Introduction

Due to the far reaching scope of application and prohibitions of EU and US embargoes and sanctions law (“Sanctions”), multinational businesses in many situations have no other choice than to require that their Russian subsidiaries comply with Sanctions. This, in turn, may expose this Russian subsidiary to substantial risks under Russian Law, as, not surprisingly, the Russian Federation has severe national interest reservations with regard to compliance with Sanctions. In the recent past, more and more cases have been reported, in which the Russian Federation took action against compliance with Sanctions. This led to Russian subsidiaries finding themselves in a classical catch 22 situation, seemingly forced to either violate against Sanctions or against Russian laws.

Far-reaching obligations under Sanctions

In many constellations Sanctions apply to Russian subsidiaries of multi-national companies, e.g. if EU or US citizens are employed in senior functions, if part of the transactions are carried out on EU or US territory or in cases that require internal approval by EU or US based parent companies. Sanctions comprise very broad prohibitions, e.g. to indirectly deliver goods or services for use in Crimea, or to indirectly make funds or economic resources available to listed entities, or to facilitate any of the foregoing. This is why actions of Russian subsidiaries may entail severe consequences for their parent companies. Breaches against Sanctions constitute criminal offenses and are, especially in the US, subject to astronomically high fines. This is also why EU and US banks usually place financing under the condition of compliance with Sanctions (cf. the LMA guidance note: United States and European Union sanctions, available on the LMA website).

Conflict with obligations under Russian laws

Not surprisingly, from the viewpoint of Russian laws, the compliance with Sanctions affects national interests of the Russian Federation. Increasingly, over the past years Russian authorities have increasingly taken the position that actions or non-actions which are taken in order to comply with Sanctions are treated as breaches of Russian laws.

For example, compliance with Sanctions gained public attention in Russia regarding a recent settlement agreement between Google and the Russian antitrust authorities. Under the agreement Google is obliged, on the whole territory of the Russian Federation, to provide users of Android OS with the freedom to choose any search engine as the default search engine on their Android OS devices. At the same time it is known that, following Sanctions, Google stopped the work of Google Play store and other services in Crimea in 2015. In the given situation, the Russian antitrust authorities take the view that, in order to comply with Russian antitrust laws, Google must fulfill its obligations under the settlement agreement on the whole territory of the Russian Federation, including Crimea. Currently, it is not clear as to whether Google will, or will not resume work in Crimea. (News in the Russian business paper RBC >>)

Furthermore, actions in order to arrange for the compliance of the Russian subsidiary’s activities with Sanctions (e.g. instructions to the subsidiary’s management or requests to the subsidiary’s management to sign a respective undertaking or to adopt a respective policy) may give rise to investigations of the Russian public prosecution authorities for breach of the following further laws:

  • Russian labor laws on the protection of employees,
  • Certain provisions of Russian criminal laws (e.g. extremist activity, public invocation for extremist activity or public invocation for violation of the territorial integrity of the Russian Federation).

Ways to square the circle

In the light of the above arranging for a Russian subsidiary’s compliance with Sanctions is an issue which should be handled thoroughly and carefully. In all cases we recommend to take a risk-based approach, especially also taking into account the relevant Russian law implications. Very often, tailor-made solutions can be found meeting the requirements of Sanctions without exposing the subsidiary to substantial risks under Russian law.