Who is Sanctioning?
The sanctions against Russia are being imposed mainly by the USA and the EU. Other national sanctions from Canada and Australia exist, but affect business activities to a far lower extent for volume reasons. In this newsletter we are restricting our analysis to EU and US sanctions.
Who must observe the sanctions?
EU sanctions must be observed by:
- All companies established or registered in the EU
- Any other legal persons, institutions or organisations with regard to transactions carried out in the EU in whole or in part
- EU citizens and
- Non-EU citizens within the EU
The US sanction regime must be observed by all "US persons". These are:
- US companies and their foreign representative offices
- US citizens and
- Persons residing in the USA
What EU sanctions apply?
So far, the EU has imposed various types of sanctions that are mainly based on EU Regulations No 208/2014 (measures directed against certain persons of the government of Yanukovych), No 269/2014 (measures in respect of the territorial integrity of Ukraine) and No 692/2014 (restrictions on the import of goods originating in Crimea). With the Council Regulation No 833/2014 of 31 July 2014 the EU imposed for the first time also sector related sanctions concerning the financial, energy, dual-use and arms sectors.
The personal restrictions apply currently (as of 01/08/2014) to 117 natural and 23 legal persons, institutions and organisations, which are listed in Annex 1 of the Regulation No 208/2014 and of the Regulation No 269/2014. The restrictions are the following:
- Travel bans for listed persons
- The freezing all funds and financial resources of listed persons
- A ban on provision of economic resources and financial assets
- A ban on performance
The following measures are of particular significance for business transactions:
Under the "ban on provision" it is prohibited to make funds or economic resources available, directly or indirectly, to the listed persons. In this respect, both terms – "funds" and "economic resources" are very widely interpreted by authorities or courts. The aim of the indirect ban on the provision of economic resources and financial assets is to prevent circumvention and avoidance constructs. To illustrate this, the supply of goods to non-listed persons that are then supposed to pass these goods on to sanctioned persons is just as much banned as the supply to a non-listed legal person, organisation or institution that is owned or controlled by one of the listed person.
In most of the cases the "ban on provision" will lead to the "ban on performance", which means that if the performance of the contract is banned under the sanctions, the contract may not be performed. The same applies to secondary claims arising due to non-performance of the initial contractual obligations: such claims may not be performed either and the sanctioned party cannot sue for fulfilment or damages in the territory of the European Union.
The "freezing of all funds and financial resources" of listed persons may also endanger the financial stability of the listed business partners and make the cash flows more difficult.
With the Council Regulation No 833/2014 of 31 July 2014, which gives effect to the Council Decision 2014/512/CFSP of the same date, the EU imposed for the first time sector related sanctions against Russia. These concern the arms sector, the so called dual-use goods, the oil production engineering, as well as the financial sector:
- The supply of military equipment is prohibited, as well as military-related technical assistance and financing. The competent authorities may, however, grant an authorisation for contracts concluded before 1 August 2014.
- The supply of the dual-use goods and technology is not allowed, if those items are or may be intended for military use or for a military end-user. In this case the authorisation for export will not be granted. The competent authorities may, however, grant an authorisation for contracts concluded before 1 August 2014.
- In addition, a prior authorisation is required for the export of certain key technologies for oil production and exploration. The goods concerned are listed in Annex II to Regulation (EU) No 833/2014. The competent authorities may, however, grant an authorisation for contracts concluded before 1 August 2014.
- In the financial sector the five largest Russian credit institutions Sberbank, VTB, Gazprombank, VEB as well as Rosselkhozbank were imposed with restrictions on long-term financing. These measures prohibit them from purchasing transferable securities and other money-market instruments. The restrictions are applicable also to the subsidiaries of the aforementioned banks.
In addition, the following restrictions of the business activities are of relevance regarding Crimea and Sevastopol:
- The import of goods originating in Crimea is prohibited (this prohibition does not apply in respect of the execution of certain older trade contracts).
- The financing of and participation in infrastructure projects in Crimea in the transport, telecommunication and energy sector is prohibited.
- The participation in companies in the areas of the exploitation of oil, gas and mineral resources, as well as the financing of the use of these raw materials are prohibited.
- Further prohibited is the sale of equipment and technologies for the transport, telecommunication and energy sectors as well as the use of oil, gas and mineral resources in accordance with an annexed list.
- These aforementioned restrictions apply equally to the provision of technical assistance or to the provision of brokering services in the mentioned context.
Violations of the sanction regime will be punished by the EU Member States. In Germany, a violation of the sanctions regulations may result in criminal or administrative penalties. No claims of the sanctioned parties from sanctioned legal relationships will be satisfied if they are made; claims for damages against European companies in connection with failure to comply with contracts affected by the sanctions are excluded.
What US sanctions apply?
The US sanctions have their legal basis in executive decrees No. 13660, 13661 and 13662 of the US President. These decrees also require the following restrictions against certain natural and legal persons:
- Travel bans for listed persons.
- The blocking of all assets of the listed persons and entities; a ban on any direct or indirect provision of economic resource and assets to the listed persons and a ban on the reception of such resources from these persons.
The list containing the names of all sanctioned persons is the so called SND List (Specially Designated Nationals). Next to the SND List there is also the SSI List (Sectoral Sanctions Identification), which contains a list of persons targeted with sectoral sanctions. These concern currently the Russian financial as well as the energy sector. The following legal entities are currently included in the SSI List and thus blocked from long-term financing activities (over 90 days): Gazprombank, Vneshekonombank, OAO Novatek, Rosneft, Bank of Moscow (since 29.07.2014) and Rosselkhozbank (since 29.07.2014). Also affected are all legal entities in which listed companies own a 50% or more interest. All other transactions are allowed with the sanctioned financial institutions.
What must you do?
Violations against the enacted sanctions – whether intentional or negligent – can entail considerable penalties and monetary fines. German undertakings doing business in Russia should therefore take categorical precautions. The following steps are advisable:
- Review of your business partners: <br/> <br/> <br/> Is your business partner a listed person?<br/> <br/> <br/> Is your business partner held or controlled by a listed person?<br/> <br/> <br/>Does your business partner indirectly come under the scope of application of the sanctions? <br/>
- Review of your monetary transactions: <br/> <br/> <br/> Are your payments handled by banks affected by the sanction?<br/> <br/> <br/> <br/> Are your payments subjected to the restrictions of the sanctions regime? <br/>
- Review of the object of the company: <br/> <br/> <br/> Do any relevant goods come under the sanctions regime?<br/> <br/> <br/> Is the business connected to Crimea or Sevastopol?<br/>
It is currently difficult to have an overview of the various sanction measures. Through their indirect effect, the bans can have a significantly wider scope than is immediately apparent from the sanctions list.
The situation for EU-based companies with respect to the US sanctions is also complex: Compliance with the US sanctions - e.g. on request of the US business partner - which are wider in scope than the EU sanctions can constitute an illegal boycott, which is prohibited and may lead to monetary fines.
CMS Moscow has bundled the CMS competencies under foreign trade legislation, EU law and US law in order to provide answers in every single case.