Business with Russia under sanctions
By Dr. Thomas Heidemann and Artur Baron
With the enactment of the Countering America‘s Adversaries Through Sanctions Act (CAATSA) in August 2017, the US and the EU seem to have finally abandoned the idea of coordinating their economic sanctions against Russia. While the first measures in 2014 were comparable, the similarities are harder to identify today. The already exterritorial US sanctions regime has been extended once again in its personal and material scope. Now, non-US persons also face consequences if they facilitate significant transactions with Russian Specially Designated Nationals (SDNs). Accordingly, the recent list of key players in the Russian economy (such as Mr. Deripaska), who have significant business relations with western companies, caused panic and tension on the Russian market. Many European companies with Russian business are worried about the situation. According to a recent survey conducted by the German-Russian Foreign Chamber of Commerce (AHK) among companies with Russian business, 60 per cent of them are strongly or moderately affected by the recent US sanctions. The respondents estimate the short-term loss to be between 271 and 377 million euros. 79 per cent of the respondents wish the German government to publicly criticize the new sanctions and ensure that German companies and company representatives are not held responsible by the US for their business with Russia (see AHK press release of Apr. 26, 2018).
So, what is important when doing business in Russia under sanctions?
It is becoming increasingly difficult to keep an overview of and comply with the very dynamic sanctions regime. On the one hand, it is challenging to obtain sufficient information about the business partner and its owners. In the case of a Russian joint stock company, for example, it is not possible to clearly identify the actual stockholders at a certain point in time. Furthermore, the ownership structure often leads to nontransparent offshore entities. While in the UK, a political debate opened up about transparency in Britain‘s Overseas Territories, where a lot of Russian capital is suspected, the Russian lawmakers provide exceptions to certain disclosure requirements in order to protect Russian companies. In late 2017, the Russian banking law was amended, authorizing the Russian government to determine the cases in which financial institutions are exempted from certain disclosure requirements, such as the composition of top management. In addition, Russian companies other than financial institutions can also be exempted from disclosing information as to their management and shareholders in the Russian Unified State Register of Legal Entities (EGRUL). At present, the measures are aimed primarily at protecting the Russian defense sector, but the scope is likely to be extended in the future. Collecting information for proper sanctions due diligence therefore remains a challenge.
Apart from that, the sanction regulations against Russia have become increasingly complicated, especially in the area of financial sanctions. The FAQs published by the United States’ Office of Foreign Assets Control (OFAC) offer initial guidance but not the answers in individual cases. In many respects, the answers leave room for interpretation. At the same time, keeping an eye on US sanctions is becoming increasingly important for European companies, which run the risk of being sanctioned by the US for facilitating significant transactions with Russian SDNs (Section 228 CAATSA). The interpretation of the term „significant transactions“ is crucial in this respect. The OFAC provides criteria that it takes into account when assessing this question, such as the size, number, frequency or nature of the transactions. In the end, the authority has wide discretion and decides on a case-by-case basis.
Furthermore, the numerous exceptions and grace period regulations in the form of General Licenses must be taken into account. General Licenses allow the settlement of existing obligations and the winding up of existing relations with some SDNs by a certain deadline. As far as a General License applies, secondary sanctions cannot be imposed.
In any case, one should not underestimate the complexity of sanction regulations and should seek professional advice in the US if important transactions are at stake.
Keeping an eye on Russian countersanctions
In response to the recent expansion of US sanctions, Russia has announced countersanctions and the respective bill is currently under review in the State Duma. The measures in question are not only directed against the United States, but also against other states yet to be designated, and include the following:
- restrictions on the import of medicinal products as well as consumer and agricultural products originating from the US and other foreign states;
- restrictions on the import of other products to be determined by the Russian government;
- restricted access to public procurement in Russia for technology and software originating from the US and other foreign states;
- restrictions on the provision of consulting, audit and legal services in Russia by foreign entities or entities under the control (more than 25% ownership) of foreign entities;
- restrictions on the employment of foreign citizens in Russia.
Meanwhile, the spokesperson of the responsible State Duma committee announced that the bill may be amended to allow import and export restrictions on all kinds of products, not only those outlined above. Once the bill is passed, it will be up to the Russian president to decide on the specific measures and designate the states that shall be sanctioned besides the US. The proposed measures can potentially cause significant harm to foreign investors. The progress of Russia‘s countersanctions should therefore be closely monitored, as should US and EU sanctions.
Companies with business in Russia that are not directly affected by sanctions should consider taking precautionary measures. It might be worth analyzing whether business could be directly affected by either western sanctions or Russian countersanctions in the future. With regard to US sanctions, there is reason to fear that further Russian companies with considerable business in Europe could be listed as SDNs. The “Kremlin list” could serve as a basis for further designations. Upon its release, many mocked the list of 210 senior Russian officials and oligarchs as the “Kremlin phonebook” but the recent round of US sanctions demonstrated its significance. Legal precautions should therefore be seriously con-sidered when dealing with potential SDNs.
Besides, the events of the last few weeks have shown once again that many Russian companies – directly or indirectly – affected by sanctions run into considerable liquidity problems within a short period of time. The sanctions then often serve as an excuse to suspend payments to their respective business partners. Although such excuses have no relevance from a legal point of view (also under Russian law), quick action is required to secure any claims.