Sakhalin 2: nationalisation? No, reorganisation

Since the beginning of the collective West's sanctions war against Russia, many foreign companies operating in our country have announced their withdrawal from the Russian Federation, started to curtail their activities, and some even stopped them completely. It is noteworthy that there are many politicians and public figures in Russia who, even before the war began, declared that the presence of foreign capital in the country had reached a dangerous level.

Until the middle of the last decade, Rosstat provided a fairly large amount of statistical data that made it possible to assess the position of foreign capital in the Russian economy. According to the latest available data from Rosstat, in 2015 the shares of companies with foreign capital in the total authorised capital of all forms of ownership were equal: in trade - 81%, in the food industry - 66%, in the mining industry - 42%.

Only expert estimates are available for later years. Thus, according to the calculations of academician S. Yu. Glazyev, today about 50% of the assets of the Russian industry belong to non-residents. This assessment also takes into account Russian citizens who operate Russian companies from offshore jurisdictions

Of course, this dominance of foreign capital in the domestic economy creates very serious consequences for Russia. First of all, foreign capital has become a powerful pump that drains financial resources from our state.

According to the Balance of Payments of the Russian Federation, over the seven-year period from 1994 to 2000, foreign investors withdrew income (dividends and interest) in the amount of $60.7 billion from the country. But for the seven-year period from 2015 to 2021, this figure has already amounted to more than $600 billion. As we can see, in a short period of time, the scale of profit withdrawal has increased by an order of magnitude. By the way, the sum of $600 billion is equivalent to two annual budgets of the Russian Federation in recent years.

The almost complete absence of restrictions on cross-border capital transactions in the Russian Federation leads to the fact that non-residents can quickly enter capital into the country and also quickly withdraw it. This will destabilise the Russian economy. And in general, most of the foreign capital is focused not on long-term investments in the Russian economy, but on speculative operations.

Finally, foreign companies in Russia can act at the behest of the authorities of the United States and other Western countries. Namely, to make decisions that run counter to the national interests of Russia and are directly aimed at the economic weakening of our country. And the current sanctions war against Russia has clearly demonstrated this.

So, as of May 10, out of the 30 largest foreign companies (by revenue), 12 completely stopped working. From the remaining companies, about half have scaled back their work. One can't help but compare foreign capital to the Trojan horse that Moscow voluntarily allowed into the Russian economic space three decades ago.

What to do? - Take advantage of the situation and help foreign capital leave our country. What does it mean to help? - Carry out the nationalisation of companies with foreign capital to transfer the share of non-residents to the Russian state. Of course, some foreign companies can be transferred to Russian private capital or capital from friendly countries (for example, Belarus, Iran, India, etc.). But all more or less strategically important foreign companies should be nationalised.

The list of such strategically important companies is compiled in accordance with Presidential Decree No. 1009 of 04.08.2004 "On Approval of the List of Strategic Enterprises and Strategic Joint-Stock Companies". But this list is outdated.

Today, in the context of the sanctions war, maximum economic mobilisation is needed, and this, in turn, requires a revision of the criteria for selecting companies and a sharp expansion of the list. Simply put, it is necessary to significantly expand the public sector of the Russian economy, including at the expense of companies with foreign capital.

On March 10, Deputy Chairman of the Russian Security Council Dmitry Medvedev said that the Russian government is already considering the possibility of the bankruptcy and nationalisation of the property of foreign companies leaving the Russian market. On the same day, March 10, a list of foreign companies that may be nationalised in the future was sent to the government and the Prosecutor General's Office. The list includes about 60 companies that have announced that they will stop working in Russia without providing guarantees to consumers.

The list includes Volkswagen, Apple, IKEA, Microsoft, IBM, Shell, McDonald's, Porsche, Toyota, H&M and others. According to estimates, the total volume of obligations of these companies to citizens, the state and counterparties reaches more than 6 trillion rubles. Russian media reported that Russian businesses supported the initiative, proposing to introduce external management for such enterprises. It was reported that the initiative was also supported by the government's commission on legislative activity.

But then there was silence. No cases of nationalisation were registered until the end of June. I will not now dwell on the reasons for such a strange lull. But on July 1, the long-awaited news was broadcast in many Russian media outlets. It was reported that Russia has finally decided to nationalise foreign capital.

The object of nationalisation was named as the company “Sakhalin Energy”, which is the operator of the “Sakhalin 2” project. An important part of the project is a plant for the production of liquefied natural gas (LNG). The company is owned by Russia's Gazprom (50% plus one share), Anglo-Dutch Shell (27.5% minus one share), as well as Japan's Mitsui & Co (12.5%) and Mitsubishi (10%).

The authors of this sensation refer to the Decree of the President of the Russian Federation No. 416 of 30.06.2022 that has just been adopted "On the application of special economic measures in the fuel and energy sector in connection with unfriendly actions of some foreign states and international organisations". This document states that the government is instructed to create and register a limited liability company (LLC) in the Russian jurisdiction, to which the rights, obligations and property of Sakhalin Energy will be transferred.

Here are the headlines that appeared yesterday in publications on this topic: "Sakhalin Energy's property — forced nationalisation”; "Putin sent a signal to the West by approving the nationalisation of Sakhalin 2"; "And here comes nationalisation! Putin gave the state the property of the Sakhalin 2 operating company"; "Satanovsky: nationalisation of Sakhalin 2 will bring down the iron curtain on Western countries"; "Kyodo: nationalisation of Sakhalin 2 may lead to higher energy prices in Japan", etc.

Has nationalisation really taken place? Let's get this straight. It is envisaged that the capital of the new company will include the Russian Gazprom. As for the foreign shareholders of Sakhalin Energy, the possibility of entering into the capital of the new company is not closed for them. Sakhalin Energy's Japanese shareholders are likely to take advantage of this opportunity,

But Shell will almost certainly be out of the game. Back in February, the Anglo-Dutch corporation loudly announced that it was withdrawing from the Sakhalin 2 project and leaving Russia. In fact, it has become a real drag on the project. And it still hasn't left Russia because it hopes to sell its stake in Sakhalin Energy, but it's not working out.

So, the decision was made by Shell Corporation, and the Russian authorities only help its departure and accelerate it (all reorganisation procedures are extremely limited in time). If a foreign shareholder does not want to participate in the new company (which they must declare as soon as possible), the government must evaluate their share and sell it within four months from the date of refusal. Funds from the sale will be credited to an account of type "C", which will be opened in the name of the shareholder.

The presidential decree states that the decision on Sakhalin 2 was made in connection with "unfriendly and contrary to international law” actions of the United States and "affiliated" states and organisations that are aimed at imposing sanctions against Russia.

Another important detail. The Sakhalin 2 operator is currently registered in Bermuda. Now it will be registered in the jurisdiction of Russia, which is necessary, given the growing sanctions and other risks. This corresponds to the provisions of the Federal Law just signed by the President of the Russian Federation Vladimir Putin (June 28) "On Amendments to the Law of the Russian Federation ‘On Mineral Resources’".

It establishes a ban on subsurface use for foreign legal entities. From now on, subsurface use licenses can only be issued to Russian legal entities. Foreigners wishing to continue mining natural resources in Russia must create Russian legal entities and re-issue licenses for the latter.

Some observers were also quick to comment that the new law marks the beginning of an era of nationalisation of foreign capital in Russia's extractive industry. No, foreigners are only invited to "change their shoes", i.e. re-register in the Russian jurisdiction, but in the new so-called "Russian" companies, the capital will still remain foreign.

So, speaking about the latest decision on the Sakhalin 2 project, we must admit that we are not dealing with nationalisation, but with the reorganisation of the project. Unfortunately, the nationalisations of foreign companies promised in March have not yet happened in Russia. Let's hope that they will still be there. The sanctions war gives Russia a great opportunity to gain fully-fledged economic sovereignty, and this opportunity should be used.