Foreign investors in Russia face considerable problems owing to the economic sanctions imposed on Russia by the United States and the European Union in connection with the Ukrainian crisis. The same is true for domestic investors in the European Union and the United States.

Generally there are two approaches to assessing the turmoil caused by the sanctions.

The foremost of these is how the restrictions imposed affect those investors who have already invested in the designated entities or have entered joint ventures with them. The main problem is that most investors holding shares in the targeted enterprises or spheres of business are likely to bear losses, or at least to raise less money than they might have expected. This problem has already arisen in the oil-and-gas sector: as a part of sanctions it was prohibited for western companies to cooperate with certain Russian energy corporations, particularly in Arctic projects. The most spectacular example of a victim of such a decision is ExxonMobil Corp., which is involved in ten joint ventures with Rosneft.  Nine of these have been suspended owing to the sanctions.

The immediate effect of the European Union and United States sanctions has been to cause losses to investors holding shares in European Union and United States corporations whose core business depends to a significant degree on cooperation with Russian companies active in the oil-and-gas and defense industries. Such western companies actually fall within the sanctions regime together with their Russian counterparts.

Although the sanctions do not affect existing obligations, in any ambiguous case it is generally advisable to inform the parties to a contract that a force-majeure circumstance has arisen, making it impossible to duly perform any contractual provision. As many honorable companies admit, in the current situation the overriding priority is to fix losses and the only way to do so is to negotiate carefully on every thorny issue; in these circumstances, any attempt at scalping can lead only to the whole economic situation being aggravated. This, in turn, puts a question mark against the terms for the global economy and its players to engineer a recovery.

Secondly, the sanctions affect those market players whose intention was to invest in prosperous Russian state-controlled corporations. The most evident part of the imposed restrictions that affect investors is the block on European and US companies and individuals investing in or otherwise providing financing with maturity of the obligation exceeding 90 days (from September 12, the term for most of companies is reduced by 30 days) to certain Russian finance, oil-and-gas and defense industry companies1 and their subsidiaries. Although both the European Union and United States imposed restrictions only on a limited list of Russian companies, difficulties have also arisen with the financing of other large Russian corporations. The problem is grounded in a fear of unintentionally contracting with a subsidiary of a designated legal entity or with a subsidiary of a subsidiary of such an entity, as well as in apprehension that the list of targeted companies may be expanded. Furthermore, European and US authorities are also placing additional constraints on doing business with (including investing in) large Russian companies not targeted by the sanctions. These take the form of complicated control over every transaction, which actually freezes any intended transaction. Though such measures are not implemented by statute, they represent a widespread practice that can only be changed for the better by numerous court judgments favoring business.

Both companies and individuals can face severe punishment for violating the sanctions regime. The United States International Emergency Economic Powers Act2 provides for a fine for companies of up to USD 1 million for each restricted transaction, while individuals may be sentenced to up to 20 years in prison. The same offence is punished differently in EU-member countries, but substantial fines and long-term prison sentences are also applied.

Recent European and US law enforcement practice is guided by the spirit of the law rather than by the literal meaning of it: evasion schemes (such as registering a subsidiary of a European Union and United States legal entity, which is not subject to the sanctions regime) generally do not work; indeed, this leads to the same penalties and sentences being imposed as are mentioned above. Thus, such attempts are not recommended unless expert advice is taken in the relevant jurisdiction to confirm that they are appropriate.

Thus any economically reasonable attempt of any nature by EU and US entities to avoid sanctions is in most cases doomed to failure. Furthermore, it may end in companies facing serious losses and individuals being subject to severe prison sentences. As a result, neither straightforward disobedience nor sophisticated evasion schemes can be regarded as the option of choice.

In this situation, the assistance that lawyers can potentially offer actually comes down to making a preliminary examination of the proposed counterparties and to providing court representation in probable actions concerning punishment for violation of the sanctions regime. In both cases, defense may consist of proving that either the foreign party to a contract or a transaction is not subject to the regulations in issue, or their Russian counterparty has no connection with the restricted legal entities, meaning that the sanctions regime is inapplicable in the given case. In terms of the trends we observe, this is the most dependable way to work things out.

This article was also published in the OWC annual publication AEB-Investieren in Russland 2014