Hundreds of companies said they were pulling out or suspending operations in Russia after its invasion of Ukraine, from energy producer Shell Plc to automaker Hyundai Motor Co. to PwC, a global services company professionals.
The following is an overview of how insurance and international arbitration could soften the blow to these companies, which stand to lose billions of dollars.:
Does standard insurance provide coverage?
No, but companies can buy political risk in addition to credit, property and aviation insurance. It covers government asset seizures and forced abandonment, cancellations of government licenses for operations such as mining, and the inability to convert foreign currency. Insurance typically covers long-term energy or infrastructure projects, but can be purchased by other types of businesses. The policies are confidential, insurance experts said, and disputes are resolved by private arbitration.
Berne Union, a trade association representing political risk insurers, estimated that $1 billion in new political risk insurance was purchased in Russia in 2020, its most recent data.
Much of the insurance is underwritten by non-commercial agencies such as the Overseas Private Investment Corp. of the United States and the Multilateral Investment Guarantee Agency, which is part of the World Bank.
Will companies leaving Russia have any complaints?
Companies that leave and abandon their business without any action taken by the Russian government to take control of their assets will find it difficult to obtain insurance, according to legal experts.
“You see companies saying ‘we are leaving because we support Ukraine.’ The question then becomes whether the policy covers voluntary leaving,” said Micah Skidmore of law firm Haynes and Boone.
Insurers are more likely to pay claims for income earned in Russian rubles that are no longer convertible into foreign currency, legal experts said.
What could help businesses recoup their losses?
Russia could take steps that would back up claims that assets are being seized. Last week, Russian President Vladimir Putin signed into law a measure that allows the country to list planes leased from foreign companies on the Russian aircraft register.
Air rental company AL.N said earlier this month that Russian law demonstrates Moscow’s intention to confiscate the planes and the company expected the move to help it recover its insurance.
The sanctions give the aircraft leasing industry until March 28 to sever ties with Russian airlines. If more than 400 jets in Russia are not taken over, the industry stands to lose nearly $10 billion.
The ruling United Russia party said in early March it was considering a proposal to nationalize foreign companies leaving the country. If adopted, this measure vsould also support insurance claims.
Are there other avenues for compensation?
A company can turn to trade agreements signed by Russia that provide for arbitration when government actions harm foreign investment.
Law firm Steptoe & Johnson said in a note to clients last week that typical international arbitration claims include infringement of intellectual property rights, refusal to release aircraft and expropriation of assets. .
At least nine Ukrainian companies used trade deals to seek billions in arbitration from Russia after Moscow annexed Ukraine’s Crimea region in 2014.
However, the international arbitration process can take years and Russia does not voluntarily pay awards, legal experts say.
Franz Sedelmayer, whose German security equipment company was expropriated by Russia in 1996, won a $2.3 million arbitration award in 1998 but spent more than a decade battling before many courts to try to collect the money.
A company would not be able to collect both insurance and arbitration.
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