American companies could lose billions if Russia does seize their assets

https://finance.yahoo.com/news/american-companies-could-lose-billions-if-russia-seizes-their-assets-155936278.html

American companies ‘can’t do much’ if Russia seizes their assets

Alexis Keenan, Reporter, March 15, 2022

McDonald’s (MCD), Salesforce (CRM), Starbucks (SBUX), and hundreds of other U.S. companies that have paused business in Russia after its invasion of Ukraine may lose their Russian-based assets forever.

On Monday, the Wall Street Journal reported that Russian prosecutors threatened McDonald’s, Coca-Cola (KO), and IBM (IBM), and other companies, warning that Russia could seize property of companies that flee the country and prosecute executives who speak out against the Kremlin.

Now, international law scholars say, the whims of the Russian government could determine the fate of U.S. assets in Russia. The stakes are high: Exxon (XOM) has $4 billion in Russian limbo, according to a Reuters analysis of company statements. Citigroup (C) has $10 billion there, the analysis found.

“Whether it’s a storefront or a mine, there’s really not not a whole lot you can do to protect that from seizure by the government,” says Paul Stephan, a law professor at University of Virginia’s School of Law and expert in post-Soviet legal systems.

‘They’re unlikely to let them go’

Russia has indicated that it will act on its threats to seize assets. On Thursday, Russian President Vladimir Putin proposed external management and transfer of control of companies that withdraw from Russia, as the Washington Post and Reuters reported. Putin has also supported a proposed Russian law that would nationalize operations of departing Western companies, the Wall Street Journal reported.

For their part, U.S. companies may have little recourse.

Men walk in front of the McDonald's flagship restaurant at Pushkinskaya Square - the first one of the chain opened in the USSR on January 31, 1990 - in central Moscow on March 13, 2022, McDonald's last day in Russia. - On February 24, Putin ordered Russian troops to pour into pro-Western Ukraine, triggering unprecedented Western sanctions against Moscow and sparking an exodus of foreign corporations including H&M, McDonald's and Ikea. (Photo by AFP) (Photo by -/AFP via Getty Images)
Men walk in front of the McDonald’s flagship restaurant at Pushkinskaya Square – the first one of the chain opened in the USSR on January 31, 1990 – in central Moscow on March 13, 2022, McDonald’s last day in Russia. (Photo by AFP) (Photo by -/AFP via Getty Images)

In theory, international and domestic laws protect against illegal asset seizures, says Yale Law School professor Lea Brilmayer, who specializes in international courts and tribunals. In reality, she said, U.S. companies can’t rely on Russia to return U.S. business property.

“That’s not going to do them a lot of good in this case,” she said, explaining that Russia would be expected to refuse participation in any legal proceedings and assert sovereign immunity to insulate its government from any domestic claims. “You really can’t do much of anything.”

“Once they have control of U.S. corporate assets, they’re unlikely to let them go,” Brilmayer says of the scenario where Russia makes good on its threats.

Several international arbitration bodies hear disputes between companies and governments, she says. Yet what makes regaining assets difficult is that there’s no single entity with power to enforce rulings.

One possible, yet slim, avenue for U.S. companies to regain seized property is through the U.S.-Russia negotiations, or through a larger peace deal with the U.S. government. It’s possible, Brilmayer said, that Russia would bargain for the return of Russian assets seized by the U.S. through sanctions, or otherwise. Such deals, she cautioned, can be slow to materialize.

“That’s hard to get when one of the countries is belligerent, if you’re talking about the short term,” she said. “I think the track record on getting back assets in this sort of situation is not as good.”

Another avenue unlikely to materialize, she said, is through default judgments in U.S. courts. A company, for example, could obtain a ruling against Russia’s government, without its participation. In theory, Russian assets held by the U.S. government could then be used to reimburse U.S. companies for losses.

The potential loss of Russia-based assets poses steeper risks to some U.S. companies than others. Exxon (XOM), McDonald’s, and Mondelez International (MDLZ) are three of the U.S.’s most heavily invested companies in Russia, according to CNN. Those companies did not respond to a request for comment from Yahoo Finance.

Some companies do carry private and government-funded political insurance meant to protect them against diplomatic hostilities, Stephan noted. However, larger multinational companies, he said, tend to self-insure, and rely on treaty protection as a backup.

“Russia’s track record is to lose treaty claims, then not honor them, and it’s very hard,” he said. “There are outstanding $70 to $80 billion worth of claims against Russia right now, as a result of treaty arbitrations, but almost none resulted in a payout.”

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

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