The Emerging Indirect Expropriation Strategy Under Russian Sanctions, Tax and Bankruptcy Laws

On Friday, Oct. 7, 2022, the Russian government moved forward by presidential decree to disenfranchise the owners of the Sakhalin-1 energy project, including the foreign nationals of several countries that the Russian government designated as "unfriendly countries," Mondaq reported. Russia has applied the "unfriendly country" designation to any country, including the U.S., that has joined in international sanctions against Russia. Using a March 3, 2022, presidential ban on foreign investment in the energy sector – which prevents foreign investors from "unfriendly" States from restructuring or selling their interests in Russian strategic enterprises – the government can control the terms by which an investor can restructure/sell its assets and can effectively appropriate the assets in an indirect manner. The decree issued in relation to the Sakhalin-1 project was part of the Russian counter sanctions strategy, which resulted in an indirect form of expropriation, with limited options available for redress. U.S. companies need to be aware of their increasing exposure to business risks from this "creeping" form of expropriation, particularly given the continuing scope of U.S. sanctions against Russia, which makes a foreign company remaining in Russia vulnerable to sanctions or harm to business reputation. The Sakhalin-1 action follows a similar strategy Russia used in seizing full control of another gas and oil project in the Russian Far East, Sakhalin-2. Following a July 2022 decree, the Russian government transferred the project to a new Russian holding company, and a major U.S. oil company subsequently reported the loss of its 27.5% stake in the project in September. Read more.