Legal Framework: What do Russia’s Sanctions Really Mean?

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By Helge Masannek

In March 2014, the EU and the United States introduced sanctions against certain Russian and Ukrainian persons as a reaction toward Russia’s role in the Crimea crisis. European “Regulations concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine” included economic sanctions, asset freezes and travel bans and have been implemented on March 5 (2014/119/CFSP), March 17 (2014/145/CFSP), May 12 (2014/265/CFSP) and July 12 (2014/455/ CFSP) as well as July 30 (2014/507/CFSP). As of July 31, there were 123 individuals and legal entities on the sanctions list.

The US sanctions lists contain 95 individuals and legal entities and were first implemented on March 6 (Executive Order 13660), and then on March 17 (Executive Order 13661), on March 20 (Executive Order 13662) and several later amendments to Executive Orders.

By July 2014, the EU and the US lists together reached 167 positions, including 110 individuals and 57 legal entities. As these sanctions are not unique (for example, very similar sanctions have been introduced earlier against individuals and legal entities in Belarus), it is important to analyze the legal framework of the EU and US sanctions.

No economic contacts at all

With the sanctions, the EU and the US have tried to exclude both individuals and enterprises from the economic activities of the EU and the USA, respectively. Therefore, for example, the property of sanctioned persons has been frozen and the sanctioned individuals are also not allowed to enter the EU and the US.

On April 28, the US also imposed an export and re-export prohibition on Russia for high-tech goods which could be used in the defense industry. The U.S. Commerce Department´s Bureau of Industry and Security has also revoked existing export licenses for such goods. On July 30 and July 31, the EU introduced sectoral sanctions forbidding investments in Crimea in the areas of electricity networks, oil production, and transport infrastructure. Any technical assistance in these areas, even verbal consultations, are forbidden. The EU has also prohibited arms exports and exports of goods of dual use to Russia, as well as it has banned Russian state-owned financial institutions from the European capital markets.

Both the EU and US sanctions forbid any economic interactions with listed persons and also with companies that are 50 percent or more owned by a listed person. This means that it is forbidden to obtain goods from a listed person or to sell goods to them. Obtaining or rendering of services is also forbidden. Additionally, it is illegal to manage the property of sanctioned persons in any form, as well as to pay dividends to them.

And there are even more items to consider. Along with the companies which belong to listed individuals in amounts of 50 percent or more, the sanctions also affect companies which do not belong to listed individuals legally, but are controlled by them, sometimes via middlemen.

Other countries follow

After the introduction of sanctions by the EU and the US, other countries followed suit. Within months, countries like Norway and Montenegro joined the EU sanctions regime.

On March 17, Canada introduced its own sanctions list (Special Economic Measures (Russia) Regulations, SOR/2014-58), with rules similar to the US rules. This list was extended on March 19 (SOR/2014-58), March 21 (SOR 2014-62), April 28 (SOR 2014-65), May 4 (SOR/2014-98) and May 12 (SOR/2014-108). The Canadian sanctions list consists of 47 individuals and 19 companies. Some names which are found on the US or EU lists, are not included on the Canadian list. For example, Igor Sechin, a CEO of Russian oil giant, Rosneft, was not included on the Canadian list, although his name is on the US list. Rosneft is active in Canadian oil projects.

On April 2, Switzerland introduced its own measures “to prevent escaping from the sanctions”, which were extended on May 20 (SR 946.231.176.72.). Making new business contacts with listed persons is now prohibited and previously existing business relationships must be reported to the authorities. Switzerland also imposed travel bans against those on the EU lists.

Australia has imposed its own sanctions too. Japan has introduced a very special type of sanctions – in the form of cancelling the Japanese-Russian talks on visa liberalization, defense cooperation and investment agreement.

Should I follow the sanctions?

One of the most essential questions for any company and individual is whether they should follow the sanctions regime. The answer is rather simple here. Both the EU and US sanctions regime must be followed by companies established under EU and US laws, respectively. This means that a German or French company cannot sell goods to a listed person or manage its property.

Within most sanctions regimes (including those related to Russia and Ukraine) the prohibitions also apply to the foreign branches (and representative offices) of EU and US companies – but do not affect the foreign subsidiaries of these companies which are established under foreign laws. The US expands its sanctions regime to all foreign subsidiaries of US companies only within certain situations, such as the sanctions against Iran or North Korea. But it should be noted that the purposeful structuring of a business in such a way that the sanctions are circumvented, e.g. by delivering goods via subsidiaries to listed persons, will be regarded as a violation of the sanctions.

This means that a Russian representative office of a German or US company must follow the European or US sanctions against Russia, respectively, but a Russian subsidiary of a German or US company is not required to do so. One important exception: if a foreign company has a US representative office, the US laws would view this company as a US company and demand adherence to the US sanctions regime.

Private persons are liable too

No matter where they live, citizens of the EU or the US should follow the sanctions. This means that a German or US director working for a Russian subsidiary of a German or a US company will find himself liable for forbidden interactions with listed persons, even if the company itself is considered to be a Russian company and does not need to follow the sanctions.

The same situation occurs if an EU or US citizen runs his own company in Russia. Such a company is legally a Russian company and does not need to comply with the EU or US legislation while operating in Russia. However, if an EU or US citizen is the owner of the Russian company or is acting on the behalf of the company, they are obliged to follow the sanctions. Thus the company is to a certain extent obliged to follow the sanctions.

Are there any exceptions?

Like all legislation, the sanctions regime has its exceptions too. The most obvious one affects contracts that have been signed before the sanctions came into power. According to the EU laws, European companies may still receive payments due on these contracts if the goods have already been delivered. The EU also allows medical assistance to listed persons if the condition is life-threatening; to give legal assistance in cases related with the sanctions regime; or to sell goods or deliver services if identification is normally not required for this interaction (for example, shops and restaurants).

The Canadian law goes further and allows pension payments to any person in Canada or any Canadian located abroad, as well as some international payments (UN, payment for certain legal services, etc.). Payments made by or on behalf of listed persons pursuant to contracts entered into prior to the sanctions are also allowed if the payment is not for their benefit.

The US law is the most restrictive and forbids any payment or goods delivery, even pursuant to contracts entered into before the sanctions’ introduction and foresees a special license for any company that wants to fulfill its contractual obligation. Individuals who are invited by international organizations, like the UN, or act within these organizations on behalf of their country are normally free from the sanctions regimes even if they are listed by the US or the EU.

What if I break the rules?

The fines for breaking the sanctions regime can be substantial. According to the US law, every purposeful violation can result in a fine of up to US$1million and imprisonment for up to 30 years. In the EU, the penalties differ from country to country, but can also reach substantial sums. In Germany, for example, a person can face imprisonment for up to 10 years. In France, a person can be imprisoned for up to 5 years. In addition to the legal consequences, there might also be some reputational risks for those companies that are publicly named as sanctions violators by the EU or US authorities or by the mass media regardless of whether these allegations are even legitimate.

What is very important to note is that a negligent action can be punished too. A person who acts responsibly should carefully check all their business contacts, including partners, customers and suppliers. For example, by using a search engine exclusively developed by RUSSIA CONSULTING. This search engine allows a company to check the ownership structures of almost every Russian company, showing not only the owners of the company but also the ownership of the parent company and its parent company, etc. It also allows a company to find the name of the General Directors of these companies and to avoid legal and reputational risks which can occur through dealing with listed persons.

RUSSIA CONSULTING has been consulting and supporting foreign clients in St. Petersburg since 2004. The company has been instrumental in helping foreign investors to set up businesses in the city and handle local economic conditions. On-the-ground presence and years of business experience in the given city are essential to giving sound advice on foreign investment. RUSSIA CONSULTING can provide you and your organization with an in-depth understanding of business set-up, business consulting, taxation, accounting, recruiting, basic legal matters, IT services, set-up of internal control systems, adapted to the local environment. Furthermore, we can provide you with office space, a local general director, or finance and tax due diligence.