Authorities have approved a mechanism for confiscating foreign assets in Russia.

The Government Commission on Legislative Activity has approved a mechanism for the confiscation of foreign assets in response to "unfriendly actions" by the United States and other countries against the Russian Federation and the Central Bank. The Justice Ministry's bill , which introduces corresponding amendments to the Arbitration Procedure Code, as well as the laws "On Appraisal Activities" and "On Enforcement Proceedings," was supported at a meeting of the Government Commission on February 3, sources in the Commission and the government told RBC.

The planned seizure of Russian assets by unfriendly states is a "gross violation not only of international law but also of the rights of the Russian Federation as an owner and creditor" and entails an obligation for such states to compensate for the damages, the Ministry of Justice argues in the explanatory note to the bill. Its development was carried out in pursuance of a decree by President Vladimir Putin, which authorized Russian courts to use US property in Russia to compensate for damages from the seizure of Russian assets.

The amendments are reciprocal measures in response to actions by foreign states and contain legal preventative measures, Vladimir Gruzdev, Chairman of the Board of the Association of Russian Lawyers, told RBC. "Whether they will be applied in practice, time will tell," he added.

RBC's sources clarified that the bill was approved subject to further revisions: according to a source on the committee, the issue of the Prosecutor General's requirement to notify the Government Commission for Control over Foreign Investments of any lawsuit filed in COURT is planned to be resolved by the second reading in the State Duma . Currently, the draft stipulates the requirement for such notification.

RBC sent inquiries to the government apparatus and the Ministry of Justice.

According to open sources, Russian sovereign assets abroad primarily consist of bonds and bank accounts, the Ministry of Justice states in its explanatory note to the bill. In this case, claims may be filed against unfriendly countries and their individuals on the following grounds:

• Violation of treaty obligations by unfriendly states, which is expressed in the confiscation of these countries' government bonds or income from them from Russia. In fact, such a measure could be considered a failure by unfriendly countries to fulfill their obligations under their external public debt to Russia, according to the Ministry of Justice;

• violation of contractual obligations of banks, depositories and other participants in financial markets in the form of blocking and write-offs from accounts opened by Russia in compliance with the sanctions regime;

• causing harm by decisions that resulted in the loss of Russia's property;

• causing harm to private individuals involved in the seizure of Russian property, including through disclosure of information about it, refusal to conclude transactions, or implementation of transactions necessary for the transfer of Russian property without its consent to the disposal of unfriendly states;

• joint and several liability of a group of companies for property claims against one of the group members that evades their fulfillment due to compliance with anti-Russian sanctions;

• Unjust enrichment arising for individuals if they acquired or saved property as a result of the seizure of Russian assets. For example, through receiving a cash payment from a special fund that the US could establish using Russian assets, the bill's authors indicate.

Any case that contains any of the legal elements listed above may be grounds for a lawsuit aimed at restoring Russia's interests, according to the draft law.

It is assumed that the plaintiffs in these lawsuits may be either the Federation (represented by the property owner or an executive body designated by the government ) or the Bank of Russia. The defendants may be states designated in accordance with the bill "On measures to influence unfriendly actions by the United States of America and other foreign states." This means that, by presidential decision, defendants may be designated not only by the United States, as stipulated in the decree, but also by other countries, as stated in the explanatory note to the bill.

The claim must contain information about the lost property and its last known location, the grounds for deprivation of rights to it, and an assessment of Russia's claims. The bill authorizes the Arbitration Court of the Moscow Region to hear claims. Plaintiffs are required to notify the Government Commission for the Control of Foreign Investments of their claims, and if the Prosecutor General's Office files the claim, the Prosecutor General must send the notification.

The court then begins preparations for the trial, including by submitting a request to the government commission for a list of property located in Russia that may be subject to foreclosure. If the claim is upheld, the operative part of the decision must specify the name, value, and location of the property subject to foreclosure (the procedure for assessing its value will be established separately by the government), resolve the issue of its possible immunity, and resolve the issue of foreclosure on the debtor's property held by third parties. The property is then transferred to the ownership of state bodies, which have the rights of the claimant. The claimant has the right to refuse the said property and withdraw the claim, provided the government commission has consented to do so.

Importantly, the proposed mechanism complies with domestic civil law: it is assumed that seizure will be carried out, among other things, on the basis of Article 237 of the Civil Code ("Foreclosure on Property for the Owner's Obligations"), Gruzdev noted. A Russian court, when considering cases in accordance with the procedure stipulated by the bill, may fully or partially exclude the application of US law or other unfriendly jurisdictions to the relevant legal relations, the bill's authors note in their explanatory note.

This is possible, for example, by establishing a closer connection with the Russian legal order (Clause 2, Article 1186 of the Civil Code), the impossibility of determining the content of applicable foreign law (Part 3, Article 14 of the Arbitration Procedure Code), and by refusing to apply certain foreign law provisions with reference to ensuring the rights and legally protected interests of participants in civil transactions (Article 1192 of the Civil Code) or protecting public order (Article 1193 of the Civil Code). "This will prevent defendants from unfriendly states, in particular, from citing the fact that they were forced to participate in the implementation of sanctions aimed at seizing Russian sovereign assets," the explanatory note states.

The proposed mechanism takes into account the existence of jurisdictional immunities of foreign states in Russia, and vice versa, Gruzdev noted. "If the court determines that the scope of immunities granted to Russia in a foreign state does not correspond to the scope of immunities granted to that foreign state in accordance with Russian law, when considering the claim, the court may limit the foreign state's immunity based on the principle of reciprocity," he noted.

The government-approved mechanism is a response to a US law passed in April 2024 that allows for the extrajudicial confiscation of Russian sovereign assets, which remains dormant, notes Maria Udodova, Senior Associate in the Compliance and Sanctions Law Practice at BGP Litigation. A corresponding decision by the US President will trigger the implementation of the Russian mechanism, she believes.

"The fundamental difference between the two mechanisms is that the American version only allows for the confiscation of sovereign assets. The Russian version allows for the seizure of both state and private assets located in Russia," the expert notes.

In April 2024,  US President Joe Biden signed the REPO Act, which allows for the confiscation of Russian sovereign assets under US jurisdiction (including the assets of the Bank of Russia), in whole or in part. The document stipulates that such a decision is not subject to judicial review, except in cases of alleged deprivation of rights guaranteed by the US Constitution. As noted, American legal experts are divided on whether Russia has constitutional rights in the US that could prevent the confiscation of its assets.

The Russian draft law lacks clear grounds for including assets privately owned by foreign individuals in the list of assets subject to foreclosure, according to Yuri Aksyonov, partner at Orchards. The text merely states that such a list is compiled and submitted to the court by the government commission for the control of foreign investment. "In practice, this could lead to the forced seizure of property belonging to foreign individuals based solely on its inclusion on the list compiled by the government commission," the expert warns.

Maxim Barashev, managing partner of BBNP, also warns of the risks of a formalistic approach to interpreting the bill's provisions. "Foreign entrepreneurs, foreign subsidiaries, and other individuals who own property in Russia could be forcibly deprived of it simply due to their indirect involvement in the deprivation of Russia of property abroad," he suggests.

Another aspect of the bill that attracts attention is the permissibility of using the proposed mechanism solely to protect state interests, Aksyonov believes. "At the same time, many Russian companies and individuals have also been negatively impacted by anti-Russian sanctions and other unfriendly actions and therefore have a legitimate interest in proportionate compensation for their losses from the assets of 'complicit' foreign entities," he notes. According to the Constitution, private, state, municipal, and other forms of ownership are recognized and protected equally in Russia, Aksyonov points out.