The scope of the EU sanctions targeting Russia is complex, especially when it comes to the consolidated groups of companies active within Russia. As the rules are relatively new, there is no relevant case law regarding this issue which could be relied upon in interpretation or guidance.
Although the present situation renders it challenging for any company engaged in trade in Russia to ensure full compliance with the sanctions’ regulations, a risk evaluation and analysis of your company’s activities is recommended. This is particularly important as a possible violation of these rules is subject to penal sanctions.
In addition, more than one sanctions regime may apply to your global business – for instance the US sanctions. The US sanctions have a wider scope of application and the rules are not identical with the sanctions imposed by the EU.
The central issues that all EU based entities engaged in Russian business should take into consideration are listed below:
1. Scope of application of the EU sanctions
The EU sanctions apply within the EU, to companies established within the EU, to all EU citizens as well as to business conducted within the EU.
The starting point is that a Russian subsidiary of an EU parent company, which is not incorporated under EU legislation, is not bound by the EU rules.
However, the activities of a Russian subsidiary may nevertheless affect the EU based parent company. This is due to the fact that the parent company is obliged to comply with the EU sanctions, and consequently it should refrain from all direct and indirect activities of the subsidiary if such activities are forbidden by the EU regulations. The unconditional precondition of the EU sanctions is that all attempts to circumvent the sanctions are punishable.
It must be determined on case-by-case basis whether the activities of the subsidiary could adversely affect the parent company. This includes e.g. orders to or financing of the subsidiary with knowledge that sanctions are breached. However, issues like ownership, level of involvement and timing will be only few of the determining factors when evaluating if a parent company is in breach of the EU sanctions regime through the activities of its subsidiary.
Since the sanctions also apply to EU citizens regardless of whether the citizen is domiciled in the EU or not, it is important to instruct all EU citizens working with the Russian subsidiary to comply with the EU sanctions regulations.
As an EU based company can fall under application of the EU sanctions through the actions of its Russian subsidiary, a careful assessment of the transactions and business of the subsidiary should be applied.
2. Listed end-users
The sanctions regulations state that funds or economic resources cannot directly or indirectly be made available to listed persons or companies or entities or bodies associated with them.¹
(¹Listed persons and companies see Council Decision 2014/145/CFSP and Regulation (EU) No 269/2014; Council Decision 2014/151/CFSP and Regulation (EU) No 284/2014; Council Decision 2014/238/CFSP and Regulation (EU) No 433/2014; Council Decision 2014/265/CFSP and Regulation (EU) No 477/2014; Council Decision 2014/455/CFSP and Regulation (EU) No 753/2014; Council Decision 2014/499/CFSP and Regulation (EU) No 811/2014; Council Decision 2014/508/CFSP and Regulation (EU) No 826/2014)
The requirement is unconditional in its sphere of application (see above) but the exact extent of this prohibition can be discussed. Since the wording “funds or economic resources” leaves room for interpretation, it is not clear if e.g. services fall under this prohibition. As an exemption, it can be mentioned that normal day-to-day business on consumer goods and goods suited for personal use will unlikely fall under definition “funds or economic resources”.
Even if this restriction in principle only applies to the listed persons or entities, an indirect involvement is also possible. Such situation can materialize e.g. if business is conducted with a subsidiary of a listed company in which the listed company has a majority of ownership or determinative influence on. This would entail that restrictions can also apply to business conducted with a non-listed company. An economic resource will not, however, be considered to have been for the benefit of a listed person or entity merely because it is used by a non-listed person or entity to generate profits which might be in part distributed to a listed shareholder.
The matter becomes increasingly complicated when the actions of a Russian subsidiary of an EU company are considered in conjunction of the possible breach of these provisions. A parent company could easily be associated with listed entities through its subsidiary.
Although the rules are not exact and leave room for interpretation, the EU based parent company has always a duty to investigate the background of its business contact to ensure compliance with the regulations. To what extent that also applies to the business contacts of the Russian based subsidiaries will depend e.g. on the extent that the parent company is involved in the day-to-day business of the subsidiary.
3. Goods for export
Presently, the EU sanctions ban only the export to Russia of dual-use goods and certain goods intended to the use of oil industry, including gas.
Dual-use goods are goods which can be used for both civil and military purpose.
It is prohibited to export dual-use goods which could be used for military purposes in Russia. This provision has only one exemption – if the export is based on an obligation contained in an agreement entered into before 1 August 2014, an authorization can be requested from the Ministry of Foreign Affairs of Finland (or relevant authorities in your country).
It may be pointed out that the restriction concerns only export of dual-use goods. If the manufacture is in Russia, the rules do not apply. However, in such case it is forbidden to provide a possible Russian subsidiary with finance, instructions or knowledge to manufacture such products, as this can be regarded as circumvention of the rules.
In respect of technology intended for oil industry, so far the authorization is granted for technology which is listed in Annex II of the Regulation (EU) No 833/2014, provided that the technology is not for projects pertaining to deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia.
Consequently, if technology is not on the list but it is used for projects referred to above, authorization is not required. When applying for an authorization an “end-user certificate” will be required.
An exported product can also contain parts which are considered either dual-use goods for military use or parts which can be used for oil industry. The decisive factor when determining whether the entire product is subject to the EU restrictions is how central the prohibited part is for the product in whole.
To conclude, under the EU sanctions, the export to Russia of goods other than i) dual-use goods for military use, ii) goods for listed end-users, or iii) certain goods for the oil industry can in principle presently continue normally.
4. Capital markets and Banking
The EU measures aim to limit the access of Russian banks listed in the Regulation (EU) No 833/2014 to EU primary and secondary capital markets.
Other instruments of payment and financial services, such as traditional bank guaranties and documentary credits (remburssit), are outside of this sphere of application. However, one should be careful if such instruments are related to any continued financing (jatkorahoitus).
In the present situation, the EU is considering further sanctions which will likely affect the banking more severely. However, the details of the scope of these possible new sanctions (if any) or the time table for such possible new sanctions is still unconfirmed.
On 8 September, the EU adopted a new package of restrictive measures targeting sectorial cooperation and exchanges with the Russian Federation. Further restrictions were formally adopted by the Council through a written procedure. New restrictive measures will apply from the day following their publication in the EU Official Journal, which has been postponed.