Special economic measures (sanctions) were imposed against the Republic of Turkey by Decree No. 583 of the President of the Russian Federation dated 28 November 2015 1 (hereinafter Presidential Decree No. 583). These measures imply a ban on the import of specific Turkish goods, the sale of tourism products that involve a visit to Turkey, a ban on charter flights, the employ- ment of Turkish citizens or engagement of Turkish citizens on the basis of a civil law contract in Russia, and abolition of the visa-free regime with Turkey. One area of the Russian economy seriously affected by the sanctions imposed on Turkey is the construction sector, where Turkish companies and specialists have built up solid positions dating back to the 1990s. According to available data, today the “Turkish segment” of Russia’s construction mar- ket is made up of approximately 300 companies with total orders of approximately USD 50 billion, inter alia, within the framework of the implementation of high-profile private and public projects. Turkish construction firms rank highly in the “price-quality” criterion when a contractor (general contractor, subcontractor) is selected to implement a construction project.
What should Russian clients bear in mind now when dealing with a Turkish construction firm, or Russian employers when hiring Turkish specialists?
1. Ban on lines of business
Resolution No. 1457 of the Government of the Russian Federa- tion dated 29 December 2015 2 was adopted to enforce Presiden- tial Decree No. 583. The Resolution approved the list of types of work (services) that, effective 1 January 2016, may not be performed (provided) in Russia by companies under the jurisdic- tion of the Republic of Turkey (hereinafter Turkish companies), and also by organisations controlled by Turkish companies and/or Turkish citizens (hereinafter controlled companies).
In particular, this affects the following lines of business in the construction sector:
- the construction of buildings and engineering structures;
- the performance of specialised construction work;
- activities relating to architecture, design and engineering, technical tests, research and analysis;
- the performance of work, provision of services to meet state and municipal needs.
The specific lines of business covered by the ban are determined in accordance with the codes of the Russian National Classifier of Types of Activity “OK 029-2014 (KDES Version 2)”. According to these codes, the ban covers all the core lines of business in the areas of project design, construction and management, and also the main civil and industrial construction sectors, for example:
- the construction of new buildings;
- reconstruction, capital repairs, routine repairs and additional work;
- the construction of residential and non-residential buildings, including administrative, industrial and public buildings: hospitals, schools, hotels, shopping centres and indoor sports facilities;
- the construction of roads and railways, underground railways, bridges, tunnels and utilities;
- design and engineering;
- the provision of construction project management services, construction supervision and design supervision.
The bans on the aforementioned lines of business apply to any forms of contractual arrangements with Turkish partners affected by the sanctions (general contractor, subcontractor).
At the same time, however, the sanctions do not apply to work and services, the performance and provision of which was stipu- lated by contracts concluded before 30 December 2015.
Digression: definition of a controlled company
- Companies are classified as controlled companies based on indicia that the companies are under the control of another person in accordance with Parts 1 and 2 of Article 5 of Federal Law No. 57-FZ dated 29 April 2008 3. A company is deemed to be controlled in the event of the existence of one of the following indicia:
- the controlling person (Turkish citizen or Turkish company) has the right to dispose either directly or indirectly of more than 50 per cent of the total number of votes attributable to the voting shares (interests) constituting the charter capital of the controlled person;
- the controlling person received the right or authority to deter- mine the decisions being adopted by the controlled person, inter alia, the terms and conditions for doing business;
- the controlling person has the right to appoint the chief exe- cutive officer and/or more than 50 per cent of the collective executive body of the controlled person and/or has the unre- stricted ability to elect more than 50 per cent of the board of directors (supervisory board) or other collective management body of the controlled person;
- the controlling person exercises the authority of the manage- ment company of the controlled person;
- the controlling person has the right to dispose directly or indi- rectly of less than 50 per cent of the total number of votes of the charter capital of the controlled person, provided that the ratio of votes is such that the controlling person is able to determine the decisions being adopted by the controlled person.
2. Employment ban
Pursuant to Presidential Decree No. 583, clients for work (services) not included in the list to be determined by the Russian Government (see below) are banned, effective 1 January 2016, from engaging employees that are Turkish citizens, who were not in employment and/or civil law relations with the aforementioned clients for the work (services) as at 31 December 2015, to perform job duties, perform work (provide services). In our opinion, this ban applies not only to Turkish citizens planning to conclude direct labour or civil-law contracts in Russia (requiring the receipt of a work visa), but also to Turkish citizens, who are the employees of foreign legal entities (manufacturers or supplies) performing installation (installation and supervision) work (requiring the receipt of a “Maintenance” business visa).
Resolution No. 1458 of the Government of the Russian Federation dated 29 December 2015 4 approved the list of companies per- mitted from 1 January 2016 to engage Turkish citizens to per- form job duties and perform work (provide services). This list included both Russian and Turkish companies and controlled companies operating in the construction sector (http://govern ment.ru/orders/21227/).
Please note that Resolution No. 1296 of the Government of the Russian Federation dated 30 November 2015 5 states that the bodies of the Federal Migration Service of the Russian Federa- tion are entitled, pursuant to the procedure established by the legislation of the Russian Federation, and within the limits of the quota approved by the Government on the employment of foreign workers, to extend the effective term of the work permits (issue new work permits) to Turkish citizens in employment and/or civil- law relations with legal entities incorporated in accordance with the laws of the Russian Federation, organisations and individuals under the jurisdiction of the Russian Federation as at 31 Decem- ber 2015. However, this procedure does not apply to the repre- sentative offices and branches of foreign companies. In addition, in our opinion, there is a risk that the aforementioned procedure for extending work permits might not apply to highly skilled spe- cialists and other employees among Turkish citizens, who have received work permits separately from established quotas (for example, individuals holding the position of electrical engineer).
We would also like to draw your attention to the prevalent prac- tice where Turkish citizens are refused entry into the Russian Fed- eration, including individuals holding a valid work permit, by the border authorities of the Russian Federation (inter alia, located in Russian airports) without any disclosure of the reasons. It is not advisable to challenge such a refusal, as the border authorities are entitled to refuse entry without disclosing the reasons.
3. Execute, no pardon: what can one expect of the sanctions regime?
Against the backdrop of continuing tension in Russian-Turkish foreign policy, Russia’s state authorities have been making mutually exclusive statements regarding the fate of construction contractors on the Russian market.
On the one hand, fully aware that the enactment of the prohibitive measures would adversely affect prospects for the implementa- tion of numerous important projects in the Russian economy, the Ministry of Economic Development of Russia has prepared a draft Resolution of the RF Government (https://regulation.gov.ru/ projects#npa=45238), stipulating the possibility of concluding contracts with Turkish companies and controlled companies, whereby the bans and restrictions will not apply to them. The inclusion of the contracts in a special list selected according to the rules approved by this Resolution (hereinafter the Rules) would serve as the grounds for the conclusion of such contracts.
To be included in the list, the contract must comply with specific criteria established by the Rules. For example, the contract may be concluded with a Turkish company if the failure to conclude such a contract would affect the performance of the internal or external obligations of the Russian Federation, as the goods (work, services) cannot be replaced from other sources, or if such a replacement would result in disproportionately high costs.
The need to conclude a contract with a Turkish company or con- trolled company, and its inclusion in the list, should be substanti- ated by the applicant participating in the selection and planning to conclude the contract with the Turkish party. In addition, the applicant must submit a set of documents containing information both on the contract to be concluded, and also on the Turkish counterparty.
The Inter-Departmental Commission under the Ministry of Eco- nomic Development of Russia will assess whether a correspon- ding construction contract may be included in this list.
Even though the Rules establish an exhaustive list of grounds for refusing the conclusion of a contract, such a refusal may be attri- buted, for example, to the existence of a possibility to replace the supplier, the lack of “significant losses” of the Russian company or the absence of threats to the country’s security. Such wording will make it possible to apply similar grounds liberally and prohibit Russian companies from concluding corresponding contracts with Turkish partners.
On the other hand, the President of Russia declared on 25 January 2016 at the Inter-Regional Forum of the People’s Front for Russia that “restrictions against Turkey in the construction sector will be expanded”.
4. Consequences of the imposition of sanctions against Turkey for contract practice
From the perspective of civil law, the conclusion of a contract with a Turkish company or controlled company stipulating the performance of lines of business covered by the sanctions will result in the invalidity (nullity) of the contract in accordance with Article 168 of the Civil Code of the Russian Federation. Null and void transactions do not engender legal consequences as of the time of their conclusion, with the exception of the consequences related to their invalidity.
In connection with this fact, the introduction of further sanctions will require companies to adapt their sanctions compliance proce- dures, and also to include in contracts additional terms and con- ditions that make it possible to prevent the conclusion of invalid transactions, and if this does happen, to mitigate the negative property consequences of their termination. Accordingly, the fol- lowing measures could be included among recommended mea- sures:
- The counterparty is required to disclose information on the ownership and management structure of the company;
- The counterparty provides assurances that it has not violated the sanctions regime;
- The counterparty assumes liability for the submission of false information and misrepresentation of the facts;
- The submission of false information and misrepresentation of the facts serves as grounds for the termination of the contract;
- The imposition of sanctions is stipulated as independent grounds for the termination of the contract.