Processes: Rosneft vs. Federal Republic: A delicate precedent

The consequences of the Russian attack on Ukraine a year ago shook up the energy market in Germany.

Processes: Rosneft vs. Federal Republic: A delicate precedent

The consequences of the Russian attack on Ukraine a year ago shook up the energy market in Germany. The federal government was suddenly in a hurry to cut oil imports from Russia, which were worth billions. To this end, the federal government intervened in the market in a drastic manner. Was that legal? The Federal Administrative Court is hearing about this in Leipzig (reference number: BVerwG 8 A 2.22).

What is the procedure about?

The state-owned Russian company Rosneft - the parent company in Moscow and a subsidiary in Luxembourg - is complaining that the federal government will lose control of the two German subsidiaries Rosneft Deutschland GmbH and RN Refining in September 2022

Specifically, the federal government placed the Rosneft subsidiaries under trusteeship of the Federal Network Agency. This appointed a new management. Rosneft is still the legal owner of the German subsidiaries, but can no longer have a say. Should the subsidiaries make a profit, this remains with them in Germany as a reserve. The federal government doesn't make money, but neither does Russia. A spokesman for the Federal Network Agency put it this way: "The trustee ensures that no payments are made by companies to Russia unless this is authorized by the trustee in individual cases."

Why did the federal government take control?

In the course of EU sanctions, Germany agreed to stop using Russian crude oil from 2023. However, the Rosneft subsidiaries imported and processed mostly Russian oil. At the same time, they had a significant market share: According to the Federal Ministry of Economics, they held twelve percent of the oil processing capacity in Germany through holdings in three refineries.

Central was the majority stake of 54 percent in the PCK refinery in Schwedt, Brandenburg, which supplies north-east Germany with petrol, diesel and other products. She depended on Russian crude oil from the Druzhba pipeline. According to Economics Minister Robert Habeck, Rosneft had no interest in stopping this.

How does the federal government justify the trust solution?

Legally, the ministry argued in the Federal Gazette as follows: Due to uncertainties about the consequences of the EU sanctions, contractual partners had restricted cooperation with Rosneft. Employees are about to migrate. This puts the operation of critical infrastructure at risk.

According to the ministry, in the case of PCK, in order to continue operating the refinery economically without Russian oil, it would need deliveries of tanker oil via the port of Gdansk. According to Polish information, this is only conceivable when Russian shareholders are no longer involved, the Federal Gazette continued.

How does Rosneft justify the lawsuit?

The plaintiffs cite three main reasons: there was no hearing prior to the trusteeship solution, the legal requirements for such trusteeship administration did not exist and there was no legal basis for an embargo on pipeline-bound Russian crude oil since January 1, 2023. This refers to deliveries via the Druzhba line. These are not covered by the EU oil embargo against Russia, only tanker oil. Germany also waived the pipeline oil per EU protocol note.

Why was the federal government allowed to access it?

The traffic light coalition had amended the Energy Security Act accordingly in 2022. Paragraph 17 provides for the option of trusteeship for operators of critical infrastructure in the energy sector. It comes into play "when there is a concrete risk that without trusteeship the company will not be able to fulfill its tasks serving the functioning of the community in the energy sector and there is a risk of the security of supply being impaired".

Why is the procedure in Leipzig important?

With the legal construction of the state trust administration of a private company with foreign owners, the federal government entered new legal territory. First Gazprom Germania was put under the trusteeship of the Federal Network Agency, then the Rosneft subsidiaries. It is possible that the Federal Administrative Court will abolish the trusteeship - then the German subsidiaries would be under Russian control again. That would be a bitter defeat for the federal government. Should Rosneft fail in court, that would be confirmation for Berlin.

How could things continue with Rosneft?

The trust administration was initially limited to six months, i.e. until March 15th. It should be extended - if the federal government wins in Leipzig. Habeck also has plans to expand options to sell energy companies held in escrow, as in the Rosneft case. This is currently only permitted if it is necessary to maintain the value of the company. In the future, a sale should also be allowed “to ensure the functioning of the community in the energy sector and to maintain security of supply”. That could point to the federal government's plans for the Rosneft subsidiaries.

Date announcement of the court Rosneft Germany Communication of the Federal Ministry of Economics 2022 The relevant paragraph 17 of the Energy Security Act