Russian Federation: Russia's Proposed Response To US Sanctions – Criminal Liability For Sanctions Compliance And Counter Sanctions

Last Updated: 21 May 2018
Article by Hannes Lubitzsch
Most Popular Article in Russian Federation, May 2018

Unlike other countries, Russia currently does not ban companies from complying with foreign economic sanctions. In particular, there is no administrative or criminal liability for sanctions compliance under Russian law. Further, to date only light economic counter sanctions have been imposed by Russia in response to the US and EU sanctions (primarily, an import ban for agricultural products since 20141).

The Russian State Duma now is working in parallel on two draft laws which are intended to be Russia's response to the latest round of US sanctions of 6 April 2018:

(1) draft law No. 464757-7 "On Changes to the Criminal Code [...]" imposing criminal liability on any individual complying with foreign sanctions in Russia (the "Blocking Law"); and

(2) draft law No. 441399-7 "On Measures (Counter Measures) in Response to Unfriendly Actions of the United States [...]" authorizing the Russian President to impose further economic counter sanctions on foreign states and their companies (the "Sanctions Law").

In addition, high-ranking politicians had demanded the introduction of administrative liability for legal entities complying with the latest US sanctions on the Russian territory, with a fine up to RUB 50 million (approx. USD 800,000).2 As of today, this legislative initiative seems to have been put on hold.

1. Blocking Law

Following the submission of the Blocking Law to the State Duma on 14 May, the Duma members unanimously adopted the draft law already on the next day (15 May) in the first reading.3 The draft law introduces two new sanction-related offences to the Russian Criminal Code:

  • Actions performed by any individual – i.e. a Russian or foreign citizen – to comply with foreign sanctions shall be punished by imprisonment of up to four years, if they result in the prevention or restriction of the ordinary business operations/transactions of Russian persons.
  • Deliberate actions performed by a Russian citizen which facilitate the introduction of foreign sanctions, including by providing recommendations and conveying information, shall be punished by imprisonment of up to three years.

The compliance with US and EU sanctions in Russia is targeted by the first offence. The wording of this offence in the Blocking Law is rather vague:

"Article 2842. Restriction or refusal to carry out ordinary business operations or transactions for purposes of assisting in the implementation of measures of restrictive character imposed by a foreign state, a union of foreign states or an international organization.

1. The performance of actions (inaction) for purposes of implementing the decision by a foreign state, a union of foreign states or an international organization on the introduction of measures of restrictive character, if these actions (inaction) resulted in the restriction or refusal of the performance of ordinary business operations and transactions by citizens of the Russian Federation, legal entities registered in the Russian Federation, the Russian Federation, subjects of the Russian Federation or municipal bodies, as well as persons controlled by them (Russian private and public subjects, as well as persons controlled by them) –

shall be punished by a fine in the amount of up to 600,000 rubles or the amount of the salary or other income of the convicted person for a period of up to four years, or by restraint of liberty for a term up to four years, or by forced labor for a term up to four years, or by imprisonment for a term up to four years with or without a fine in the amount of up to 200,000 rubles or the amount of the salary or other income of the convicted person for a period of up to one year."

The scope of the protected "ordinary business operations and transactions" of Russian persons is intended to be determined broadly. According to the explanatory remarks to this offence in the Blocking Law, they shall include any legal actions aimed at the performance of contractual or statutory obligations within the ordinary course of business. In particular, the protected business operations/transactions shall apparently extend to:

  • the entering into agreements which would generally – without the sanctioning of the Russian counterparty – not be refused (e.g. the opening of bank accounts); and
  • the performance of existing continuing obligations which would usually – without the sanctioning of the Russian counterparty – not be terminated.

Given the vague wording of the Blocking Law, the scope of restrictions actually applicable to companies operating in Russia – and the risk of a potential criminal liability for the management resulting from a violation of these restrictions – would depend to a large extent on the practical implementation of the law by the Russian law enforcement authorities.

Even without such a criminal liability, the winding down of business relationships with sanctioned persons can turn out to be rather complex in the Russian legal environment, in particular due to civil law restrictions ( please see our newsletter of 12 April 2018) and antitrust requirements. The proposed criminal liability would further limit the room to maneuver for aligning Russian business operations with US and EU sanctions.

However, the Blocking Law has given rise to widespread criticism from large Russian businesses which are categorically rejecting the law: Russian companies and their management would be subject to liability either under the US' secondary sanctions or the Blocking Law. Further, the Blocking Law would create risks of unjustified criminal investigations against Russian and foreign citizens.4 To allow for consultations with the business community, the law's second reading in the State Duma (three readings are required) was postponed until further notice. It therefore seems that the Blocking Law will be subject to substantial changes before entering into force.

2. Sanctions Law

The Sanctions Law was adopted by the State Duma in the second reading on 17 May.5 While the draft law adopted unanimously in the first reading on 15 May still provided for 16 harsh, mostly specific, economic counter sanctions (including an import ban for foreign pharmaceuticals and a prohibition to employ foreign nationals in Russia), the current version is – following significant pushback from all sides6 – drafted as a framework law providing for only very general counter measures.

The Russian President is already authorized to impose broad counter sanctions – based on the Federal Law No. 281-FZ "On Special Economic Measures" of 2006, which formed the legal basis for the 2014 import ban for agricultural products from the US and the EU. The drawback of the 2006 law is that measures must be limited in time and, if needed, be extended. Under the Sanctions Law, counter measures can be imposed without such a time limitation.

Counter measures can be taken against (i) the United States and other foreign states performing "unfriendly" actions against Russia, Russian legal entities or Russian citizens ("Unfriendly States"), (ii) organizations under the jurisdiction of Unfriendly States ("Unfriendly Organizations"), (iii) organizations, including Russian legal entities, which are directly or indirectly owned ("through a prevailing participation of more than 25% in the capital") by Unfriendly Organizations ("Unfriendly Subsidiaries") and (iv) officials and citizens of Unfriendly States who participated in unfriendly actions against Russia.

The potential counter measures listed in the Sanctions Law do not target the implementation of foreign sanctions in Russia. They are limited to economic counter sanctions such as:

  • import bans for products and raw materials originating from Unfriendly States, or manufactured by Unfriendly Organizations and Unfriendly Subsidiaries (except for products indispensable to life which cannot be replaced with products manufactured in Russia);
  • exclusion of Unfriendly Organizations and Unfriendly Subsidiaries from the participation in state procurement on Russian territory;
  • exclusion of Unfriendly Organizations and Unfriendly Subsidiaries from the privatization of Russian state property.

The Sanctions Law does not provide for an automatic sanctions escalation. Taking any specific counter measures will require the prior decision of the Russian President and its implementation by the Russian Government. The third and final reading of the Sanctions Law is currently scheduled for 22 May.7

Footnotes

1 http://www.kremlin.ru/acts/bank/38809

2 https://www.vedomosti.ru/business/news/2018/04/25/767812-edinaya-rossiya-predlozhila-shtrafovat-za-soblyudenie-sanktsii-ssha-na-50-mln-rublei

3 http://sozd.parliament.gov.ru/bill/464757-7

4 https://www.vedomosti.ru/economics/articles/2018/05/17/769805-duma-perenesla-rassmotrenie-zakonoproekta-o-nakazanii-za-soblyudenie-sanktsii

5 http://sozd.parliament.gov.ru/bill/441399-7

6 https://www.kommersant.ru/doc/3629453

7 https://www.kommersant.ru/doc/3630415

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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