance cover should also take this into account, as should the negotiation of the terms and conditions of cover that were not initially designed to take account of these trade sanctions.

AU Group, a broker specialised in credit and political risks, is available to help companies find the best solutions for covering the risks associated with their international investments.