Sanctions on Russia
Due to the attack by Russia to Ukraine, several states have and are imposing further sanctions on Russia and Belarus. The sanctions are described as the strictest in history. Even if the sanctions are aimed to place hardship on the Russian government and Russian companies the sanctions naturally have a material impact on the companies engaged in business with Russian counterparts.
Consequently, the sanctions have significant implications for Finnish companies and other European companies that must be taken into considerations when dealing with Russian counterparts. We have below shortly summarized the main sanctions. It should be noted that if a company trades with a company or persons that are sanctioned, there are significant penalties in place. In Finland a breach of the sanction is punishable under the Finnish Criminal Code.
The EU sanctions placed on Russian companies and Russian persons can be divided into four categories:
- Restrictive measures imposed as a result of Russia’s destabilizing actions in Ukraine (so-called sector sanctions)
- Restrictive measures against persons and entities responsible for measures that threaten or undermine the territorial integrity, sovereignty, or independence of Ukraine (so-called personal sanctions)
- Restrictive measures in response to the illegal annexation of Crimea and Sevastopol
- Restrictive measures in response to the recognition of the non-government-controlled areas of the Donetsk and Luhansk oblasts of Ukraine and the ordering of Russian armed forces into those areas.
Extensive sanctions from 2014 (EU Regulation (EU) 2014/833), which have now been significantly extended by several EU Regulations, apply to specific sectors, in particular to finance, defense, energy, aeronautics, and space technology.
Restrictions on access to the capital market include banning the financing of Russia, its government, and its central bank. Financial flows from Russia to the EU are significantly limited, among others, several Russian banks have been excluded from the SWIFT-payment system.
New restrictions are placed on the export of dual-use items and technology and related services, and on the export of certain products and technology that could contribute to the technological development of Russia’s defense and security sector. In addition, controls have been extended to a wider range of products, such as electronics, information technology, semiconductor manufacturing equipment, all ships, boats and their parts, all aircraft and their parts, sensor technology and oil refining technology.
The extension of this system of sanctions also includes restrictions on the sale, supply, transfer or export of certain products and technology to Russia for oil refining and the provision of related services. In addition, an export ban will be introduced covering products and technology suitable for use in the aerospace industry and related services.
Extensive sanctions from 2014 (EU Regulation (EU) 2014/269) which has been significantly extended by subsequent EU Regulations targeted at individuals and entities held accountable by the EU for the war in Ukraine. Also listed are President Putin and foreign minister Lavrov, as well as all members of the Russian Duma. The criteria for imposing sanctions on individuals and entities have also been extended (EU Regulation (EU) 2022/330).
According to EU Regulation ((EU) 269/2014, Article 2 (2)):
“No funds or economic resources shall be made available, directly or indirectly, to or for the benefit of natural persons or natural or legal persons, entities or bodies associated with them listed in Annex I”
That is to say, the funds and economic resources belonging to, owned, held, or controlled by the natural or legal persons, entities, or bodies subject to the restrictive measures shall be frozen and no funds or economic resources shall be made available, directly or indirectly, to or from them. Virtually all economic cooperation with a listed person and a company owned or controlled by it is prohibited and must always be carefully evaluated. Control is not necessarily the same as ownership and should be audited separately. The provisions apply not only to trade but also to other means of cooperation, e.g., the acquisition or provision of services. It, therefore, requires comprehensive knowledge of customers and end users of products, as well as their owners.
EU has further on 9 March 2022 notified that it will expand the sanctioned persons list, prohibit export of maritime navigation technology to Russia, place crypto assets to the sanctions list, and add sanctions against the Belarussian banking sector.
Additionally, the US and the UK has placed sanctions:
Sanctions against Russia have been significantly increased and the new sanctions have largely been coordinated with the EU. However, it is worth noting that past and ongoing US sanctions are clearly broader and more detailed than EU sanctions. US sanctions lists and export control regulations should be known and read carefully. Although US sanctions may not directly apply to a Finnish company, they will apply, e.g., in connection with the dollar trade or if US citizens are in charge of the company. The US uses the so-called principle of “long arm” and national borders do not preclude the interpretation that the sanctions it imposes must be complied with. The US has also excluded a number of Russian banks from the SWIFT-payment system and prohibited the import of Russian oil and gas energy.
Assets of Russian banks are frozen in the UK and Russian banking system is completely precluded from the UK financial markets. The UK is banning Russian state-owned and key strategic companies from raising funding in the UK financial markets. Sanctions have been imposed on companies and oligarchs at the heart of the Putin regime, e.g., freezing of property and travel bans. The UK has imposed trade and export restrictions on Russia’s high-tech and strategic industries (including electronics, telecommunications, and aerospace). Further, the UK has closed Russians from UK airspace, strictly limited the possibility of Russian controlled vessels from entering its harbors and blocked wealthy Russians from entering UK banks.
The above is only a summary of the applicable sanctions. It should be noted that the sanctions are continuously being updated. A general rule is that if there is any doubt that the business would be subject to sanctions then it is important to be extra careful and to examine the situation carefully. We are of course happy to assist our clients in these inquiries and provide other assistance in relation to applicable sanctions.
Exit from Russia
A further significant consequence of the sanctions and the war in Ukraine is that several companies have and are considering withdrawing from the Russian market or at least suspending their Russian business temporarily. Planning and executing a withdrawal or a suspension, however, necessitates several considerations. A company withdrawing or suspending its Russian business operations should consider both the legal ramifications on the company and the ramifications on the personnel of the exiting company.
The legal hurdles to be overcome in withdrawing from the Russian market remain somewhat unclear. It should also be noted that the situation may change quickly and if the situation continues to escalate, it is not impossible that Russia may even conduct seizures or nationalization of foreign directly or indirectly owned assets. However, currently it is unclear if and in which man-ner these initiatives relating to seizure or nationalization of foreign owned assets will be implemented. As a response to the sanctions placed on Russia it has imposed a so-called “anti-sanction” aimed to alleviate the impacts of the sanctions on Russia and to make it harder for foreign entities to withdraw from the market.
The anti-sanctions are, among other, sanctions whereby:
Russian residents are required to obtain a permit from the Government Commission for control over foreign investments for:
Transactions on granting loans in rubles and foreign currency to entities of non-friendly foreign states (which have announced restrictions against Russia).
Transactions on transfer of ownership title to securities and real estate with entities of non-friendly foreign states (both sale and purchase of such property to/from such entities), as well as with entities who acquired such property from entities of non-friendly foreign states on or after February 22, 2022.
Operations on Russian residents transferring foreign currency to their foreign accounts/deposits, as well as on money transfers without a bank account being opened using foreign e-pay system services.
Especially crucial for a company considering withdrawal from the Russian market is the requirement for a permit to transfer ownership title with non-friendly foreign states. As non-friendly foreign states are considered in practice all states that have imposed sanctions on Russia, Finland is also considered a non-friendly state.
Also, the possibility of Russia imposing severe consequences on companies and its employees both foreign and Russian, especially senior management, if the company does not follow the applicable anti-sanctions, should be considered. The consequences for both Russian and foreign employees may include fines or even imprisonment. As the situation is unclear, thorough planning, preferably with the help of a local law firm, is advised if a withdrawal is considered. Our network of law firms and other consultants is available for these evaluations.
If there are any questions regarding the applicable sanctions or assistance needed in a particular case related to sanctions, our sanctions desk is willing to help. For additional information please contact Ulla von Weissenberg, Ismo Hentula, Pia Tanskanen or Emil Vartiainen.