New Rule Imposes Donation on Foreign Investors Exiting Russia

Introduction

Russia has introduced a new rule imposing a donation of at least 10% of sale proceeds on foreign investors from “unfriendly countries” who sell their businesses and exit the Russian market. This new rule is considered another way of penalizing foreign companies exiting Russia, where over 2,000 companies have applied to leave the market. However, multinational corporations find leaving Russia difficult as they have to fulfill contractual and legal obligations.

Impact of the New Rule

The introduction of the new rule means that investors from unfriendly countries who wish to sell their businesses in Russia must donate a minimum of 10% of the sale proceeds to the Russian budget. The new rule is believed to be another way of penalizing foreign companies that are exiting Russia. This can be observed through the high number of companies applying to exit the market. The authority handling applications meets only three times monthly and considers up to seven requests each time, thus lengthening the exit process.

Companies that deal with business-to-consumer services such as McDonald’s, Starbucks, and Goldman Sachs are some high-profile companies that have left Russia due to this challenging process. The Russian finance ministry did not give any comment on the matter.

Reduction of Fees for Foreign Owned Insurers in Russia for 2022

The suspension of new contracts and departure of foreign clients caused a sharp drop in fees for foreign-owned insurers in Russia. As a result, several large insurance firms such as Alliance Life, RB Life Insurance, and Raiffeisen Life saw their premium collections reduced by 37-44%. Smaller companies like Turikum experienced almost half-cut premiums.

Companies that focused on the corporate segment providing coverage to firms with foreign shareholders were affected. The structure of insurance portfolios also had an impact on performance. Companies where banking and life insurance prevailed showed a decrease in premiums. Companies with foreign participation reinsurance, which dominated, faced restrictions imposed on the reinsurance market.

About 20 insurance companies with foreign capital were present in the Russian market, accounting for approximately 5% of direct insurance premiums. Previously, foreign-invested insurance firms that have passed on to new companies, primarily banking groups, will restore their performance. The position of firms that have not yet shifted from foreign ownership is expected to continue deteriorating. In the event of a buyback when the market changes, transferring business to management can help.

International Corporations still doing Business in Russia despite International Sanctions

Despite international sanctions imposed on Russia, many global corporations continue business as usual in the country. Subsidiaries of over 1,400 EU and G7 companies were still active in Russia last fall. The continued activity of these businesses means that billions of rubles are helping stimulate the Russian economy and undermining the efficacy of international sanctions.

Many international corporations on Yale’s list are still operating in Russia, allowing Russia to finance its war. Governments could suggest that these companies have a moral and ethical obligation to discontinue their work in Russia to limit its ability to finance its war in Ukraine.

International corporations have the power to bring a quicker end to Russia’s invasion of Ukraine by terminating their operations in the country. Stronger measures could be taken by political and governmental leadership, such as encouraging stakeholders to withdraw their holdings and invest in other corporations or imposing surcharges on a company’s revenue as long as they continue operating in Russia.

Conclusion

In conclusion, the Russian government has introduced new rules imposing donations on foreign investors leaving the country as a way of penalizing them. Multinational companies find it challenging to leave due to contractual and legal obligations. On another note, foreign-owned insurers faced a reduction in fees as a result of restricted reinsurance markets and structural issues with insurance portfolios. Despite international sanctions, many global companies still operate in Russia, allowing the country to finance its war. Governments may consider implementing stronger measures to limit Russia’s ability to fund its war in Ukraine.

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