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US v Russia Sanctions Crossfire – How is your business affected?

23/04/2018

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United Kingdom

The past few weeks have seen the introduction of new sanctions against Russia by the US, the scope of which extends to non-US persons.

The coming few weeks promise to see a cross-fire of retaliatory sanctions from Russia, with further sanctions still being considered by the US. Businesses with any involvement in or connection to Russia must keep a close eye on these developments given the serious potential for sanctions from both sides to adversely affect business and frustrate contracts.

 

US Sanctions against Russia

 

On 6 April 2018, the US imposed sanctions on a number of Russian oligarchs, government officials and entities, adding their names to the Specially Designated Nationals List ("SDN List"). The US sanctions freeze the assets of these individuals and entities (to the extent those assets are within US jurisdiction) and prevent US persons from dealing with these individuals and entities. US persons include (a) entities organised under US law (and their non-US branches), (b) individuals or entities in the US, and (c) US citizens or permanent resident aliens.


Non-US persons could also face sanctions for knowingly facilitating significant transactions for or on behalf of any person or entity on the SDN list, including the newly sanctioned Russian entities and individuals. Foreign financial institutions are susceptible to restrictions on the opening or maintenance of correspondent or payable through accounts in the US if it is determined that they also knowingly facilitate significant financial transactions on behalf of any Russian person sanctioned. These penalties operate in effect to bar non-US persons from doing any business with the newly targeted companies and their oligarch owners.


Diplomatic pressure is now being brought to bear on the Trump administration, in particular by Germany, to ease US sanctions against Russia, amidst fears that certain manufacturing activity in Europe, particularly in the metal industry, will be adversely hit by the US sanctions. It is reported that German Chancellor Angela Merkel will be meeting members of the US administration in April to seek exemptions for German companies from the new US sanctions on Russia. The announcement of another round of US sanctions has currently been postponed. However, this does not negate the fact that non-US companies must for the time being abide by the US sanctions, and be wary that further sanctions may yet still be introduced.


Russian Sanctions against the US


In retaliation for the US sanctions, a draft sanctions bill has been progressing through the Russian Parliament since 13 April 2018, entitled "On Measures (Countermeasures) in Response to Unfriendly Actions of the USA and (or) other Foreign States". If passed, the bill imposes a number of sanctions against the US and other foreign states, being those that have joined the actions of the US, imposed sanctions on Russia, Russian entities or individuals or supported such decisions. Similar to certain US sanctions, the measures introduced by the bill will apply to companies with greater than 25% direct or indirect US or other foreign ownership. If adopted, the bill could cause severe repercussions for economic activity by foreign companies in Russia, in a variety of industries. Russian media reports that the bill has already been approved by all sides and is likely to be enacted before 7 May 2018. The bill may introduce any or all of the following measures:


1. Import Restrictions - prohibition/restriction on the import into Russia of agricultural products, raw materials and food, alcohol and tobacco products, and some medicinal products, originating from the US and/or other foreign states;


2. Termination/suspension of international cooperation restrictions between Russia and the US and/or other foreign states in the sectors of nuclear power, rocket and propulsion, and aircraft production;


3. Travel bans - on US and/or other foreign persons working on the development and implementation of policy and legal actions involving the Russian Federation;


4. Foreign Hardware and Software - prohibition/restriction on the use of US and/or other foreign technological equipment and software for Russian state and municipal needs;


5. Consulting, Auditing and Legal Services in Russia - prohibition/restriction on the provision of consulting, audit and legal services by US and foreign-owned entities for Russian state and municipal needs, as well as with respect to certain types of entities (as yet undefined);


6. Privatisations - prohibition/restriction on the participation in privatisations for US persons and/or persons of other foreign states;


7. Participation in matters of state property - prohibition/restriction on the provision of services related to the sale of public property owned by Russia by entities under the jurisdiction of the US and/or other foreign states;


8. Nullification of Trademark Rights - exhaustion of the exclusive right to trademarks owned by US and/or other foreign-owned entities in respect of certain goods (as yet undefined);


9. Air Navigation Surcharges  - increase of the fees for air navigation services of US or other foreign states' aircraft for the transportation of goods while using Russian airspace;


10. Rare Earth Metals Restriction – prohibition/restriction on the export from the Russian Federation by citizens or entities of the US or other foreign states of rare earth metal products or equipment;


11. Foreign Employment Restrictions - prohibition/restriction on the employment in Russia of citizens of the US and/or other foreign states, including highly qualified experts; and


12. Wider import restrictions - prohibition/restriction on the import of any other goods originating from the US and/or other foreign states (relevant list to be drawn up by the Russian Government).


How is your business affected?


All businesses, whether wholly or partly owned by a US entity/individual, and including those without any connection to the US at all, will need to take care not to carry out any business dealings with those Russian individuals and entities on the SDN list. Internal sanctions policies should be reviewed to ensure the new US sanctions are captured and businesses should keep abreast of sanctions developments. Existing and future contracts with a Russian element should be reviewed to consider their termination provisions and the allocation of risk, in the event that tighter sanctions against Russia, which do materially impact the contract, are introduced.  


It remains to be seen as to what countermeasures will be introduced by Russia. Those measures that will benefit domestic commercial interests such as restrictions on certain imports and the prohibition on co-operation in the aircraft industry are more likely to be introduced. Other measures, which would have a negative impact on Russian exports or the business of government corporations, may be reconsidered, such as the restrictions on the nuclear industry and restrictions on the use of US and European auditors and lawyers. Businesses should consider which restrictions may apply to their current or future business and again seek to ensure that contracts and their termination provisions adequately address a changing sanctions landscape.


How we can help:


We can assist your business by:


• Helping you to navigate the sanctions regimes (whether related to Russia or in regard to sanctions targeting all other countries such as Iran, Syria and Korea) and advising how to protect your position and make sure you are on the right side of sanctions laws;


• Reviewing current and future commercial agreements relating to business in Russia and providing advice in regard to protective measures to take and the operation of any termination and force majeure clauses; and


• Reviewing your current sanctions policies and procedures to ensure they are comprehensive, meet the needs of your business and will work to mitigate any sanctions related issues in the future.


If you would like to discuss any aspect of this note or the sanctions world in general, please contact us

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