New transaction bans for persons from unfriendly countries in the financial and fuel and energy sectors

On 5 August 2022 the President of Russia signed an edict ("Edict No. 520") on special economic measures in the financial and fuel and energy sectors in connection with unfriendly actions of certain foreign states and international organisations[1]. Edict No. 520 applies to strategic enterprises, fuel and energy companies and their service partners, users of subsurface sites containing deposits of hydrocarbons and other minerals, and banks.

It is stated in the document that the reason for adopting the measures is to protect national interests. The full text of Edict No. 520 can be viewed here.

Prohibitions established by Edict No. 520

Persons connected with unfriendly countries and persons controlled by them are banned until 31 December 2022[2] from entering into transactions involving securities and interests held by them in Russian legal entities and participating interests, rights and obligations belonging to participants in production sharing agreements, joint activity agreements or other agreements on the basis of which investment projects are carried out in the territory of Russia.

The prohibition introduced by Edict No. 520 applies to transactions:

• involving shares in joint stock companies included in the list of strategic enterprises and strategic joint stock companies[3] ("the List")
• involving shares and interests in business companies in which joint stock companies included in the List directly or indirectly own shares or interests
• involving participating interests, rights and obligations belonging to participants in the "Sakhalin-1" Production Sharing Agreement and the Agreement on Oil Development and Production at the Kharyaginskoye Field
• involving shares and interests in business companies which manufacture, service and repair equipment for fuel and energy companies
• involving shares and interests in business companies which generate and supply thermal power and (or) electricity
• involving shares and interests in business companies engaged in the refinement of oil and petroleum feedstocks and the manufacture of refined products thereof
• involving shares and interests in Russian banks
• involving shares and interests in business companies which are users of subsurface sites containing deposits of oil, gas, coal, uranium, copper, gold, diamonds and other minerals meeting certain criteria

For the purposes of Edict No. 520, transactions are broadly defined to include any arrangements that result directly or indirectly in the establishment, variation, termination or encumbrance of rights of possession, use or disposal of securities, interests in the charter capitals of Russian legal entities, rights and obligations under PSAs and joint activity agreements, etc.

It should also be noted that the criteria governing the prohibition of transactions involving and shares and interests in subsurface users are less restrictive for certain types of minerals and deposits, such as gas and oil, than for deposits of federal significance.

The transactions listed above may take place only upon receipt of a special permit from the President of Russia. Transactions made without a special permit will be deemed void, and shares and interests transferred in violation of the rules will not confer corresponding rights on their new owners.
In the near future, the President of Russia will approve lists of fuel and energy companies and Russian banks that are subject to the restrictions introduced by Edict No. 520.

Exceptions to Edict No. 520

The prohibitions established by Edict No. 520 do not apply to legal relations:

• governed by Edict No. 416 of the President of Russia of 30 June 2022 ("Edict No. 416")
• governed by Federal Law No. 320 of 14 June 2022 ("Law No. 320")

Edict No. 416 instructs the Russian Government to establish a limited liability company (LLC) to which all the rights and obligations of Sakhalin Energy Investment Company, Ltd. (the "Sakhalin-2" project) are to be transferred.

Law No. 320[4] governs arrangements whereby a branch/representative office of a foreign legal entity connected with unfriendly countries is converted into an LLC. In particular, the special procedure may be applied provided that Russian persons own at least 25% of shares/interests in the foreign legal entity concerned.

***

We recommend that every transaction involving shares or interests in fuel and energy companies and Russian banks should be checked to assess the need to obtain a special permit from the President of Russia. We also recommend keeping track of new documents issued pursuant to Edict No. 520.