• Draft legislation sets out broad menu of sanctions and prohibitions—from import and services restrictions to individual bans—but decision to adopt any one measure would be made by the President.
  • Measures seek to emulate certain U.S. sanctions mechanisms by targeting not only U.S. and other foreign companies, but also entities with more than 25% foreign capital.
  • Measures that have the highest likelihood of being adopted are those that benefit the growth of domestic industries.

On April 13, 2018, deputies of the State Duma of the Russian Federation introduced a draft Federal Law № 441399-7 “On measures of reaction (counteraction) against unfriendly actions of the United States of America and (or) other foreign states” (Draft Law). For purposes of the Draft Law, the other “foreign states” are those that have joined actions of the United States, imposed sanctions on Russia, Russian legal entities or individuals, or supported such decisions.

According to an explanatory note accompanying the Draft Law and statements given by the deputies, the Draft Law is an answer to the U.S. Treasury Department’s recent designation of several prominent Russian individuals and companies on the Specially Designated Nationals and Blocked Persons lists, will serve as an incentive for the development and improvement of domestic industries and the strengthening of the country’s political position in the world arena, and will help to improve relationships with countries that don’t support U.S. policies toward Russia.

SUMMARY

The Draft Law sets out a broad menu of potentials sanctions and prohibitions (Measures) that can be introduced—as separate measures or in any combination—by the Russian Government upon the decision of President Putin in response to actions of the United States or other foreign states. Only the President has the authority to decide to adopt the Measures and likewise to terminate them.

Each of the Measures casts a very broad net and the implementation of any Measure would require the Russian Government to develop a list of prohibited products, services or barred persons. The Draft Law targets U.S. commercial interests and those of its allies and supporters across a wide spectrum of sectors, products and services. Similar to certain U.S. sanctions, the Measures also apply to companies with greater than 25% direct or indirect U.S. or other foreign ownership (Foreign-Owned Entities). The Measures provided by the Draft Law are as follows:

International Cooperation Restrictions. Termination or suspension of cooperation with U.S. and/or other governments as well as with Foreign-Owned Entities in the following sectors:

  • Nuclear
  • Aircraft
  • Rocket and propulsion

Imports of Goods. Prohibition or restriction of imports of U.S. and/or other foreign origin:

  • agricultural products, raw materials and food;
  • alcohol and tobacco products; and
  • medicinal products, other than those for which analogues are not produced in the Russian Federation and/or foreign countries

Barred Persons. Prohibition from entry into the Russian Federation of U.S. or other foreign persons working on the development and implementation of policy and legal/regulatory actions involving the Russian Federation.

Use of Foreign Hardware and Software. Prohibition or restriction on use of U.S. or other foreign technological equipment and software for state and municipal needs, as well as needs of certain types of legal entities.

Provision of Consulting, Auditing, Legal Services in Russia. Prohibition of or limitation on the provision by Foreign-Owned Entities of certain types of services, including consulting, auditing and legal services on the territory of the Russian Federation for state and municipal needs, as well as needs of certain types of legal entities.

Participation in Matters of State Property. Prohibition of or limitation on the participation of Foreign-Owned Entities in the privatization or sale of state or municipal property.

Nullification of Trademark Rights. Exhaustion of the exclusive right of Foreign-Owned Entities to trademarks in respect of certain goods.

Air Navigation Surcharges. Increase of charges for air navigation services of U.S. or other foreign states’ aircraft carriage of goods during the use of the Russian airspace.

Rare Earth Metals Export Prohibition. Prohibition of or restriction on the export from the territory of the Russian Federation by U.S. or other foreign citizens and Foreign-Owned Entities of rare earth metal products and equipment.

Foreign Labor Restrictions. Prohibition of or restriction on the hiring in Russia of U.S. and other foreign citizens, including highly qualified experts.

ANALYSIS

Review of the Draft Law is scheduled for April 16 at an extraordinary meeting of the Council of the State Duma, but deliberation and voting will likely occur only after the May holidays (May 1-9). During consideration of the Draft Law, comments will be sought from the relevant Ministries, government corporations and other stakeholders. Accordingly, the provisions most likely to be adopted into law are those that will benefit domestic commercial interests. These would include restrictions on certain imports, such as medications and agricultural products, limitations on use of U.S. hardware and software, and prohibition on cooperation in the aircraft industry—sectors where the Russian Government has long been seeking to cultivate domestic capabilities.

On the other hand, Measures that would significantly hurt Russian export interests or have a negative impact on the business of its government corporations, are less probable to become law or to be passed as presidential orders, if they do. Such Measures include the prohibition on international cooperation in the nuclear industry (which would hurt Rosatom’s robust export business) and restrictions on the use of U.S. (and potentially European) auditors, which would create difficulties for companies reliant on the services of the Big Four.

The proposed exhaustion of exclusive trademark rights also seems unlikely to become law, as it would constitute a violation of intellectual property rights. This provision would appear to legitimize the use in Russia of trademarks of Foreign-Owned Entities by other companies, taking away from such Foreign-Owned Entities the ability to sue for trademark infringement in Russian courts.