Accountor - Sanctions & Business in Russia: Today & Tomorrow

SANCTIONS & BUSINESS IN RUSSIA: TODAY AND TOMORROW

BUSINESS BREAKFAST PAVEL ANTONOV, ACCOUNTOR

01.05.2023

2

TOPICS TO DISCUSS

1. Practical meaning of sanctions for foreign companies

2. Restrictions for business deals (legal consequences for businesses & individuals)

3. Measures to be taken for legal compliance and avoiding risks

4. Business in the Crimea – what is allowed and what is not?

01.05.2023

3

PRACTICAL MEANING OF SANCTIONS FOR FOREIGN COMPANIES – EU RESTRICTIVE MEASURES WHO SHOULD COMPLY WITH SANCTION RULES IN THE TERRITORY OF THE RF?Legal entities: If the entity is registered pursuant to the laws of an EU member or its operations are carried out in the territory of EU (for example, the branch office of a Chinese company located in Germany) as well as its foreign branch offices and representative offices.

Subsidiaries of foreign companies registered pursuant to the laws of Russia are not covered by restrictive regulations.

01.05.2023

4

PRACTICAL MEANING OF SANCTIONS FOR FOREIGN COMPANIES – EU RESTRICTIVE MEASURES WHO SHOULD COMPLY WITH SANCTION RULES IN THE TERRITORY OF THE RF?Natural persons: Citizens of EU countries (including those who hold passports of 2 countries, one of which is an EU Member State) and foreigners who permanently live in EU. Including: owners and managers of + subsidiaries of foreign companies registered

pursuant to the laws of Russia;+ Branch offices of non-EU companies located in

EU.

01.05.2023

5

PRACTICAL MEANING OF SANCTIONS FOR FOREIGN COMPANIES – EU RESTRICTIVE MEASURES WHERE DO EU SANCTIONS APPLY?Sanctions are designed to have effects on third countries.Nevertheless, EU restrictive measures only apply within the jurisdiction of the EU, that is:

+ Within EU territory, including its airspace;+ For EU nationals, whether or not they are in the EU;+ To companies and organisations incorporated under the law

of a Member State, whether or not they are in the EU. This also includes branches of EU companies in third countries;

+ To any business done throughout or in part of the European Union;

+ On board aircrafts or vessels under the jurisdiction of a member state.

01.05.2023

6

PRACTICAL MEANING OF SANCTIONS FOR FOREIGN COMPANIES – EU RESTRICTIVE MEASURES

01.05.2023

COUNCIL REGULATION (EU) No 269/2014 of 17 March 2014

All funds and economic resources belonging to, owned, held or controlled by any natural persons or legal entities or bodies associated with them as listed in Annex I shall be frozen.

No funds or economic resources shall be made available, directly or indirectly, to or for the benefit of natural persons or legal entities or bodies associated with them listed in Annex I.

7

PRACTICAL MEANING OF SANCTIONS FOR FOREIGN COMPANIES – EU RESTRICTIVE MEASURES Definitions are wide and general:

'funds' means financial assets and benefits of every kind

'economic resources' means assets of every kind, whether tangible or intangible, movable or immovable, which are not funds, but may be used to obtain funds, goods or services

'freezing of economic resources' means preventing the use of economic resources to obtain funds, goods or services in any way, including, but not limited to, by selling, hiring or mortgaging them

01.05.2023

8

PRACTICAL MEANING OF SANCTIONS FOR FOREIGN COMPANIES – EU RESTRICTIVE MEASURES Asset freeze An asset freeze concerns funds and economic resources owned or controlled by targeted individuals or entities. It means that funds, such as cash, cheques, bank deposits, stocks, shares, etc., may not be accessed, moved or sold. All other tangible or intangible assets, including real estate, cannot be sold or rented, either. An asset freeze also includes a ban on providing resources to the targeted entities and persons.This means that EU citizens and companies must not make payments or supply goods and other assets to them. In effect, business transactions with designated companies and persons cannot legally be carried out. In certain cases, national competent authorities can permit derogations from the asset freeze under specific exemptions, for instance to cover basic needs (such as foodstuffs, rent, medicines or taxes) or reasonable legal fees.

01.05.2023

9

PRACTICAL MEANING OF SANCTIONS FOR FOREIGN COMPANIES – EU RESTRICTIVE MEASURES Natural persons and legal entities from the List are excluded from financial and economic turnover

01.05.2023

10

RESTRICTIONS FOR BUSINESS DEALS

EU nationals and companies may no longer buy or sell new bonds, equity, or similar financial instruments with a maturity exceeding 30 days, issued by:

+ five major state-owned Russian banks, their subsidiaries outside the EU, and those acting on their behalf or under their control;

+ three major Russia energy companies;+ three major Russian defence companies.

Services related to the issuing of such financial instruments, e.g. brokering, are also prohibited.EU nationals and companies may not provide loans to five major Russian state-owned banks.

01.05.2023

11

RESTRICTIONS FOR BUSINESS DEALS+ Embargo on the import and export of arms and related material from/to Russia, covering all items on the EU military list;+ Prohibition on exports of dual use goods and technology for military use in Russia or to Russian military end-users, including all items on the EU list of dual use goods. Export of dual use goods to nine mixed defence companies is also banned.

01.05.2023

12

RESTRICTIONS FOR BUSINESS DEALS

+ Exports of certain energy-related equipment and technology to Russia are subject to prior authorisation by competent authorities of Member States. Export licenses will be denied if products are destined for deep water oil exploration and production, arctic oil exploration or production, and shale oil projects in Russia.

+ Services necessary for deep water oil exploration and production, arctic oil exploration or production, and shale oil projects in Russia may not be supplied, for instance drilling, well testing or logging services.

01.05.2023

13

PRACTICAL MEANING OF SANCTIONS FOR FOREIGN COMPANIES – EU RESTRICTIVE MEASURES COUNCIL REGULATION (EU) No 833/2014 of 31 July 2014

It is prohibited to directly or indirectly purchase, sell, or provide brokering or assistance in the issuance of, or otherwise deal with, transferable securities and money-market instruments with a maturity exceeding 90 days, issued by:

A major credit institution which has an explicit mandate to promote the Russian economy’s competitiveness and is established in Russia with over 50% public ownership or control as of 1 August 2014, as listed below:

01.05.2023

14

PRACTICAL MEANING OF SANCTIONS FOR FOREIGN COMPANIES – EU RESTRICTIVE MEASURES COUNCIL REGULATION (EU) No 833/2014 of 31 July 2014List of institutions referred to in the above

document:1. SBERBANK2. VTB BANK3. GAZPROMBANK4. VNESHECONOMBANK (VEB)5. ROSSELKHOZBANK

01.05.2023

15

PRACTICAL MEANING OF SANCTIONS FOR FOREIGN COMPANIES – US RESTRICTIONS

Executive Order 13662 Exports, re-exports, or in-country transfers to certain Russian energy companies designated on the Entity List (i.e., Gazprom, Gazprom Neft, Lukoil, Rosneft, Surgutneftegas) are subject to licensing requirements Otherwise above activities by a U.S. person or within the United States are prohibited Licenses are issued by the U.S. Commerce Department’s Bureau of Industry and Security

01.05.2023

16

PRACTICAL MEANING OF SANCTIONS FOR FOREIGN COMPANIES – US RESTRICTIONS Executive Order 13662IT IS PROHIBITED in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in the maritime area claimed by the Russian Federation and extending from its territory

only where the exporter (i) knows that the items will be used for targeted end-uses (i.e., deepwater, Arctic offshore, or shale projects) or (ii) is unable to determine whether the items will be used for such end-uses

01.05.2023

17

RESTRICTIONS FOR BUSINESS DEALSFinancial assistance

Q. Does the provision of payment services and issuance of letters of guarantee/credit constitute financial assistance and are they therefore prohibited as goods and technology subject to a ban?

A. Payment services and issuance of letters of guarantees/credit constitute financial assistance and are prohibited when linked to the underlying commercial transaction subject to a ban.

01.05.2023

18

RESTRICTIONS FOR BUSINESS DEALSFinancial services measures Trade Finance

Q. Can EU persons process payments, provide insurance, issue letters of credit, extend loans, to sanctioned entities for non-prohibited exports or imports of goods, or non-financial services to or from the Union?

A. Yes, all of these operations are allowed as long as they are subject to the exemption under Article 5(3).

01.05.2023

19

RESTRICTIONS FOR BUSINESS DEALSFinancial services measures Trade Finance

Q. Can an EU citizen provide funds to a non-sanctioned entity, including loans or credit, which are channeled through a sanctioned entity, provided that the funds do not stay with the sanctioned entity for more than 30 days?

A. Yes, that would not constitute providing a new loan or credit with a maturity exceeding 30 days to a sanctioned entity and would therefore not fall within the prohibition.

01.05.2023

20

LEGAL CONSEQUENCES FOR BUSINESSES & INDIVIDUALS

Examples of fines for breachFor breach of embargo Germany and others can use the following measures:(1) fines imposed on companies in the event of

criminal prosecution – up to 10 mil EUR depending on the economic benefits obtained;

(2) forfeit of goods related to breach;(3) cancellation of export privileges.

01.05.2023

21

MEASURES TO BE TAKEN FOR AVOIDING RISKS

01.05.2023

Measures to be taken for avoiding risks

22

MEASURES TO BE TAKEN FOR LEGAL COMPLIANCE AND AVOIDING RISKS

01.05.2023

•Check all existing and potential business contacts

•Analyze the consequences of continuing or establishing businesses

•Companies who have representative or branch offices in Russia may want to think of changing their structure – establishing subsidiaries pursuant to Russian laws

23

MEASURES TO BE TAKEN FOR LEGAL COMPLIANCE AND AVOIDING RISKSCLEAR UNDERSTANDING OF EXTENT OF THE FOREIGN COMPANY’S BUSINESS IN RUSSIA:

To review contractual clauses you have to insulate yourself against from the effects of sanctions measures

To determine whether your company currently has citizens of EU/US/other jurisdictions in management positions in Russia. Option of multiple directors

01.05.2023

24


Existing subsidiaries that have EU citizens in their management may change structure – the “sole executive body” of an RF company can be restructured. Since Sep.1, 2014, it is possible to have multiple directors

If a citizen of the US/EU/other relevant jurisdiction is the direct owner of a company in Russia, then it is possible to restructure ownership so that the owner is from a third-country

01.05.2023

25

MEASURES TO BE TAKEN FOR LEGAL COMPLIANCE AND AVOIDING RISKSSANCTION EXAMPLE: US/Executive Order 13685 prohibits all direct and indirect transactions by US persons/entities to or from Crimea

01.05.2023

Circumvention practices: Omission of references to Crimea in transaction documentation Omission of references to Crimean cities/towns in SWIFT messages (street references only) Distribution agreement with a third-country to sell US products in Russia (sales in Crimea)

26


01.05.2023

Requesting additional information from parties (including financial institutions, corporate entities, and individuals) that have previously violated or attempted to violate U.S. sanctions targeting Crimea before processing relevant transactions.

Ensuring that the company’s transaction monitoring systems include appropriate search terms corresponding to major geographic locations in Crimea and not simply references to Crimea.

27


Clearly communicating U.S. sanctions obligations to, and discussing sanctions compliance expectations with, correspondent banking and trade partners.

Such communications should include, for example, a description of the U.S. prohibition on the direct and indirect exportation or re-exportation of goods, technology, and services (including financial services) from the United States to Crimea.

01.05.2023

28

i. The EU has adopted a prohibition on imports originating from Crimea and Sevastopol unless accompanied by a certificate of origin from the Ukrainian authorities.

ii. Investment in Crimea or Sevastopol is outlawed. Europeans and EU-based companies may no longer buy real estate or entities in Crimea, finance Crimean companies or supply related services.

iii. EU operators will no longer be permitted to offer tourism services in Crimea or Sevastopol. In particular, European cruise ships may no longer call at ports on the Crimean peninsula, except in case of an emergency. This applies to all ships owned or controlled by, or flying the flag of, a European Union member state.

01.05.2023

RESTRICTIONS FOR CRIMEA AND SEVASTOPOL

29

RESTRICTIONS FOR CRIMEA AND SEVASTOPOL1. The EU has adopted a prohibition

on imports originating from Crimea and Sevastopol unless accompanied by a certificate of origin from the Ukrainian authorities.

2. Investment in Crimea or Sevastopol is outlawed. Europeans and EU-based companies may no longer buy real estate or entities in Crimea, finance Crimean companies or supply related services.

01.05.2023

30

3. EU operators will no longer be permitted to offer tourism services in Crimea or Sevastopol. In particular, European cruise ships may no longer call at ports on the Crimean peninsula, except in case of an emergency. This applies to all ships owned or controlled by, or flying the flag of, a European Union member state.

01.05.2023


31

4. It is prohibited to export certain goods and technology to Crimean companies or for use in Crimea. This concerns:

5. Transport, telecommunications and energy sectors or companies involved in the prospection, exploration, and production of oil, gas and mineral resources

6. Technical assistance, brokering, construction or engineering services related to infrastructure in the same sectors must not be provided

01.05.2023


32

What de facto application of Russian legislation in Crimea/Sevastopol means for foreign businesses? Traditional trade flows are affected Legal uncertainty - the validity of contracts, legal remedies, business registries and databases (e.g. rights to real estate property) Many companies are switching legal jurisdictions and their Crimean affiliates have started operating as part of the Russian market with employees re-hired

01.05.2023

BUSINESS IN THE CRIMEA

33

What de facto application of Russian legislation in Crimea/Sevastopol means for foreign businesses?

01.05.2023

BUSINESS IN THE CRIMEA

•Unclear taxation system – which taxes under which law

•Unclear situation with VAT refunds

•Uncertainty with renewal of licenses

•Non-implementation and non-recognition of court decisions

34

POSITIVE IMPACT OF SANCTIONS

01.05.2023

+ The greatest sanction is fear – one should overcome it and win;

+ It is a good time to do business in Russia due to the cheaper Rouble and locals being more interested in attracting investors.

1. TOUKOKUUTA 2023

35

PASSION FOR RESULTS

Accountor - Sanctions & Business in Russia: Today & Tomorrow

Business

Transcript of Accountor - Sanctions & Business in Russia: Today & Tomorrow