By Dr. Mark C. Hilgard and Dr. Hanns Christoph Siebold

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AmCham’s Corporate and Business Law Committee meeting in early October 2017, “US Sanctions against Russia and their Impact on Companies in Europe – Legal and Political Insights”, was very well attended. Hosted by the law firm Graf von Westphalen and supported by Control Risks it gave interesting insights into a hot topic.

On August 2, 2017, US President Trump grudgingly signed into law new sanctions against Russia, a move Moscow said amounted to a full-scale trade war. The European Union’s reaction was angry, arguing that “America first” cannot mean that Europe’s interests come last. “The US bill could have unintended unilateral effects that impact the EU’s energy security interests,” EU Commission President Juncker said. However, other industries could be hit, too.

At the meeting, several experts gave ­updates on these new US sanctions against Russia and on present EU sanctions.

The setup

After a few welcoming words by Harald Nikutta, Senior Partner at Control Risks, the chairs of the Committee, Mark C. Hilgard, Partner at Mayer Brown LLP, and Hanns Christoph Siebold, Managing Director of Morgan Stanley Bank AG, gave a short introduction to the subject for members of the committee. Nabi Abdullaev, Associate Director of Moscow, Russia and CIS at Control Risks, who, prior to joining Control Risks, was editor in chief of The Moscow Times, an English-language daily newspaper in Russia, and a political and security writer for many years, said that his company believes that the biggest threat to Russia in 2018 would be the actions of the US government, now armed with a formidable mechanism to impose painful sanctions at any time.

The US anti-Russia sanctions law adopted in August 2017 is here to stay – for years, if not decades. It is designed to trounce Russia, not only for its actions in Ukraine, but also for providing arms to Syria’s Bashar al-Assad, cyber-interventions in the US, attempting to influence the political processes in Europe and corruption as well as infringing on human rights at home.

The US sanctions target not only strategic sectors of the Russian economy, such as energy and banking, but also a wide array of Russian officials, their family members and businesspeople with connections to the country’s top decision-makers. Twice in 2018, in February and August, the US administration is to present reports to Congress, documenting presumably unfavorable Russian actions and enumerating potential new targets for sanctions.

However, there are no clear guidelines in the language of the US sanctions law in terms of the specific consequences of certain factual developments. Therefore, it is difficult to determine if and when the US administration will impose sanctions against Russia and how severe they will be.

Triggers for new sanctions

There are still several developments that could trigger new sanctions on Russia.

One could be the Russian presidential election in March 2018, when Putin is set to be elected for another term. It is likely that the Russian opposition will organize street protests during this period and the authorities will respond heavy-handedly, while the global media ramps up its Russia coverage.

Another could be a conflict involving UN peacekeepers, who may be stationed in Ukraine’s separatist pro-Russian provin­ces next year, as well as a major incident between the Russian and US militaries in Syria, if it could not be de-escalated effectively.

If sanctions are eventually imposed on Russia in 2018, Abdullaev held that Moscow would retaliate but tailor its response to not endanger its relations with core European nations, China, Japan and Turkey – all major players offering valuable cooperation. Thus, escalating conflict in Ukraine will alienate Europe from Russia, a costly perspective that will not add much to Russia’s achievement there, i.e., halting Ukraine’s integration into the West.

Becoming a spoiler to the US effort to resolve the North Korea crisis in which China is the ultimate powerbroker will endanger Moscow’s relations with Beijing and Tokyo.

This leaves the Middle East, where Russia will become a much more difficult counterpart for the US in post-conflict resolution in Syria.

Cyberattacks against US government targets and leaks of compromising information, fake or real, about US officials and politicians to the media may be regarded in Moscow as a legitimate response to US sanctions. Similarly, Russian liberal opposition, routinely regarded by the Kremlin as the US-backed “fifth column,” would suffer tougher official crackdowns and persecution.

Targeting US business would not be a rational choice for Russian decision-makers. Russia strives to keep the US investment and critical technologies it needs for its strategic industries and to prevent the US elite from forming a unified anti-Russian front.

Dr. Gerd Schwendinger, lawyer and partner at Graf von Westphalen, who also serves as Co-Head of the GvW US desk and is a member of the firm’s International Trade & Customs Practice Group, explained that the United States of America and the European Union had different economic interests in Russia-related trade.

He highlighted that the EU was Russia’s largest trading partner and that there were deep economic links between the two: Almost half of Russia’s exports – worth $292 billion – end up in EU countries. A total of 15% of Russia’s GDP comes directly from the country’s exports to the EU. Russia, in turn, is the third-biggest trading partner for the EU, with $169 billion in imports. The economic relationship between Russia and the US is more unbalanced: Russia is the US’s 20th-largest trading partner, with $27 billion worth of trade exported across the Atlantic. On the flip side, the US is Russia’s fifth-largest partner, accounting for just $11 billion in trade (the above data is based on Russian trade flows in 2013, i.e., before the sanctions imposed in 2014 kicked in;

Against this backdrop, Schwendinger held that it was not surprising from an economic point of view, that it was easier for the US to impose sanctions on Russia, whereas the EU has been rather reluctant to impose US-style sanctions.

EU sanctions against Russia (as opposed to US sanctions)

The EU sanctions imposed in the context of the Ukraine crisis are, in particular:

(1) Sanctions regarding certain listed entities (asset freezing and prohibiting funds and economic means being made available to certain listed persons and entities) laid down in Regulation (EU) No. 269/2014 concerning restrictive measures with respect to actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, and Regulation (EU) No. 208/2014 concerning restrictive measures directed against certain persons, entities and bodies in view of the situation in Ukraine.

(2) Sanctions regarding Crimea/Sevasto­pol set forth in Regulation (EU) No. 692/2014 concerning restrictive measures in response to the illegal annexation of Crimea and Sevastopol.

(3) Sanctions regarding Russia stipulated in Regulation (EU) No. 833/2014 concerning restrictive measures in view of Russia’s actions destabilizing the situation in Ukraine.

Apart from an arms embargo, which is based on the national laws of EU Member States and on CFSP (Common Foreign and Security Policy) Council Decisions, the EU sanctions against Russia laid down in Regulation (EU) No. 833/2014 comprise, in particular,

  • restrictive measures related to dual-use items (Articles 2, 2a),
  • the Russian energy sector
    (Articles 3, 3a),
  • technical or financial assistance
    (Article 4)
  • restricted access to capital markets regarding certain transferable securities and money market instruments (Article 5).

So far, Council Decision (CFSP) 2017/1148 of June 28, 2017, provides for a prolongation of EU sanctions until January 31, 2018; further prolongations are to be expected.

It is particularly noteworthy that the scopes of EU and US sanctions against Russia are by no means identical. Indeed as the new US secondary sanctions against Russia claim to be applicable extraterritorially (i.e., without any nexus to US territory and/or US persons), their legality under public international law is very questionable.

EU and national blocking legislation (regarding US sanctions)

In order to counteract (illegal) extra­territorial sanctions of other states, the EU and some of its Member States have enacted blocking legislation.

At EU level, Regulation (EC) No. 2271/96 (EU Blocking Regulation) entered into force in 1996. This Regulation aims to “protect against the effects of the extraterritorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom.” However, only certain US sanctions (against Cuba, Iran and Libya) fall within the scope of the EU Blocking Regulation, which does not apply to US sanctions against Russia.

At a national level in Germany, however, companies active in foreign trade must heed Section 7 of the German Foreign Trade and Payments Regulation (Außenwirtschaftsverordnung, AWV) which reads as follows: “The issuing of a declaration in foreign trade and payments transactions whereby a resident participates in a boycott against another country (boycott declaration) shall be prohibited.”

Unlike the EU Blocking Regulation, the scope of Section 7 of the AWV is not limited to specific (US) sanctions/boycotts/embargoes. It is, instead, interpreted broadly by German authorities and can comprise all kinds of boycott declarations – including such based on the new US sanctions against Russia.

Risks for European companies: ­Enforcement and penalties

A violation of Section 7 of the AWV is an administrative offence which can trigger a fine of up to 1 500,000 per violation. Moreover, Section 7 AWV is also a statutory prohibition (Verbotsgesetz) in the sense of Section 134 of the German Civil Code. The latter sets forth that a legal transaction that violates a statutory ­prohibition (i.e., Section 7 of the AWV) is void. Other (potential) consequences are that such violations, which can come up during audits and investigations carried out by customs authorities, could lead to the revocation of authorizations and simplifications granted by said authorities, etc.

Although there seems to be an enforcement deficit with regard to Section 7 of the AWV – which could change in the future, however – the aforementioned conflict of laws and the respective risks involved frequently constitute a practical and legal challenge for European companies that wish to be compliant with both US and European/German laws.

Karen Walter, Head of Economic Sanctions Unit, Group Legal & Compliance, Allianz SE, Munich, presented EU perspectives on the Countering America’s Adversaries Through Sanctions Act (“CAATSA”).

When explaining CAATSA, Walter advised that prior to CAATSA, US sanctions against Russia had reflected a close US-EU collaboration in response to the Crimea annexation.

When CAATSA came into force on August 2, 2017, some things changed. The Act gave a new US policy justification – i.e., punishing Russia for election interference – and created US-EU divergence in sanctions coverage. CAATSA also limited presidential discretion to ease Russia-related sanctions. The US-EU divergence will affect many EU companies with Russian business ties as it will increase compliance risks and burdens (e.g., similar transactions now have different risks) as well as business risks (e.g., counterparties have a different risk appetite).

Walter first explained the nature of ­secondary sanctions that target the ­activities of non-US persons who were beyond the jurisdiction of the United States. In effect, secondary sanctions are denials of US benefits (because no monetary penalties are possible without jurisdiction).

The CAATSA offers an impressive array of secondary sanctions from which the president can select generally up to five. The list includes denial of export-import bank financing and assistance, denial of US export licensing, prohibiting US financial institutions from making loans to the sanctioned party, using US government power to oppose a loan from a non-US financial institution to the sanctioned party, exclusion from US government procurement, prohibiting the sanctioned party from foreign exchange trans­actions within US jurisdiction, prohibiting transfers of credit or payments involving any financial institution within US juris­diction, loss of designation as a primary dealer in US government debt in­struments, freezing of assets in the US and a denial of US entry visas to the sanctioned party’s corporate officers.

Most secondary sanctions are mandatory

Walter explained that the president was required to impose key new mandatory secondary sanctions on (non-US) persons for:

Crude oil projects: Knowingly making or providing support for a significant investment in a special Russian crude oil project (deepwater, Arctic offshore or shale).

Cybersecurity: Knowingly providing financial services in support of another person that engages in activities undermining the cybersecurity of any person on behalf of the Russian government.

Sanctions evaders: Knowingly facilitating a significant transaction with a party determined to be related to the Russian intelligence or defense sectors, with a person found to support human rights abuses in territories forcibly occupied by Russia or with any party sanctioned under Russia/Ukraine sanctions (or their family members).

Privatizations of Russian state-owned ­assets: Making (or facilitating) with actual knowledge any investment of US$ 10 million or more that directly and significantly contributes to the ability of the Russian government to privatize state-owned assets in a manner that unjustly benefits Russian government officials, their close associates or their family members.

She also elaborated on key new discretionary secondary sanctions meaning that the president is permitted, but not required, to impose secondary sanctions on any person knowingly

  • investing $ 1 million or more (or
    $ 5 million in a year) that directly and significantly contributes to enhancing Russia’s ability to construct energy export pipelines or
  • providing the Russian Federation with goods, services, technology, information or support ($ 1 million or more, or $ 5 million in a year) that could directly and significantly facilitate the maintenance or expansion of the construction, modernization or repair of energy pipelines.

The imposition of these sanctions is to be “in coordination with allies of the United States.” Walter explained that this collaboration requirement was added to ease EU concerns regarding the Nord Stream 2 natural gas pipeline from Russia to Germany.

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