Foreign trade law update: Further EU and U.S. sanctions against Russia enter into force; Russia plans additional countermeasures

The EU, Switzerland, the U.S. and numerous other countries have once again expanded their sanctions against Russia due to its continuing attacks on Ukraine. The EU adopted what is officially its fourth sanctions package on 16 March 2022. The new sanctions package follows the packages of 24 and 26 February 2022 (newsletter of 28 February 2022) and 28 February/2 March 2022 (newsletter of 7 March 2022) and includes bans on all transactions with certain Russian state-owned enterprises, new investment in the Russian energy sector, the export of a wide range of luxury goods to Russia and the import of certain iron and steel products from Russia. This fourth sanctions package was preceded by the adoption of further sanctions against Russia and Belarus on 9 March 2022. Switzerland and the U.S. have also expanded their sanctions. Russia, in turn, is broadening its response with additional countermeasures over and above the initial steps approved by the Russian government on 28 February. A Russian draft bill provides for much more far-reaching measures under certain conditions, including freezing assets and liquidating undertakings – measures that could also affect subsidiaries of Western companies. Such companies should take precautionary measures as a matter of urgency – also with a view to possible legal protection later on. 

EU sanctions

The EU already introduced the following additional economic sanctions on 9 March 2022:

• The list of persons who are no longer allowed to enter the EU, whose assets have been frozen and who are subject to the ban on providing funds or economic resources (see newsletter of 28 February 2022 and newsletter of 7 March 2022) was expanded to include a further 160 individuals, namely 146 members of the Federation Council and 14 “oligarchs”/businesspersons (see Implementing Regulation (EU) 2022/396).
• Restrictions were imposed on the export of maritime and radio-communication technologies (whether or not originating in the EU) to Russia (see Regulation (EU) 2022/394). According to the new Article 3f Regulation (EU) 833/2014, it is prohibited to sell, supply, transfer or export, directly or indirectly, the maritime navigation goods and technology listed in the new Annex XVI to any natural or legal person, entity or body in Russia, for use in Russia, or to be placed on board a Russian-flagged vessel. Also prohibited are direct and indirect services of any kind in connection with the aforementioned goods and technology or their provision, manufacture, maintenance and use, as well as the direct or indirect provision of financing or financial assistance related to the aforementioned goods, technology and activities. These bans do not however apply in certain situations, for example if the goods and technology are intended for humanitarian purposes. In addition, special authorisation may be granted for non-military use and non-military end-users if it has been determined that the goods and technology or related technical or financial assistance are intended for maritime safety.
• The Council also added the maritime sector to the list of legal persons, entities and bodies subject to bans in respect of investment services, transferable securities, money market instruments and loans, by including the Russian Maritime Register of Shipping in Annex XIII to Regulation (EU) 833/2014.
• The term “transferable securities” within the meaning of Regulation (EU) 833/2014 was broadened to specifically include crypto assets, seeArticle 1, letter (f) Regulation (EU) 833/2014 as amended by Regulation (EU) 2022/394.
• Sector-specific sanctions against Belarus were expanded (The Regulation (EU) 2022/398 amending Regulation (EC) 765/2006) to include the following financial sanctions:
  • General ban on transactions with the Central Bank of Belarus related to the management of reserves or assets, including transactions with any person, entity or body acting on behalf of or at the direction of the Central Bank of Belarus. As for the financial sanctions against Russia, special authorisation may only be granted for such transactions if they are necessary to ensure the financial stability of the European Union or a Member State.
  • General ban on the provision of public financing for trade with and investment in Belarus. This ban does not apply to binding commitments established prior to 10 March 2022, the provision of public financing or financial assistance up to a total value of EUR 10,000,000 per project for small and medium-sized enterprises established in the EU or to the provision of such financing or assistance for trade in food and for agricultural, medical or humanitarian purposes.
  • Ban on the listing and provision of services in relation to shares of Belarusian state-owned entities on EU trading venues as from 12 April 2022 (see newsletter of 28 February 2022 for the corresponding sanctions against Russia).
  • Restriction of financial inflows from Belarus to the EU by generally prohibiting the acceptance of deposits (as defined in the new Article 1, point (21) Regulation (EC) 765/2006) from Belarusian nationals or residents that exceed an amount of EUR 100,000. One exception to this ban is if the deposits are necessary for non-prohibited cross-border trade in goods and services between the EU and Belarus. As for the financial sanctions imposed on Russia (see Article 5c(1), letter (b) Regulation (EU) 2022/328), special authorisation may be granted in certain cases, for example if the deposit is intended exclusively for the payment of reasonable professional fees in connection with the provision of legal services. The sanctions also include a ban on accounts of Belarusian clients being held by EU central securities depositories as well as on the sale of euro-denominated transferable securities issued after 12 April 2022 to Belarusian clients (see re corresponding sanctions against Russia: newsletter of 28 February 2022).
  • General ban on the provision of euro-denominated banknotes to Belarus or any Belarusian person, entity or body, including the Belarusian government and the Central Bank of Belarus, for use in Belarus.
  • Exclusion of the Belarusian banks listed in the new Annex XV to Regulation (EC) 765/2006 (currently: Belagroprombank, Bank Dabrabyt, Development Bank of the Republic of Belarus), as well as legal persons established in Belarus more than 50% of which are directly or indirectly owned by one of the financial institutions listed in Annex XV, from specialised financial messaging services such as SWIFT as from 20 March 2022.

With its Federal Council’s decision of 16 March 2022, Switzerland has once again (see newsletter of 7 March 2022) adopted the sanctions imposed by the EU on 2 and 9 March 2022 and will be revising the Ordinance on Measures against Belarus for this purpose. By Ordinance of 15 March 2022, Annex 8 to the Ordinance on Measures connected with the Situation in Ukraine was also amended to include more than 200 additional natural persons and entities that will henceforth be subject to travel restrictions and/or financial sanctions.

In its fourth sanctions package of 16 March 2022, the EU has again amended and tightened Regulations (EU) 269/2014 and 833/2014.

• Compared to the situation on 9 March 2022, the comprehensive personal sanctions adopted by the EU have been extended to include a further 15 persons and nine entities, bringing the current totals to 893 and 65 respectively (see Implementing Regulation (EU) 2022/427).
• Of particular importance is the amendment of Regulation (EU) 2014/833 by Regulation (EU) 2022/428 in the form of a ban on engaging “directly or indirectly [...] in any transaction” with specified companies and persons (see the new Article 5aa Regulation (EU) 833/2014). Until 15 May 2022, this ban does not apply to the execution of existing contracts that were concluded before 16 March 2022 (“wind down period”). It also does not apply to transactions that are absolutely necessary for the supply of fossil fuels and certain other raw materials to the EU, or to certain energy projects. This new provision could be extremely significant, although some of the details are still somewhat vague. Based on an initial assessment, the following can be said in this regard:
  • The new provision first of all applies to the – currently twelve – companies listed in the new Annex XIX (including Rosneft, Transneft, Gazprom Neft and Kamaz). According to Article 5aa(1), letter (a) Regulation (EU) 833/2014, these are state-owned enterprises established in Russia and companies in respect of which Russia, its government or Central Bank has the right to participate in profits or with which Russia, its government or Central Bank has other substantial economic relationships. In our view, the new Annex XIX is conclusive in this respect. This means that companies that fulfil the above-mentioned requirements are only subject to the ban if they are listed in the Annex. The direct and indirect ban on transactions also applies to subsidiaries of the companies listed in Annex XIX, provided that the listed companies hold more than 50% of the shares and the subsidiary is established outside the EU (Article 5aa(1), letter (b) Regulation (EU) 833/2014). Subsidiaries within the EU are therefore not subject to the ban. Finally, transactions with companies acting on behalf or at the direction of a listed company or a subsidiary subject to the ban are also prohibited (Article 5aa(1), letter (c) Regulation (EU) 833/2014).
  • “Indirect” transactions within the meaning of Article 5aa(1) Regulation (EU) 833/2014 are likely to cover scenarios in which the goods or services being traded – in the sense of a third-party sale – are ultimately passed on in economic terms to a listed company, its subsidiary or persons acting on their behalf or at their direction within the meaning of Article 5aa(1), letters (a) to (c) Regulation (EU) 833/2014.
  • The new ban on transactions is arguably a separate sanction mechanism that is independent of the ban on providing funds or economic resources under Article 2(2) Regulation (EU) 269/2014. Although the two bans do not cover exactly the same ground, there is some overlap and they do complement one another. For example, the ban on transactions under Article 5aa(1) Regulation (EU) 833/2014 also covers entities that are not subject to the ban on providing funds or economic resources under Article 2(2) Regulation (EU) 269/2014. The material scope of the ban on transactions under Article 5aa(1) Regulation (EU) 833/2014 may also differ from the scope of the ban on providing funds or economic resources in that it covers “transactions” that do not necessarily involve “economic resources” in the sense of the latter ban (e.g. the purchase of everyday goods).
• Pursuant to the new Article 5j Regulation (EU) 833/2014, it will be prohibited as of 15 April 2022 to provide credit rating services to any Russian national or natural person residing in Russia or any legal person, entity or body established in Russia or to provide them with access to any subscription services in relation to credit rating activities. This does not apply to nationals of a Member State or natural persons who have a temporary or permanent residence permit in a Member State.
• Annex IV of Regulation (EU) No 833/2014 was also expanded. It lists persons and companies connected to Russia’s defence technological and industrial base on whom tighter export restrictions regarding dual-use goods, as well as goods and technologies which might contribute to the technological enhancement of Russia’s defence and security sector, are imposed.
• The new Articles 3 and 3a of Regulation (EU) No. 833/2014 impose a prohibition of new investments in the Russian energy sector, as well as a comprehensive export restriction on equipment, technology and services intended for the energy industry:
  • Prohibition of the creation and acquisition of new shareholdings and the provision of new financing and related investment services to companies operating in the energy sector. 
    Pursuant to the new Article 1, letter (u) of Regulation (EU) No. 833/2014, the energy sector comprises the exploration, production, distribution within Russia or mining of crude oil, natural gas or solid fossil fuels, the refining of fuels, the liquefaction of natural gas or regasification, the manufacture or distribution within Russia of solid fossil fuel products, refined petroleum products or gas, and the construction of facilities or installation of equipment for, or the provision of services, equipment or technologies for, activities related to power generation or electricity production.
  • Prohibition of the sale, supply, transfer or export of the goods listed in Annex II to Regulation (EU) No 833/2014 (certain transport technology equipment in the energy sector) to persons or entities in Russia or for use in Russia. Assistance of any kind in connection with such goods or technology is also prohibited. 
  • Exemptions are now only possible subject to strict conditions – in some circumstances, for example, for fossil fuels, for contracts that have already been concluded, and for entities owned by an entity that is incorporated or constituted under the law of a Member State.
• Further trade restrictions on iron and steel products and on luxury goods apply under the new Articles 3g and 3h of Regulation (EU) No. 833/2014:
  • Prohibition of import into the European Union or the purchase or transport of certain iron and steel products which originate in Russia and are listed in more detail in Annex XVII to Regulation (EU) No 833/2014. Technical or financial assistance, brokering services or insurance related to these prohibitions are likewise not permitted.
    This prohibition does not apply to the execution until 17 June 2022 of contracts concluded before 16 March 2022 (“wind down period”).
  • Prohibition of export to Russia or for use in Russia of luxury goods listed in Annex XVIII to Regulation (EU) No 833/2014, such as clothing, furnishings and sports equipment, the value of which exceeds EUR 300 per item, unless otherwise specified in the Annex (for vehicles, for example, the limit is EUR 50,000 per item).

U.S. sanctions

Since our last Foreign Trade Law Update of 7 March 2022, the U.S. has also expanded its economic sanctions against Belarus and Russia. These include in particular:

• The further expansion of personal sanctions by supplementing the SDN list (“specially designated nationals list”).
• Expansion of goods-related restrictions:
  • Import bans from Russia will in apply in future to fish (products), spirits and non-industrial diamonds. Added to this will be import bans in the energy sector with regard to crude oil, petroleum, petroleum fuels and oils, including distillation products, liquefied natural gas, coal and coal products. In addition, “U.S. persons” (regarding this term, see newsletter of 7 March 2022) will be prohibited from investing in Russian energy products. Moreover, U.S. persons may not assist foreign persons in carrying out acts of the aforementioned nature.
  • No banknotes denominated in US dollars may be exported from the United States or by a U.S. person to the Russian government or to a person resident in Russia. U.S. persons are also prohibited from assisting foreign persons in acts of the aforementioned nature (e.g. payment in U.S. dollars or use of a U.S. bank).
  • As of 11 March 2022, export restrictions will apply on luxury goods to Russia and Belarus and – regardless of their location – to SDN-listed Russian and Belarusian “oligarchs” or “malign actors” who support the Russian or Belarusian governments. The term “luxury goods” is broadly defined and – unlike under EU law – not limited by a minimum value. They include, among other things, certain spirits, tobacco, ceramic and leather products, jewellery, watches and handbags, and certain items of clothing. Items that were already in transit on 11 March 2022 are not subject to the new regulations.

Suspension of concessions to Russia at WTO level

• Independently of the fourth EU sanctions package, the Council gave the Commission the green light to co-sign a multilateral declaration on behalf of the EU that is to be published under the World Trade Organisation (WTO) framework. This can include WTO measures to suspend concessions or other obligations vis-à-vis the Russian Federation, such as the suspension of most-favoured nation status for goods and services from the Russian Federation. This would pave the way for tariff increases and further trade restrictions at WTO level.

Additional countermeasures proposed or implemented by Russia

On the Russian side, as well, further countermeasures have been proposed or adopted since our last Foreign Trade Law Update of 7 March 2022:

• From 8 March 2022 on, for example, restrictions on imports from and exports to “unfriendly states” will apply to certain products and raw materials. This is meant to ensure the “security of the Russian Federation and the uninterrupted functioning of industry”. However, this does not affect imports and exports for personal use.
• Furthermore, as of 7 March 2022, it will be possible to suspend compensation payments to rights holders from “unfriendly states” for the use of patents without consent.
• Russian parliament has additionally passed a draft bill allowing the executive branch to exempt certain goods from intellectual property rights protection. This measure could presumably apply in particular to certain agricultural, medical and similar goods that can no longer be imported due to the sanctions and would therefore have to be produced in Russia itself in connection with substitution programmes. This may severely affect the ability to protect commercial rights, but it is not yet clear which specific goods are affected by the measures.
• A draft bill has been introduced in response to declarations by foreign companies that they will discontinue operations in Russia. While it is not clear at present whether it will be adopted, this could happen at any time. Courts would then be able to impose “external management” on Russian subsidiaries of foreign parent companies if applied for by a board member or the state authorities. This only applies to companies that are at least 25% controlled by a natural person or legal entity from an “unfriendly state” such as, for example, the EU, Switzerland, the UK or the U.S., had a carrying amount of more than one billion roubles on the last balance sheet date and/or an average of more than 100 employees:
  • The courts may order external management if the management bodies or shareholders have actually ceased managing the company. This can in particular be the case if the (local) management and/or shareholders exited Russia after 24 February 2022, leaving the company without management or have committed acts that have significantly reduced assets, resulted in insolvency or led the company to cease business operations. As a result, external management may be introduced for up to three months, and not terminated even if the company were to go back on its decision to stop doing business in Russia.
  • External management can also be imposed if measures are taken that may lead to an “unjustified” discontinuation of activities, liquidation or the insolvency of the company. This may especially be the case if, after 24 February 2022, the management bodies of the company have publicly announced the company’s discontinuation of business without any apparent economic reason, terminated material contracts of the company or notified more than one third of its employees that their jobs will be terminated. The resulting external management can last up to six months, but may be terminated if the company revises its decision to stop doing business in Russia.
  • The court has to decide within seven days of receiving the application. If petitioned, it can also decide to freeze all of the company’s assets.
    Currently, Vnesheconombank (VEB) is expected to be appointed as external manager for the non-financial sector, and the Russian Deposit Insurance Agency as external manager for the financial sector. It should be noted that VEB itself is subject to a number of sanctions, particularly from the EU and the U.S.
    The external management assumes all management powers. The powers of all other management bodies, including all previously granted powers of attorney and all previously filed petitions for voluntary liquidation and/or bankruptcy, are suspended and opposing contracting parties cannot unilaterally terminate their contracts out of court. The objective is to transfer all assets to a new company, which is then sold by public auction to new owners. The original company would then be forcibly wound up. For this purpose, the external management is granted extensive rights, similar to those of an insolvency administrator under German law. It is also possible to recover assets that have already been transferred.
  • Prior to the court hearing, the company’s CEO or a shareholder holding more than 50% of the shares with voting rights may file a motion to dismiss, which must include a commitment to resume the company’s operations in Russia. In this context, it would also be possible for the company to be sold to or held in trust by persons from states that Russia has not classified as “unfriendly”.

(International) legal protection against Russian countermeasures

If these measures are implemented as announced or in a similar form, legal remedies may be available. However, preliminary injunctions and direct legal remedies against the measures will most likely be almost impossible and could probably only be obtained from Russian courts.

But it is generally possible to assert compensation claims under the bilateral investment treaty between Germany and Russia of 13 June 1989, which has been in force since 5 August 1991 (the “BIT”).

The BIT protects investments of German investors in Russia, whereby investments comprise “all types of assets”. This also includes, among other things, the assets in Russia which are likely to be affected by the measures outlined above, such as

• property,
• shares and other forms of participation in commercial enterprises
• copyrights, patents and trademarks, and 
• claims to money or services.

Even if Russia were to terminate the BIT, investments already in existence at the time of expiration of the BIT would remain protected for another 20 years.

Under the BIT, investments of German investors are protected from expropriation and restrictions on the transfer of funds, among other things. Expropriation in this context means not only direct expropriation, but also forms of indirect and de facto expropriation. A de facto expropriation may exist if formal ownership remains, but all rights of use and disposal typically associated with ownership are withdrawn or substantially restricted. With regard to the planned Russian measures, this means the following:

• Should the Russian countermeasures provide for direct expropriation or seizure of foreign assets, German investors may be entitled to compensation. If compensation is not paid (which is to be expected) or the amount is too low, this may constitute a breach of the BIT.
• Insofar as Russia orders a receivership of foreign companies or businesses as a countermeasure or deliberately or consciously drives foreign companies into insolvency through other and similar measures – depending on the circumstances of the individual case and the specific form of the Russian measure – this may constitute de facto expropriation, which would likewise be subject to compensation.
• The withdrawal or restriction of intellectual property (such as copyrights or patent rights) can also constitute a de facto expropriation and be subject to compensation. This is particularly the case if the rights of use and disposal are restricted or adversely affected to such an extent that the intellectual property becomes economically virtually worthless. But this, too, will depend on the specific Russian measures and the individual case.
• A possible ban on the export of funds related to or generated by the investment or similar restrictions on payment transactions could be in violation of the right to the free transfer of funds, depending on the structuring of the Russian measures and the circumstances of the individual case. This, too, would be subject to compensation.

However, as is typical for BITs concluded by Russia, the BIT only allows German investors to assert claims against Russia with regard to the “extent and procedure of compensation [due to expropriation] or the free transfer [of payments related to investments]” before an international ad hoc arbitral tribunal. Thus, according to the wording of the BIT, the arbitral tribunal does not, at first glance, have jurisdiction to find that investments have been expropriated. However, published decisions of arbitral tribunals against Russia do indicate that, in accordance with principles of international law, the BIT is to be construed to mean that the arbitral tribunal may also decide on the question of “whether” an expropriation has taken place.

International arbitral tribunals that have to decide on investment disputes are generally efficient and can conduct proceedings even if the respondent host state does not participate in the proceedings. This was shown by the proceedings against Russia due to the expropriations that took place as a result of the annexation of Crimea. Given the European and U.S. sanctions, however, hardly any assets will be available for enforcement at present, nor will Russia voluntarily comply with arbitral award against it in the future. However, it will still be possible to enforce an arbitral award after the sanctions have ended (in Germany, for 30 years after the issuance of the award). Furthermore, it is currently not out of the question that the sanctions regime could be changed to make it possible to enforce arbitral awards against sanctioned assets even if these awards were obtained after the sanctions were issued.

Conclusion and recommended actions 

The extended sanctions, especially those imposed by the EU and the U.S., are having an even greater impact on the Russian business of German/European companies than ever before. A general ban on transactions of all kinds with widespread networks of Russian companies, above all with their non-European subsidiaries, along with bans on importing many iron and steel products are particularly relevant in practice and difficult to implement.

Any decision to exit or discontinue business activities in Russia as BP, IKEA, H&M, OBI or McDonalds have done, now needs to be weighed against potentially drastic retaliatory measures by the Russian state, putting considerable assets at risk.
Given the dynamic situation and the – as yet – uncertain extent of Russian measures, it is advisable to safeguard key documents and records now, regardless of whether investment protection applies. This is especially true regarding possible claims for compensation. For example, documents should be saved concerning the establishment of companies, businesses or branches, key performance indicators of the company or the operation (including the latest company valuations), contracts and other agreements, official authorisations and permits, copyright and patent rights and other intellectual property and expertise, profit projections and business plans as well as documents on the measures proposed by Russia and their implementation. In short, it is advisable to prepare and save documentation providing information on the value of the company and how it is affected by Russian measures.