Amid a mass exodus, Russia drafted a law where it can seize the property of foreign investors and increase pressure on those still there.

With Western sanctions in place, recessions, inflation, and the drop in currency value, Russia’s economy is in bad shape. And the mass exodus by these businesses is not helping the country.

Many big brands are leaving Russia—from F&B establishments like Starbucks and McDonald’s to automobile, luxury, and even tech brands, among many others. And to prevent this, Russia is advancing a new law that lets it take control on the local businesses of Western companies, likewise making it hard for multinational brands who are trying to exit the country.

This departure has angered Russian politicians. Former president Dmitry Medvedev—now the deputy chairman of Russia’s Security Council—has been especially vocal about the issue, calling them “enemies who are now trying to limit our development and ruin our lives.”

Caught Between a Rock and a Hard Place

This law—which could be in place within weeks—will give Russia sweeping powers to intervene, especially where there is a threat to local jobs in the industry. It will not only make it more difficult for Western companies to disentangle themselves quickly (unless they are prepared to take a big financial hit), but it also puts pressure on those who are still there.

For example, Italian lender UniCredit, Austrian bank Raiffeisen, and even the world’s biggest furniture brand, IKEA, as well as hundreds of smaller firms still have businesses in Russia. And if any of them try to leave, they will have a hard time doing so—should this law be put in place.

Thus, all eyes are on the development of this law. IKEA, which has paused all operations in Russia to this day, is closely monitoring the progress, while Raiffeisen said that it was assessing all options, including a carefully-managed exit.

Intervention on “Unfriendly” Countries

But what exactly does this law implement this intervention? For one thing, it paves the way for Russia to appoint administrators over companies owned by foreigners in what they consider as “unfriendly” countries. This includes those who want to quit Russia, while the conflict with Ukraine affects its economy.

Likewise, countries that have imposed economic sanctions on Russia are deemed “unfriendly,” including firms in the European Union or United States, thereby putting them at risk.

The draft law includes a provision where Russia can appoint an administrator to firms where at least 25% of the shares are in “unfriendly” foreign hands. Moreover, it includes a wide range of criteria that allows for intervention—like when the company plays a critical role as a local employer, or provides important services. These include companies that make medical devices, transport and energy companies, or any firm whose closure can cause prices to sharply increase.

And with that, the state can justify taking control on many grounds. Worse, the state-appointed administrator would also be allowed to sell the confiscated business, while its former owners aren’t allowed to do business in Russia. Said administator can be appointed by a court or even the Ministry of Economic Development.

A Direct Hit to the Economy

In response to this, the European Commission proposed toughening its stance on Wednesday, May 25—to make breaking European Union (EU) sanctions against Russia a crime. This means that EU governments can confiscate the assets of companies and individuals that evade restrictions against Moscow.

Likewise, in a move that could hit Moscow even harder, the Biden administration announced that it would not extend a waiver that enabled Russia to pay US bondholders.

“The government is interested in preserving jobs and tax revenues,”explained Sergej Suchanow, a lawyer with risk management and compliance consultancy RSP International. “First and foremost, the government will apply the rules to big companies. To avoid an administrator, companies must show they are not leaving their Russian businesses in the lurch.”

On the other hand, Ulf Schneider, a consultant working with German companies in Russia, is working on an alternative—one that allows foreign companies to voluntarily hand over control to a trustee of their choice. This could convince Russia that the companies are being responsible, yet at the same time distancing themselves. “Sale is an option but the conditions for a sale are not good,” Schneider said.

This week, the bill passed its first reading in the lower house of parliament (Duma), but it still faces two more readings and an upper house review before being signed into law by President Vladimir Putin, which could take several weeks

While Russia’s economy ministry said that it will pick out companies only in “critical cases”—like when it becomes necessary to shield production or jobs—other people are against the new law. “Russia was already isolated and no longer of interest to investors,” said Michael Loewy of the Federation of Austrian Industries. “This law can only make that worse.”

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