When can Foreign Investors Participate in Russian Projects Without Risking the Imposition of US Sanctions?
By Kristina Ikaeva, Nektorov, Saveliev & Partners
US sanctions against Russia were first introduced by executive orders of the US president in 2014. Basically, these are not the sanctions against Russia as a sovereign state, but sanctions against Russian companies that are significantly co-owned by the Russian State and Russian individuals – businessmen having relations with the Russian government. There is no offcial legal definition of “sanctions”; however, US sanctions against Russia can be divided into three categories: personal, sectoral, and shadow sanctions. There are also secondary sanctions that could be attributed to a special category and are applicable in all US sanction programmes.
So, what is the content of these sanctions, and when can foreign investors participate in Russian projects without risking the imposition of the sanctions?
Personal sanctions are economic restrictive measures which apply to certain companies and individuals listed on OFAC’s (Offce of Foreign Assets Control, department of the United States Department of the Treasury) SDN (Specially Designated Nationals and Blocked Persons) list. US persons (private and legal) within the United States are prohibited from dealing in any way with the persons on the SDN list and shall block any property owned or controlled by sanctioned person or regarding which it has the interests in property or any other interest. According to The Code of Federal Regulations, US person means any United States citizen, permanent resident alien, entity organised under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.
It is also prohibited to facilitate or to support by any means (financial, technical, etc.) sanctioned person in making any transactions. There are exceptions to this; for example, transactions for humanitarian purposes are excluded from the application of the sanctions. Sectoral sanctions are restrictive measures of an economic nature which apply to certain sectors of the economy of a sanctioned state. With regard to Russia sectoral sanctions are applied in financial, oil and gas, energetic, and defence industries. Persons under sectoral sanctions are listed on the SSI (Sectoral Sanctions Identifications) list. Sectoral sanctions are less severe than personal sanctions and restrictions, and bans are imposed only on certain transactions in the sanctioned sectors of economy (sanction transactions). For example, in relation to the financial sector, US persons are prohibited from providing financing or other debt instruments with a maturity of more than 14 days to Russian banks listed on the SSI list.
US persons are prohibited from engaging in sanctioned transactions or operations with persons listed on the SSI list; the same applies to all persons within the US territory. Any other transactions or operations can be done with a person listed on the SSI list without the risk of the imposition of sanctions unless such transactions are made to circumvent sanctions.
US shadow sanctions on Russia can be explained by the reference to the “50% rule”. It is considered that any person that is listed on the SDN or SSI lists has economic interests in property of an entity that is 50% or more owned, whether individually or in the aggregate, directly or indirectly, by one or more persons that are listed on the SDN or SSI lists. Therefore, an entity owned by a person that has interests in its property (even if the subsidiary is not engaged in the same sector as the parent company listed on the SSI list) is considered a sanctioned person regardless of whether the entity itself is listed on the SDN or SSI lists.
In accordance with OFAC’s recommendations, all precautionary measures shall be taken when dealing with a legal entity which is not listed on the SDN or SSI lists, but in which one or more sanctioned persons have economic interests in property (even when their share is less than 50%) or is controlled by one or several sanctioned persons by other means than majority of shares. Such persons can be subject to OFAC sanctions in future.
Therefore, there is no risk of imposition of sanctions for a foreign investor in case of participation in a Russian project with a Russian contractor, unless prohibited transactions are carried out or the contractor is a person listed on the SDN or SSI lists or an entity 50% or more owned by such a person listed in the SDN or SSI lists.
Secondary sanctions are sanctions which foreign investors should consider the most. These sanctions apply to non-US persons for the violation of US sanction law: entering into transactions with sanctioned persons or prohibited transactions in the sanctioned sectors of the Russian economy. Therefore, if a foreign investor shows a great interest in participating in a Russian project with a Russian contractor, but at the same time has reasonable doubts about the possibility of impositions of the sanctions, the minimum necessary actions to mitigate such risks should be taken:
- to check the contractor on the SDN or SSI lists;
- to obtain representations from the Russian contractor on not being a subsidiary of a sanctioned person listed on the SDN or SSI lists;
- to use other risk-mitigation mechanisms, including sanction compliance or inserting a representation provision in the contract on the absence of sanctions risks for the contractor and others.
It is also necessary to take into account the EU sanctions against Russia, but the content of these sanctions is usually similar to and bear the same risks as the US sanctions against Russia, except for the secondary sanctions, which do not applied in EU sanctions.
Kristina IkayevaGGI member firm
Nektorov, Saveliev & Partners
Law Firm Services
Moscow, Russian Federation
T: +7 495 646 81 76
Published: GGI Insider, No. 109, September 2020 l Photo: Leonid Ikan - stock.adobe.com