The European Union has adopted economic sanctions against Russia – the latest step relating to the protection of the territorial integrity of Ukraine. Earlier this year, the Council of the European Union had already adopted sanctions against certain Russian individuals, a list that has gradually expanded to encompass individual companies and organizations.
Companies that export goods to Russia or import from Russia, provide services in Russia or cooperate with the Russian financial market should take care concerning the new EU sanctions.
The new sanctions, which are explicitly directed against Russia, substantially intensify earlier measures. In addition, the measures address a much wider circle of persons and businesses.
Thus, a large number of companies that have business contacts in Russia will have to deal with the sanction regulations. Serious limitations may apply to individual economic branches, especially in the defense sector, related industries and industries delivering goods to the defense sector, as well as to certain machine building industries.
What applies since March 17, 2014?
- freeze of economic resources and funding of certain individuals, businesses and organizations
What’s new since July 31, 2014?
- import and export ban on arms and related technical assistance and financing
- license requirement for all listed dual-use goods (Annex 1 of Regulation (EC) 428/2009); licenses will not be granted if a military relation applies; ban on technical assistance and financing in the latter cases
- license requirement for certain goods for petroleum exploration and production; permits will not be issued if the goods are to be used in the Arctic, in deep sea or concerning shale oil; license requirement also applies to related technical assistance and financing
- prohibition on the acquisition, sale and trading of securities (e.g. shares) and money market instruments (e.g. bonds), with a maturity of over 90 days, issued by certain Russian banks or their subsidiaries.
What exceptions apply?
- Licenses may be granted if the underlying contracts have been entered into prior to August 1, 2014.
- The prohibitions do not apply in relation to the provision of assistance for arms and dual-use goods“necessary to the maintenance and safety of existing capabilities within the EU”
To whom do the new rules apply?
- individuals residing in the EU
- individuals who are nationals of an EU member state
- legal entities governed by the law of an EU member state
- for transactions by companies, institutions or organizations, which are done in whole or in part within the EU
Who is affected?
- export and import companies
- service providers (e.g., providers of technical assistance)
- insurance (e.g., for export credit insurance)
- banking and financial services (e.g., loans for export)
Do the rules apply for subsidiaries in Russia?
- How far the activities of Russian subsidiaries of EU businesses are affected has to be clarified in each individual case. In particular, special care must apply concerning the provision of technical assistance for arms, dual-use goods and listed goods for exploration and production of petroleum.
What penalties may apply for violations?
Please note that the EU itself does not have the power to order penalties. However, it does have the power to order member states to implement penalty systems. Therefore, each member state has its own penalties, which may differ from state to state. As an example, the following are penalties that apply in Germany. Other EU member states are also applying their own sanctions. Concerning breaches of the embargo, German law provides for:
- imprisonment of up to 15 years in the worst case
- financial penalties
- fines against companies in the case of criminal offenses of up to € 10 million or more if the economic advantage of the fact is higher, and against persons acting of up to € 500,000
- income levies against profits
- confiscation of the goods concerned
- entry of the company in the Central Trade Register: possible disadvantages concerning future public contracts
- cancellation of export procedure privileges
- occupational risk for board members/company management: in cases when members of the company management are held to be “unreliable,” authorities may grant no export licenses to the company at all as long as these persons are part of its management
What should companies do now?
- Closely examine goods intended for export in light of these prohibitions and licensing requirements. Note that the classification of goods is often difficult – for instance, it is unclear how sporting weapons are affected by the sanctions
- Examine services they provide concerning goods covered by the sanctions, even if these services are provided by Russian subsidiaries
- Review financial services relating to such goods
- Include the new rules in in-house compliance systems
- Consider how the sanctions affect corporate strategy, e.g. with regard to planned relocation of production facilities
This, of course, is only a short overview.