Impact of Sanctions on Commercial Contracts: Russian Legal Aspects

by Artem Usov

August 27, 2014

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March 17, 2014 Council Decision 2014/145/CFSP

May 12, 2014 Council Decision 2014/265/CFSP

June 23, 2014 Council Decision 2014/386/CFSP

July 30, 2014 Council Decision 2014/508/CFSP

Council Decision 2014/507/CFSP

July 31, 2014 Council Decision 2014/512/CFSP

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• Canada

• Japan

• Switzerland

• Australia

• Norway

• Montenegro

• Ukraine

• Albania

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• Restrictions on:

• Purchase or sale of bonds,

equities or similar financial

instruments with a maturity

exceeding 90 days issued after

1 August 2014

• Provision of specific services

and technologies

• Import

• Export

• Supplies

• Investments

• Applicable to:

• EU companies

• EU nationals

• Other persons operating in EU

• With respect to:

• Specifically sanctioned Russian

entities

• Entities incorporated in Crimea

and participating in infrastructure

and other specific types of

projects conducted in Crimea

• Specific activities and services

(including those related to deep

water and arctic oil exploration

and production)

• Specific products (including

dual- use)

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Current Russian Sanctions

• Ban on importation of certain foods from EU

• Government procurement system bans specifically

listed foreign-produced products

• Hidden sanctions (government checks and audits)

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Areas of High Risk Exposure

• Government procurement system

• Food export

• Financing

• Infrastructure projects

• Energy sector

• Telecommunication sector

• Transport sector

• Oil sector

• Military products and technologies

• Dual-use products

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Risks in Commercial Contracts

• Disruption of activities

• Unpaid invoices

• Penalties

• Losses

• Other

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Scenarios of Further Escalation

• Further expanding the list of products, technologies and

services banned from exporting to Russia in the following

areas:

• Government procurement system

• Infrastructure projects

• Energy sector

• Oil sector

• Financing sector

• Further retaliatory measures taken by Russian Government

• Ban on funds transfers (in Euro or Rubles) from and to

Russia

• Other

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Case Study (1)

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Irish leasing company Irish SMBC Aviation Capital had to suspend its

performance under a contract with Russian low-cost airline operator,

Dobrolet, due to EU sanctions. Also, other European companies including

Lufthansa Technik had to suspend services provided to Dobrolet.

Under EU sanctions, no funds or economic resources shall be made

available, directly or indirectly, to or for the benefit of sanctioned persons

including Dobrolet (EU Council Decision March 17, 2014, 2014/145/CFSP

and EU Council Decision July 30, 2014, 2014/508/CFSP).

Case Study (2)

Russian Sub entered into a contract to perform a type of service for its

Russian client that requires provision of some advanced technologies

by its European parent company. Subsequently, provision of this type of

service and technology to end-users in Russia was sanctioned by EU.

EU nationals including those employed by EU parent company or

Russian Sub are prohibited from participating in performance of

sanctioned services including contracts of Russian Sub with its Russian

clients.

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Force Majeure (FM) in Commercial Contracts (1)

Generally, the entity that has not properly performed an obligation in a

transaction is liable, unless it is proved that proper performance was

impossible due to force majeure, that is, extraordinary and

unavoidable conditions (Article 401 (3) Civil Code of Russia).

Under Russian court practice:

• Embargo, sanctions, etc. are covered by FM

• Actions of third parties are NOT covered by FM

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Force Majeure (FM) in Commercial Contracts (2)

It is uncertain whether a Russian Sub can apply force majeure in case of

EU sanctions. It may depend on the following:

- Whether EU sanctions apply to contractual relations of Russian Sub with Russian

clients

- Whether Russian Sub, being a Russian legal entity and operating only in Russia,

can be considered as an entity subject to EU sanctions

- Whether there is a direct connection between the imposition of EU sanctions and

the inability of Russian Sub to perform its obligations

- Whether there was a way for Russian Sub (as a Russian legal entity operating only

in Russia) to continue to fulfill its obligations despite EU sanctions

- Whether Russian Sub sent to the Client notice of the occurrence of force majeure

circumstances and whether deadlines for such notice were met.

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Special Anti-Sanctions Clause

It is recommended to introduce so-called Anti-Sanctions Clause to

regulate obligations and avoid liability in the case of EU and

Russian sanctions:

• It applies in case Force Majeure is not applicable

• It may provide for:

• Representations and warranties

• Conditions resolute (or conditions subsequent)

(terminates rights and obligations under contract)

• Exclude or limit contract liability

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Other Practical Aspects

• Using neutral jurisdictions in structuring contractual

arrangements

(import of banned-by-Russia products through Belarus and

Kazakhstan or other countries is NOT permitted)

• Opening neutral currency bank accounts (Bank of China,

etc.)

• Localization of production in Russia or in Belarus and

Kazakhstan

• Advance payments

• Global insurance

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Recommendations

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• Proactively analyze your risk exposure

• Put in place a compliance program

• Review your commercial contracts

• Consider other practical aspects

Artem Usov

Artem.Usov@awaragroup.com

Call-center for all offices:

+7 495 225 30 38

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