Political risk insurance under the microscope as companies quit Russia
29 March 2022
Political risk insurance has become increasingly important for companies with operations in Russia following the imposition of wide ranging international sanctions that have seen many high profile business names quit the country.
Hundreds of companies have said they are withdrawing or suspending operations in Russia after its invasion of Ukraine. There are now warnings that businesses which leave Russia following the imposition of sanctions without the Russian government seizing control of their assets could struggle to collect insurance.
Legal experts warn that a company which leaves Russia in support of Ukraine will have to ascertain if their insurance covers a “voluntary departure”.
Companies can purchase political risk as an add-on to trade credit, property and aviation insurance. It covers government seizures of property and forced abandonment, cancellations of government licenses for operations such as mines and the inability to convert foreign currency.
The insurance typically covers long-term energy or infrastructure projects but can be purchased by other types of businesses.
Russia’s ruling party, United Russia, wants measures brought in to nationalise the property of Western companies that are exiting the country in the wake of Russia’s invasion of Ukraine.
The proposed legislation is designed to allow state-owned Vnesheconombank and the state export-guarantee agency to have the right to seize the property of foreign companies that left Russian markets of their own accord.
McDonald’s, which is one of more than 100 foreign companies that have suspended or announced intentions to divest operations in Russia, owns 850 restaurants and has 62,000 employees across the country. If the company decides to permanently shut down its Russian operations, its properties could be seized and put into external management, as appointed by the Russian state.
Berne Union, a trade association representing political risk insurers, estimated that Euros 912 million ($1 billion) in new political risk insurance was written in Russia in 2020. It expected that insurers are most likely to pay claims for revenues earned in Russian roubles that are no longer convertible into foreign currency.
Russian President Vladimir Putin has signed into law a measure that allows the country to place planes leased from foreign companies on Russia's aircraft register. Sanctions gave the aircraft leasing industry until March 28 to sever ties with Russian airlines. If more than 400 jets in Russia are not repossessed, the industry stands to lose almost Euros 9 billion ($10 billion).
It has been reported that up to nine companies from Ukraine used trade agreements to seek billions through arbitration from Russia after Moscow annexed the Crimea region of Ukraine in 2014. However, the international arbitration process can take years and Russia does not voluntarily pay awards.
However, a company would not be able to collect on both insurance and arbitration and any action could entail a long wait for a ruling as highlighted by the experience of Franz Sedelmayer.
The German security consultant, whose equipment business was expropriated by Russia in 1996, won a Euros 2.2million ($2.3 million) arbitration award in 1998 but spent more than a decade fighting in numerous courts trying to collect the money. He had entered into an agreement with the Police Department in St Petersburg concerning the delivery of law enforcement equipment and relevant training.
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