Many companies are suspending operations in Russia after it invaded Ukraine.
Hundreds of companies have said they will withdraw or suspend operations in Russia after the invasion of Ukraine, from energy producer Shell Plc to car manufacturer Hyundai Motor Co to PwC, a global professional services firm.
The following is a look at how insurance and international arbitration can soften the blow to those companies that could lose billions of dollars:
Does the standard insurance cover?
No, but companies can buy political risk in addition to trade credit, property and aviation insurance. It covers government property repossessions and forced abandonment, revocations of government licenses for operations such as mining and the inability to exchange foreign currency. The insurance typically covers long-term energy or infrastructure projects, but can also be purchased by other types of companies. The policies are confidential, insurance experts said, and disputes are settled in private arbitration.
Berne Union, a trade association representing political risk insurers, estimated that $1 billion in new political risk insurance was taken out in Russia in 2020, the latest data shows.
A large part of the insurance is taken out by non-commercial entities such as the Overseas Private Investment Corp of the United States and the Multilateral Investment Guarantee Agency, part of the World Bank.
Will Companies Leaving Russia Have Claims?
Companies that exit and exit without any action by the Russian government to seize control of their assets will struggle to collect insurance, according to legal experts.
“You see companies saying ‘we are leaving because we support Ukraine’. The question then is whether the policy covers a voluntary departure,” says Micah Skidmore of law firm Haynes and Boone.
Insurers will most likely pay claims for income earned in Russian rubles that can no longer be converted into foreign currency, lawyers said.
What can help companies recoup their losses?
Russia could take action to support claims of asset seizures. Last week, Russian President Vladimir Putin signed a law that allows the country to register aircraft leased from foreign companies in the Russian aircraft registry.
Air Lease Corp said earlier this month that the Russian law demonstrates Moscow’s intention to seize aircraft and the company expected the move would help the company collect its insurance policies.
Sanctions give the aircraft leasing industry until March 28 to cut ties with Russian airlines. If more than 400 jets in Russia are not repossessed, the industry risks losing 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 could also support insurance claims.
Are there other avenues for compensation?
A company may look at trade agreements signed by Russia that provide for arbitration when government actions harm foreign investment.
The law firm Steptoe & Johnson said in a note to clients last week that classic international arbitration claims include failure to protect intellectual property rights, refusal to release aircraft and asset expropriation.
At least nine companies from Ukraine used trade deals to obtain billions through arbitration from Russia after Moscow annexed Ukraine’s Crimean region in 2014.
However, the international arbitration process can take years and Russia does not voluntarily pay out judgments, according to legal experts.
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 fighting in numerous courts to collect the money.
A company would not be able to collect insurance as well as arbitration.
