Sanctions Newsletter

Economic Sanctions and Russian Responses: What do they mean for international trade and investment?

This inaugural newsletter from the ART DE LEX Sanctions Group explores the current sanctions regime affecting the Russian Federation and their probable consequences for international business.

The development of sanctions in 2014

March 2014 saw the first economic sanctions applied against Russia in response to Russia’s policies in the crisis with Ukraine. The United States, the European Union, and other countries have since imposed restrictions on the rights of private entities in their respective countries who deal with Russia, as well as restrictions on a number of Russian citizens and business entities.

The United States originated the sanctions unilaterally, but they were soon supported to varying degrees by members of the European Union, as well as the United Kingdom, Canada, Australia, and several other countries.

These measures include visa restrictions on individuals, as well as sanctions aimed at certain businesses, such as blocking the credit balances of Russian entities in financial institutions in the sanctioning countries. Sectoral sanctions imposed by the United States focus mostly on the ban of equipment and technical support for deep-water energy exploration, particularly in the Arctic.

The European Council has restricted investment, financing, and insurance by EU member-states in the infrastructure, transportation, telecommunications, and energy sectors of the Crimean economy, as well as gas and oil production and mining. The EU also has adopted a list of more than 250 types of restricted or banned goods, including hydrocarbon and subsoil assets, from import from Russia into the European Union. The sectoral sanctions by the European Union extend to a ban on the acquisition of shares, or other investment in, projects or companies related to the sanctioned sectors. The decision of the EU Council (2014/11145/CFSP) of 17 March 2014 also bans the transfer of money or shares of sanctioned Russian individuals.

The Foreign Ministry of the United Kingdom has excluded Russia from the list of countries that may acquire British aircraft products, and has revoked licenses to supply arms, parts, or dual-use products to Russia.

As the armed conflict in the southeastern part of Ukraine continues, and international tensions remain, it is probable that the sanctions regimes will expand, and the number of countries that support or participate in the them will increase.

What do the sanctions against Russia mean, and how might they influence investment projects and international trade?

Responses by the Russian Federation

The ban on the import of provisions

On 6 August 2014 Russia imposed new trade controls on the basis of protecting the country;s national security interests. Russian President Vladimir Putin signed Decree 560, On particular economic measures in terms of Russian Federation defense. (“Decree 560”). Decree 560 imposed a one-year ban, and accompanying restrictions, on the Russian import of particular agricultural goods, materials, and provisions produced by a foreign entity that supports sanctions against Russian entities and individuals. which producer is a supporter of sanctions implied against Russian legal entities or individuals

To implement Decree 560, the Russian government has adopted resolution on 6 August with further amendments dated August 20, 2014 that specify restrictions on certain goods produced in the United States, the European Union, Canada, Australia, and Norway. The total value of these goods is estimated at US$ 9 billion.

The following table illustrates the banned products.

Baby food products are exempt. Nevertheless, the Government does not explain how to define the purpose of use of a particular product group. In order to preserve market balance and price stability for agricultural and industrial products, the Russian measures empower legal bodies to make further refinements and exceptions.

Restrictions on foreign goods purchased for municipal and public use in Russia

The Russian government has enforced the embargo against several types of foreign engineering products, pursuant to Resolution 656 of 14 July 2014. Moreover, the government has applied this ban to construction equipment, trolley buses, special-use vehicles, trams, and other vehicles for civic use.

Concerning the embargo on automobiles from sanctions countries, the restrictions refer to those categories that:

• had been produced by those economic entities that are not among those entities that had been producers of the motor vehicles by assembly use in 2010 (according to the criteria listed in clause 7.1.1 of the Customs Union Commission Decision 169, dated 27 November 2009 and adopted by the Customs Union Commission on 27 January 2010 , and titled About the tariff deduction on customs import taxes for economic entities that produce motor vehicles, and
• are not required to meet the necessary levels of production or assembly.

Restrictions on passenger vehicles, cargo vehicles, and special-use vehicles remain in force if their production does not correspond to required production and assembly operations.

As of 1 September 2014, the Russian Government has imposed a ban on light industrial products that have “Federal significance” and are produced in foreign countries (except Belarus and Kazakhstan). There appears to be an exemption for products of significance to national security that are not produced in Russia. It is remarkable that the embargo does not refer to the goods of intended for use by municipal governments and other units of the Russian Federation.

The sanctions list includes textiles, outdoor clothes, work clothes, leather clothes, underwear, footwear, fur goods, and other similar products. Moreover, the Government bans the use of foreign materials and semi-finished products used in the production of goods for municipal or other governmental purposes.

Export restrictions

From 1 October 2014 until 1 April 2015, the Russian Federation will impose a temporary ban on the export from Russia of cattle hides and horse hides and their derivative products. The ban is justified on the basis of the need to conserve these materials for internal use.

Future possible restrictions by the Russian government

The chairman of the Government of the Russian Federation Dmitry Medvedev has pointed out that there is a high probability that Russia will enlarge its sanctions against foreign countries, if they continue to follow their sanctions policies against Russia. Some of these possible future restrictions might involve:

• further restrictions on public and municipal purchases, as well as purchases by individuals when the purchases have implications for national policy
• a ban on medical products, motor vehicles and parts, and tobacco and wine products of the EU members and the United States
• protective measures in aircraft engineering, shipbuilding, and other transportation related heavy industry

Whether Russia imposes these new sanctions would depend to some extent on the actions of Western governments.

According to Russian authorities, the Marrakech agreement, which began the World Trade Organization, provides the legal basis for temporary restrictions on import in the interests of national security. The import bans may include goods that are not the means of production, that do not lead to trade deficits, and that stimulate illegal importation into Russia or “gray market” trading.

Some members of the State Duma have proposed to ban work within the Russian Federation by consulting or analytical agencies that are registered in countries that imply or support a sanctions regime against Russian entities. Russian individuals, businesses, and government agencies use foreign law firms, for example, heavily.

An analysis of Russian sanctions from the perspective of the Eurasian Customs Union (Belarus, Kazakhstan, Russia)

The temporary sanctions by Russia, as well as possible future responses by Russia to the EU and US sanctions assume a ban on the import and export of a particular group of goods, such as those currently listed in the Government resolution. This has produced legislative gaps in underlying legal foundations for sanctions.

For example, the sectorial sanctions do not correspond with the legislation of the Russian, Belarus and Kazakhstan Customs Union , which is supposed to be a united market. Within the United Custom Union, the goods and products from sanctioned countries have free access and may get to Russia.

Article 4, part 1 of the Union Customs Code states:

All restrictions and ban on goods and products should be adopted and agreed by all countries- members of the United Custom Union in terms of an international agreement.

The current sanction regimes are not consistent with this provision. There does not appear to be a practical history of addressing this issue, and Russian legislation does not provide protective actions when sanction regimes are violated.

The challenges for businesses and investors

These uncertainties make it essential that companies that depend on foreign trade should evaluate all of the possible risks from sanctions. It might be necessary to make temporary, or even permanent, changes in business models, projects, plans, and agreements.

Analysts of the ART DE LEX Sanctions Group monitor systematically recent and pending legislation to identify the risks that might result for companies, private organizations, individuals, and other legal entities.