Expropriation of Russian assets & of entities and individuals deemed to support Russia’s aggression

Mit Gesetz Nr. 2116-IX vom 3.3.2022 wurden die Grundprinzipien der Zwangsbeschlagnahme von Eigentum der Russischen Föderation und ihrer Residenten in der Ukraine festgelegt. Die Beschlagnahme erfolgt entschädigungslos. Sowohl bewegliche als auch unbewegliche Vermögensgegenstände, ebenso wie Bankguthaben, Wertpapiere, Gesellschaftsanteile und sonstige Vermögenswerte können beschlagnahmt werden. Die Möglichkeiten zur entschädigungslosen Enteignung auch von Privatpersonen wurden durch die letzten Änderungen des ukrainischenSanktionsgesetzes (Gesetz Nr. 2257-IX vom 12.5.2022) erheblich ausgeweitet. Ausreichender Grund für Enteignung sind nunmehr auch finanzielle oder informationelle Unterstützung Russlands, sofern dies zu erheblichen Schäden für die nationale Sicherheit, Souveränität oder territoriale Integrität der Ukraine führt. Unter finanzielle Unterstützung fallen bereits Steuerzahlungen an den russischen Staat oder Investitionen in russische Staatsanleihen. Als informationelle Unterstützung gelten etwa Äußerungen im Internet oder Massenmedien, welche zu Hass gegen das ukrainischeVolk, seine Kultur oder Sprache aufstacheln. Ziel der sehr weitgehenden Regelungen sind vorrangig ukrainische Kollaborateure, allerdings ist der formale Anwendungsbereich deutlich weiter. Gerichtliche Kontrolle ist nur in begrenztem Umfang vorgesehen,konkrete Erfahrungen fehlen noch.

Since the begin of Russia`s aggression, Ukraine has tightened incrementally its legal mechanisms for confiscation and expropriation of assets owned by entities and individuals deemed to support Russia`s war. The major legislative acts are Law of Ukraine No. 2116-IX of March 3, 2022 "On basic principles for the expropriation in Ukraine of assets belonging to Russia and itsresidents" (as amended), hereinafter "Law 2116-IX", and Law of Ukraine No. 2257-IX of May 12, 2022 "On amending certain legislative acts of Ukraine to enhance the effectiveness of sanctions related to assets of certain persons", hereinafter "Law 2257-IX". Both laws aim at expropriation, i. e. forced unilateral transfer of ownership rights to the Ukrainian state.

While Law 2116-IX created an administrative expropriation mechanism applicable only to assets partly or fully owned or controlled by the Russian state or its residents in Ukraine, Law 2257-IX envisages a judicial expropriation mechanism applicable to any individualor entity deemed to facilitate/support Russia`s aggression.

I. Expropriation of Russian Assets under Law No. 2116-XI

1. Assets subject to expropriation

Subject to expropriation under Law 2116-IX are assets that are located (registered) in Ukraine, such as real estate and movable property, bank deposits, securities, shares (corporate rights), and that belong to Russia and Russian-controlled Ukrainian residents (as defined below) either directly or through affiliated persons.

2. Entities affected by expropriation

Entities whose assets can be expropriated are Russia as a state, as well as Ukrainian legal entities (their branches, representative offices) duly incorporated and existing in Ukraine under Ukrainian law

• whose founder (participant, shareholder) or beneficiary is, either directly or indirectly, Russia; and/or

• in which Russia or legal entities whose founder (participant, shareholder) or beneficiary is, either directly or indirectly, Russia,holds, either directly or indirectly, a share, participation interest or any other form of membership.

Law 2116-XI does not apply to entities unrelated to the Russian state.

3. Expropriation mechanism

Expropriation under Law 2116-XI shall be carried out due to reasons of public necessity (including pressing military necessity) and based on principles of the rule of law, transparency, objectivity, proportionality, strategic importance, and effectiveness. No compensation is due for expropriated assets.

The Cabinet of Ministers of Ukraine is vested with the authority to prepare draft decisions on expropriation, which shall, in particular, identify the assets being expropriated, their owners, and set the time period for the expropriation of each identified object. Draft decisions are submitted for consideration to the National Security and Defense Council of Ukraine, which passes decisions on expropriation. Such decisions take effect after their enactment by decrees of the President of Ukraine. The respective presidential decrees are subject to subsequent approval by the Ukrainian Parliament, which shall be issued within six months after the end of martial law in Ukraine.

Expropriated assets shall become state property of Ukraine as of the date of a respective presidential decree. In certain cases, such as with real estate located in Ukraine, Ukraine’s title is subject to registration in the relevant Ukrainian state registers.

Technically, expropriated assets shall be transferred to a special-purpose state-owned company still to be created by the Cabinet of Ministers of Ukraine. The said company’s title shall be limited to the so-called "right of full economic management" (a traditional ownership-like legal regime of assets belonging to state-owned companies, under which the right to dispose of/alienate the assets is realized by a controlling state authority) or "right of perpetual use" (for expropriated land).

II. Expropriation under Law 2257-IX

1. Assets subject to expropriation

Subject to expropriation are assets:

• legally belonging to an individual or a legal entity (i. e., they have title to such assets), or

• with respect to which an individual or legal entity can, directly or indirectly (through other individuals or legal entities),exercise acts tantamount in their content to the right of disposal.

Expropriated can be items of movable and immovable property including shares and other corporate rights in legal entities. So far, it remains unclear what the exercise of "acts tantamount to the right of disposal" shall mean in the context of Law 2257-IX.

2. Persons affected by expropriation

The sanction of expropriation shall be applied to individuals and legal entities who have created an essential threat to the national security, sovereignty, or territorial integrity of Ukraine (including through armed aggression or terrorist activities) or substantially facilitated (including through the provision of financial funds of informational support) the commission of such actions by other persons. Such persons include:

• Russian-controlled Ukrainian entities, as defined above (see Section I.2); and

• any other persons (individuals and legal entities, both Ukrainian and foreign, regardless of formal affiliation and control with Russia, its government, pubic authorities, Russian individuals and legal entities) who have committed one or several of the acts described below.

With regard to Russian-controlled Ukrainian entities, the mechanism of expropriation under Law 2116-XI overlaps with the mechanism of expropriation under Law 2116-XI (outlined above in Section I), since both can potentially apply.

3. Grounds for the application of the sanction of expropriation

Law 2257-IX provides an extensive, and sometimes vague, list of grounds for the application of the sanction of expropriation, covering a broad range of actions and decisions related to armed aggression against Ukraine, including its direct or indirect substantial facilitation / support, such as:

• Inflicting substantial damage to the national security, sovereignty, or territorial integrity of Ukraine, including, but not limited to, by actions and decisions related to the planning, organizing, preparing, ordering, financing, directing, coordinating and otherwise supporting aggression against Ukraine, occupation of its territory and thefunctioning of illegal occupational authorities;

• Substantial facilitation of the commission of the above actions or the making of the above decisions, in particular, by providing for use by Russia of territory, civil or military infrastructure, equipment, premises and territories for the stationing of armed unitsand military equipment, other movable or immovable property; supply, provision, storage of weapons, ammunition, explosives,etc., provision of repair of such means and tools;

• Provision of financing or material and technical support to Russia’s activities related to armed aggression against Ukraine oroccupation / annexation of its territories, in particular, by:

• Payment of taxes, duties to Russia’s budget if the total amount of such payments (except customs) for the last four consecutive reporting quarters exceeds the equivalent of UAH 40 million for a legal entity and UAH 3 million – for an individual.

• Providing donations, charitable aid, sponsorship, other free-of-charge transfer of money or property for the benefit of state ormilitary authorities of Russia, of legal entities and individuals who commit the actions or take decisions specified above orfinance such actions, if the total annual amount of such funds or value of property is at least UAH 750,000 (in equivalent).

• Investing into state bonds issued by Russia if the total annual amount of investment is at least UAH 3 million (in equivalent).

• Informational support, in particular, through organization, financing and immediate commission of public actions aimed at instigation, justification, legalization, denial of armed aggression against Ukraine, commission of war crimes, glorification of persons who have committed armed aggression against Ukraine, support of an aggressor state’s policy of non-recognition of the right of the Ukrainian people to self-identification and self-determination, distortion of the idea about the distinctiveness of the Ukrainian people, incitement of hatred toward the Ukrainian people, its culture, language, and national identity. Informational support includes activities directed at an unspecified number of recipients, in particular through the internet or mass-media.

4. Application mechanism

Expropriation under Law 2257-IX can be applied only when and as long as martial law is in force in Ukraine.

A precondition for expropriation is that the owner of the assets in question is first entered into a list of sanctioned persons and the assets are frozen. Both decisions are taken by the National Security and Defense Council of Ukraineand enacted by a decree of the President of Ukraine.

In contrast to the entirely administrative, out-of-court expropriation mechanism under Law 2116-XI, the expropriationprocedure under Law 2257-IX shall take place in a court procedure. However, the juridical procedure is in certain ways curtailed and it remains to be seen if effective judicial control will take place:

The Highest Anti-Corruption Court of Ukraine (the "Court") shall have exclusive jurisdiction to impose the sanction of expropriation, the procedure being conducted according to the Code of Administrative Procedure of Ukraine. The executive agency authorized to locate affected assets, initiate their freezing and bring claims for expropriation to the Court shall be the Ministry of Justice of Ukraine.

Each case shall be considered within 10 days by a panel consisting of three judges. A statement of claim filed withthe Court shall contain, inter alia, a substantiation of the grounds for expropriation and a list of affected assets. The Court shalldecide in favor of a party whose evidence appears more convincing compared to the evidence presented by the opposing party.

Appeals against decisions of the Court can be brought to the Chamber of Appeal of the Court within five days after adecision was pronounced by the Court or published on its website. The Chamber of Appeal has five days to consider the appeal. Decisions on appeals are not subject to further revision.

Importantly, failure by a party to appear in court (both in the first and appeals instances), regardless of the actual reason, shall not affect the process and the Court’s ability to make a judgement.

Decisions of the Court on expropriation shall be sent to the Cabinet of Ministers of Ukraine for enforcement. The latter shall define those responsible for enforcement as well as its procedure and manner. It can entrust the Ministry of Justice of Ukraine, the State Property Fund of Ukraine, military administrations and / or other state authorities, state-owned companies withenforcement.

The legal effect of expropriation is that assets passinto state ownership, i. e., Ukraine acquires title to thoseassets. Incertaincases,such as with real estate located in Ukraine, title is subject to registration in the relevantUkrainian state registers. Importantly, any pre-existing encumbrances on sanctioned assets, such as a mortgage, lien, arrest, moratorium, etc., shall not prejudice the application of expropriation.

Law 2257-IX remains silent as to enforcement of expropriation regarding assets located outside of Ukraine.

5. Protection of those who report sanctioned assets

Law 2257-IX guarantees protection to individuals (and their close relatives) who report assets of sanctioned persons subjectto expropriation to the Ministry of Justice of Ukraine. Information about such individuals may not be disclosed to any third parties who are not involved in the application of the sanctions of freezing or expropriation of those assets. Protection includes physicalsafety provided to reporting individuals and their close relatives by law enforcement agencies as well as relief from liability forreporting sanctioned assets.

III. Conclusion

The mechanisms of expropriation under Laws 2116-XI and 2257-IX are intended to ensure adequate compensation for economic damages caused to Ukraine by Russia`s aggression.

Under a common understanding of rule of law, the extensive grounds for expropriation and the very cursory juridical procedures under Law 2257-IX are questionable, reflecting the overall pressure on Ukraine as a country in war. As of end July 2022, no juridical expropriation procedure under Law 2257-IX has been published and only one administrative expropriation procedure under Law 2116-XI (relating to Ukrainian subsidiaries of Russian state owned banks, State Development CorporationVEB.RF and Sberbank) has taken place.

It remains to be seen to which extent Ukraine will use these new expropriation rules, and which legal standards will beapplied to them in practice.

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