Not expecting miracles: what assets of russia and russians can be nationalized?

On 7 March 2022 the Law of Ukraine No. 2116-IX “On the Basic Principles of Forcible Seizure in Ukraine of Property Objects of the Russian Federation and its Residents" (the “Law”) came into force. The Verkhovna Rada of Ukraine has thus implemented a long-standing political narrative of forcible seizure of property from the aggressor state and its onhangers.

Who can be forcibly seized property?

So far, the Law extends to the property of Russia and its “residents”. Residents, according to the definition given in Par. 2 Art. 1, mean Ukrainian and foreign legal entities, the owner (direct or indirect) and/or beneficiary of which is Russia.

Obviously, such a definition is too narrow, and, in fact, reduces the effect of the normative act to a minimum. Even the property of diplomatic and consular missions of Russia on the territory of Ukraine, which immediately comes to mind when we talk about property directly own by the state, is under immunity according to international law. As a result, the Law will not apply to such property.

Meantime, on 1^st April 2022 the bill No. 7169 on amendments to the Law of Ukraine “On the Basic Principles of Forcible Seizure in Ukraine of Property Objects of the Russian Federation and its Residents" clarifying certain provisions (the “Bill”) was adopted, which expanded the concept of residents and included:

• citizens of Russia
• non-citizens of Russia who have the closest ties with the aggressor state (have a place of residence or are engaged in their main activities there)
• also by the decision of the National Security and Defense Council of Ukraine or the court, individuals and legal entities (regardless of citizenship, place of residence, location, main activity) who publicly deny or support the Russian military aggression against Ukraine, establishing and approving temporary occupation of part of the territory of Ukraine, and who did not stop or cease their economic activities on the territory of the Russia during the martial law in Ukraine, imposed in connection with the implementation of armed aggression against Ukraine, are equated to residents

As of now, the Bill is not signed by the President of Ukraine, but as can be seen from the current political course, its further entry into force is only a matter of time.

Such supplemented and expanded definition of the range of subjects in respect of which the forcible seized of property is possible provides "carte blanche" to the Ukrainian authorities and allows to meet public needs not only property of Russia, but also those who are connected with it and support criminal military aggression.

What property can be forcibly seized?

According to the Par. 4 Part 1 of Art. 1 of the Law may be seized movable and immovable property, funds, bank deposits, securities, corporate rights, other property (assets) located (registered) on the territory of Ukraine owned directly or through affiliated persons by Russia and its residents, that is, property in its broadest sense.

What are the grounds for forcible seizure of property?

Part 1 of Art. 2 of the Law establishes that forcible seizure of property is possible only on grounds of public necessity and based on the principles of legality, transparency, objectivity, relevance, strategic importance and efficiency.

As a reminder, deprivation of private property according to the general principle enshrined in the Constitution of Ukraine and international legal acts (in particular, in Protocol No. 1 to the Convention for the Protection of Human Rights and Fundamental Freedoms) is an exception and is based only on public necessity. Thus, the nationalization of property can take place only when the public interest in the deprivation of property outweighs the interest of the individual.

In addition, the Law introduces a new construct of “strategic importance” without disclosing its essence. Given the evaluative nature of this construct, it is difficult to predict which objects will be considered strategically important. Accordingly, the approach to identifying objects for forcible seizure can be both broad and rather limited.

What is the procedure for forcible seizure of property?

The list of relevant property is to be determined by the Cabinet of Ministers of Ukraine, after which the National Security and Defense Council of Ukraine decides on the forcible seizure of property of Russia and its residents in Ukraine, which is enacted by decree of the President of Ukraine. It is also envisaged that within six months after the end of martial law, the Verkhovna Rada of Ukraine will approve the relevant decree of the President of Ukraine.

According to Part 2 of Art. 2 of the Law forcible seizure in Ukraine of property of Russia and its residents is carried out without any compensation for their value. This is argued by the fact that Russia has launched and is waging a full-scale aggressive war against Ukraine and the Ukrainian people. The Bill also adds that the forcible seizure of property is carried out at the expense of future reparations in favor of Ukraine, which has suffered aggression from Russia.

It seems that by using the construct of “forcible seizure”, the legislator tries to distinguish it from the forced alienation of property, which is possible, according to Art. 42 of the Constitution of Ukraine, only subject to prior and full reimbursement of the value of property, and from confiscation, which, in accordance with the Constitution, can be applied only by a court decision. The chances of success of appealing the Law on the grounds of unconstitutionality are rather difficult to assess, but, according to the author, the Constitutional Court will be able to reject such complaints, if any, using the purposive approach of interpretation[1] of the Constitution of Ukraine.

Possible objects of forcible seizure 

Taking into account the requirements of public necessity, the principle of strategic importance and the definition of residents of Russia to which the forcible seizure of property may apply, expended by the Bill in case of its entry into force, it is possible to seize the following big objects.

• Sberbank and Prominvestbank. In Ukraine, Sberbank operates as JSC “International Reserve Bank”, 100% shares of which are owned by Sberbank. Russia exercises decisive control over Sberbank through the Russian National Welfare Fund, which the government of the Russian Federation controls. PJSC “Prominvestbank” is 99.7726% owned by the Russian State Development Corporation “WEB.RF.”, which, in turn, is directly owned by the Russian Federation. However, on 25 February 2022, the National Bank of Ukraine decided to revoke banking licenses and liquidate these banks in Ukraine. However, this does not mean that at any stage of liquidation, these banks cannot be nationalized, given that the property remaining after liquidation must be transferred to shareholders of the banks, which will be direct funding for military action of the Russian Federation.
• Forward Bank. The only member of PJSC “Forward Bank” is the Russian “Bank Russian Standard” indirectly owned by the Russian entrepreneur Rustam Tariko. Given how important the financial sector of the economy is to ensure the state’s economic security, as well as the fact that Ukraine has already had some experience in the nationalization of banks, the government’s decision on Forward Bank in a state of martial law seems possible.
• Kyivstar. 99.9947% of PrJSC “Kyivstar” shares belong to the Dutch company VEON Holdings, which Russian-Israeli businessman Mykhailo Friedman owns through Alfa Group. The European Union sanctioned Mykhailo Friedman after the full-scale invasion of the Russian Federation. In current conditions of the hybrid war, the nationalization of one of the largest telecommunications operators in Ukraine may be justified by the motives of information security of the society.
• Energomashspetsstal. The company’s official website states that it is the largest Ukrainian manufacturer of special cast and forged products of individual and small-scale production for metallurgy, shipbuilding, energy (wind, steam, hydro, nuclear) and general engineering. 92.6771% of PJSC “Energomashspetsstal” shares are owned by the Cypriot company Emss Holdings Limited, indirectly owned by the Russian state corporation “Rosatom”, which deals with, among other things, the nuclear weapons complex of the Russian Federation.
• Sumy Research and Production Association. JSC “Sumy Machine-Building Research and Production Association” is one of the largest Ukrainian machine-building complexes to produce equipment for the oil, gas, nuclear and chemical industries. The indirect owner of the company is a Russian businessman Volodymyr Lukyanenko. The forcible seizure of strategically important large enterprises of the heavy industry will be in line with the doctrine of protection of economic public interests during wartime.
• Tatneft. LLC “Tatneft-Gas Station-Ukraine” belongs to the Russian PJSC “Tatneft named after V.D. Shashyna”, 36% of which is owned by the government of the Republic of Tatarstan – a subject of the Russian Federation. The fuel industry is one of the key in the realities of modern hostilities, so the nationalization of gas stations is a logical step in protecting the society’s interests.

Forcible seizure of property from a state, that has waged and is waging war, and its residents is a legitimate measure to protect the interests of Ukrainian people The Law adopted outlined the legal basis for the seizure of property directly or indirectly owned by Russia and its residents. The Law gives the authorized state authorities discretion in determining the property to be seized. Accordingly, it is not possible to predict the effectiveness of the Law at the moment, as its implementation will depend on the relevant authorities.

At the same time, it is worth remembering that the deprivation of private property is an exceptional measure and must be justified in order to avoid negative consequences for Ukraine in the future after the end of the war.