EU and Swiss sanctions against Russia & Belarus

The invasion of Ukraine by the Russian army and the continuing destruction of the country have triggered strong reactions from most Western countries, who have imposed increasingly strict sanctions on Russia and Belarus. The situation is evolving rapidly and the latest sanctions by the EU are some of the most extensive ever adopted. Switzerland has followed suit and adopted most of the EU’s measures.

The sanctions now affect a large number of individuals and entities, the financial sector as well as trade in goods and services. Companies dealing with Russian and Belarusian business partners face a legally complex and risky landscape.

10 questions that companies should consider

The new sanction packages apply to the territory of the European Union (EU), constituted as the territory of the EU 27 Member States. Precisely, it applies to:

• any person inside or outside the territory of the EU who is a national of a Member State,
• any legal person, entity, or body, inside or outside the territory of the EU, which is incorporated or constituted under the law of a Member State,
• any legal person, entity, or body in respect of any business done in whole or in part within the EU.

In other words you must comply with the EU’s sanctions regime if you are an EU-established company, and also if you are a foreign company conducting business on the EU’s territory. In addition to that, you must safeguard your EU-national employees – wherever located globally – from being involved in any transaction that is prohibited under the EU sanctions law.

In Switzerland all resident natural and legal persons must comply with the country’s sanctions regime.
 

Generally speaking, yes. There is no total embargo on Russia and Belarus (yet).

The EU and Switzerland have imposed targeted sanctions which were applied gradually, but at a fast pace, in the form of a complex set of prohibitions and restrictions.

In practice, businesses must look closely at the list of regulations that were recently published. Depending on the industry, the type of goods and services, the end-use and the end-user, as well as the structure of the financial transactions, certain prohibitions or restrictions will apply. In rare cases, the regulations foresee exemptions from the prohibitions, which also depend on the specific end use or the end-uses. Certain contractual obligations concluded before the sanctions entered into force may still be permitted (so-called “grandfather clauses”).

The high level of legal complexity and the fluidity behind the sanctions pose a real challenge for companies dealing with businesses or persons based in Russia and Belarus.

If your operations are not backed by a mature and pre-existing sanction compliance framework, it is highly recommended to put on hold any business with the sanctioned countries.

As a reminder, violation of sanctions can ruin a company’s reputation. Doing so might be deemed a criminal offence and could have severe consequences for a company and its board members. Additionally, loss of trade privileges (e.g., AEO certification) and/or an increase in controls by national authorities must be expected in case of non-compliance.
 

Several regulations were published in both the EU and Switzerland, which contain specific annexes, either directly listing the restricted goods identified by their customs tariff number, or indirectly by their nature as so-called dual-use goods (identifiable by an Export Control Number (ECN)).

To be able to identify whether any of your goods fall under the scope of the sanctions regime it is imperative to have the correct classification codes and the accurate product description in place. If you are exporting goods to any of the sanctioned countries and one of your goods’ customs tariff number is ambiguous in the sense that it could also be classified under one of the listed numbers, it is recommendable to halt the export for the time being and apply for a binding tariff classification.

In general the regulations prohibit the sale, supply, export, transit and transport of the listed goods, directly or indirectly, to any person, entity or body in, or for use in, Russia, Belarus or designated regions not controlled by the Ukrainian government (Crimea, Sevastopol, areas of the Ukrainian oblast of Donetsk and Luhansk). In line with its status as a neutral state, Switzerland has additionally banned the sale of special military equipment and dual-use goods for military purposes to all conflict parties, including Ukraine.

Likewise, from an inbound perspective, the regulations generally prohibit the import, purchase and transport of the listed goods if those goods originate in Russia, Belarus or the designated regions in Ukraine or have been exported from these countries/regions.

By now, the restrictions laid out above apply to a wide range of industries. An overview of the affected goods per destination country and a reference to the corresponding annexes can be found below. Please note that this overview is not a comprehensive list of all applicable restrictions under the sanctions regimes and does not reflect the legal wording 1:1. It may only serve as a high-level orientation guide but does not substitute a legal analysis of your exposure. In addition to that, the regulations provide for certain exceptions or the possibility to apply for special authorisations (e.g., for humanitarian, medical or pharmaceutical purposes) which are not included in the overview. If you plan on making use of such exceptions, you need to thoroughly review the legal basis, have a solid trade compliance system in place and complete knowledge of all parties involved in the transaction including the ownerships structures.

Make sure that you conduct a thorough analysis as to whether your goods fall within the scope of the regulations. Note that the category “Luxury goods” is very comprehensive and includes, among other things, selected food products, alcoholic beverages, tobacco products, beauty products, textiles, jewellery, special cutlery and tableware, electronic items, vehicles, instruments, art, sports gear, games etc

The latest restrictions should be reflected in your Global Trade Compliance Framework and Management System to block any prohibited transaction. The controls need to be effective both at the product and the destination level.

The EU’s and Switzerland’s sanctions regimes do not only restrict trade in certain goods (see question 3) but also the provision of any services related to those goods. These are not as clearly identifiable as the restricted goods themselves since services are not classified with a specific customs tariff number/Export Control Number (ECN). However, the list of restricted goods can be used as a basis to identify whether your business performs any sanctioned services.

“Related services” are generally defined as financial services, technical assistance and brokerage services as well as the provision of financial means related to the sale, delivery, export, transit, provision, manufacture, maintenance or use of the listed goods. Moreover, the provision of insurance and reinsurance as well as overhaul, repair, inspection, replacement, modification, and correction of defects should fall under “related services”. Exceptions are generally granted for humanitarian, medical and pharmaceutical purposes. In addition to that, the sanctions regimes foresee specific exceptions related to certain goods e.g., software updates (art. 6 (1) d. Swiss Ordinance).

When providing any services to Russia, Belarus or the Ukraine it is crucial to understand which goods these services relate to. Special attention should be paid to after-sales services. This could include contractual obligations for regular maintenance, automatically triggered software updates or ongoing services such as cloud / server provisions. The recent sanctions developments could mean that you are no longer able to meet these contractual obligations without violating sanctions law. A continuation of services may occur only if the law provides an exception for such services. Such exceptions should only be considered if you have a solid trade compliance system in place and have complete knowledge of all parties involved in the transaction, including the ownership structures.

Even if your transaction in goods is legally permitted you may need to ask yourself whether your Russian business partner will still be able to execute the corresponding payment transaction, e.g., with a view to the sanctions regarding SWIFT (5.1) and other financial implications (5.2.).

5.1 SWIFT

Starting 12 March 2022, seven major Russian banks and their subsidiaries were banned from the SWIFT messaging system (article 5h and annex XIV to Regulation 2022/345 amending Regulation 833/2014).

As of 20 March 2022, the ban was extended to three key Belarusian banks and their subsidiaries (art. 1zb and annex XV to Regulation 2022/398 amending Regulation 765/2006).

The SWIFT system is used to perform rapid cross-border payments. While it is not the only existing inter-banking communication system (Russia and China operate their own similar systems), it remains the most used worldwide.

These major banks will face difficulties accessing international financial markets. However, the SWIFT ban does not apply to all banks in Russia and Belarus. It will be more complex – though not impossible – for Russian and Belarusian businesses and individuals to perform international transfers via other banks operating internationally, allowing them to purchase imported goods or invest abroad.

5.2. Other financial implications

It should be noted that some banks are subject to financial sanctions, e.g., it is prohibited to trade with the Central Banks of Russia and Belarus and their subsidiaries (see point 6 referring to financial prohibitions and restrictions).

Businesses should refrain from making deferred payment arrangements exceeding a maturity range of 30 days or more with certain clients in Russia and Belarus, which could be considered as prohibited loans in the future. In the current uncertain situation it is difficult to be optimistic about the outlook for future economic and political developments.
 

The EU and Switzerland have published their list of sanctioned persons and entities, which they have been updating very regularly since 28 February 2022.

Sanctioned persons in (or in the context of) Russia and Belarus include government members, e.g., Putin himself, members of the Russian Parliament (Duma) and of the Russian Federation Council, “oligarchs and businessmen active in the oil, banking and finance sectors, as well as government members, high-level military personalities, and propagandists who contributed to spread anti-Ukrainian propaganda and promote a positive attitude towards the invasion of Ukraine.” (source European Council).

“Sanctioned entities include companies in the aviation, military and dual use, shipbuilding and machine building sectors.” (source European Council).

“Those designated are subject to an asset freeze and EU citizens and companies are forbidden from making funds available to them. Natural persons are additionally subject to a travel ban, which prevents them from entering or transiting through EU territories.” (source European Council)

Since 15 March 2022, the restrictive measures have been applied to 877 individuals and 62 entities and were prolonged for a further six months, ending on 15 September 2022.

Switzerland has generally adopted the list of sanctioned individuals and entities in Russia and Belarus from the EU in its Ordinance on measures in connection with the situation in Ukraine and the Ordinance on measures against Belarus.

The full list of sanctioned persons and entities can be found here for EU and here for Switzerland.

It is crucial for businesses to be aware that it is prohibited to directly or indirectly make resources available to any of the sanctioned entities and persons. While directly means that one is not allowed to trade with the sanctioned party itself, indirectly means that it is also prohibited to trade with a company owned or controlled by a sanctioned party.

In such a legal framework every part of a transaction must be screened against the restricted party list: think about your agents, banks, freight forwarding partners etc. However, the ownership structure of business partners is often difficult to grasp and not always easily accessible; the control aspect is even more difficult to establish.

Considering the high number of sanctioned individuals and entities as well as the pace at which the sanctioned party lists evolve, the use of an automatic Business Partner Due Diligence (BPDD) screening and sanction party list (SPL) tool is highly recommended, as well as the consultation of experts.

However, even the most powerful screening tool will not necessarily be able to detect every single attempt to circumvent the sanctions. Given the current situation, companies dealing in prohibited and restricted goods and services can expect to receive unusual business propositions .

Companies should take extra care and perform their due diligence duties. Before engaging in a transaction, a detailed review should be performed using KYC - Know Your Customer - checklists. Such checklists support the identification of red flags and potential violations of the applicable sanctions.

Below, you will find a few examples of KYC red flags:

• The client is new or unknown, and his identity is not clear: questions about his identity lead to evasive answers or the client cannot provide convincing references.
• The client does not provide answers, or satisfactory answers, to questions relating to the country/place of destination or the intended use of the goods.
• The customer does not request the technical or commercial information usually requested during commercial negotiations.
• The client demands unusual and exaggerated discretion about the place of destination or the goods to be delivered.
• The client offers unusually favourable payment terms. For example, he is willing to pay immediately a large sum in cash.
• The client asks for a project that has already been started by another company to be completed.
• The value of the goods indicated does not correspond to normal commercial practice.
• The customer requires security measures that are apparently excessive in view of the intended use. Requests for packaging are not comprehensible (e.g., packaging designed for ocean transport while the place of destination is in Europe).
• The customer wants labelling, marking or inscription that is not usual for the goods ordered.

The persons and entities included on the sanction’s lists referred to under question 6 are generally prohibited from entering and transiting through the EU and Switzerland.

In addition to that, the EU partially suspended the application of the Agreement with Russia on the facilitation of the issuance of visas. Diplomats, other Russian officials, businesspeople, and representatives of business organisations – even though they are not necessarily on a sanctions list – will no longer be able to benefit from visa facilitation provisions which allow privileged access to the EU at lower visa fees and eased procedures for issuing short-stay visas. This impacts your business partners’ ability to travel between Europe and Russia.

Business travel may also be affected by the closure of airspace. More importantly, however, the bans on airspace are likely to increase the cost and lead time of air freight between European and North Asian countries. The EU and Switzerland, along with other countries such as the US, Canada, the UK, Iceland, and Norway, have closed their airspace for Russian and Belarusian aircraft. This applies irrespective of whether the Russian owners are on a sanctions list or not. In retaliation, Russia has imposed a ban on aircraft from these countries in its own airspace.

Besides these individual restrictions, Russia faces an additional negative economic impact from the decisions taken by some of the leading global economies to withdraw the most-favoured-nation (MFN) rule – a WTO trade facilitation concept – for Russia. When a trading partner is awarded this status, only its lowest trade barriers – tariffs, quotas and the like – apply to imports of the awarded country. If the awarding country then decides to lower barriers to one trading partner, it must lower them to all deemed a most-favoured nation. However, when this trading privilege is revoked, the “old” unfavourable trade barriers (e.g., customs tariffs) are reimposed, making imports more expensive.

Possibilities for investment in Russia and Belarus are seriously constrained by the recent sanction packages.

In general, the financial sanctions adopted by the EU and Switzerland (see question 9) aim at “cutting Russian access to the most important capital markets.” This includes prohibition of public financing or financial assistance for trade with or investment in the Russian Federation, as well as prohibition of participation in projects co-financed by the Russian Direct Investment Fand. Interest and repayments are complicated by the ban from SWIFT of major Russian and Belarusian banks and their subsidiaries (see question 5).

Moreover, investments into Russia are restricted by the prohibition to directly or indirectly make funds, including loans and credits, available to any individuals and entities on the sanctions list. As laid out in question 6, this also applies to entities which are not explicitly named on the sanctions list but owned or controlled by a sanctioned entity.

Investments which involve the provision of goods and services listed under question 3 and 4 to Russia or Belarus are also prohibited.

The EU has further prohibited a number of investment activities in the non-government-controlled areas of the Donetsk and Luhansk oblasts of Ukraine, including the acquisition of real estate and entities (or shares therein), the granting of loans and credit, the creation of joint ventures, and the provision of investment services related to these activities.

Besides that the EU has imposed a ban on investments in the energy sector in Russia. The prohibitions target Russian entities, but also those constituted in any other third country if they operate in the Russian energy sector. It is prohibited to acquire or extend participations in these entities, grant loans and credit, create joint ventures, and provide investment services related to these activities.

Future economic relations with Russia and Belarus are highly uncertain. The sanctions are likely to further intensify and cover ever more sectors and activities. It is therefore recommendable to abstain from new investments in Russia – even if they may be legally allowed at this moment.

Many companies will have contractual obligations toward their Russian business partners or in connection to Russia that were concluded before the effective date of the latest Russia-related sanction regimes. This may, for example, be the case in the context of long-term contracts, framework contracts or service contracts. It raises the question of whether it is still “legally compliant” to execute the corresponding contractual responsibilities. The answer is that it depends.

In a first step you should evaluate the execution of the contractual obligations against the respective sanction regimes. In case the contractual obligation is legally admissible, you may (from a legal perspective) proceed with executing the related transaction – subject to the considerations outlined under Question 10.

In case the contractual obligation is generally prohibited under the new sanction regimes, you may proceed with the assessment of potential exemptions. Thereby, both the EU and the CH sanction regimes partly exempt certain legacy contractual obligations (also referred to as “grandfather clauses”).

Even if the transaction is not prohibited by the sanctions, you may conclude that you wish to withdraw from a contract for other reasons (see question 10). In these cases, you should carefully examine the possibilities to terminate the affected contract, as well as the consequences of non-fulfilment from a legal perspective (private law) on a case-by-case basis.

Many businesses have clear company values ensuring that all employees are working towards the same goals and standards. These values are commonly communicated within the organisation and externally (e.g., by mission statements published on the internet). The company’s core values can support the vision and shape the culture of your business. Consequently, every single business decision should be aligned with these values – including the decision to (not) conduct business in the context of Russia and the invasion of the Ukraine.

Several companies have comprehensively banned the Russian market and closed their local business respectively. Businesses, investors, and consumers may increase pressure on companies that are pursuing business with the Russian market. Your reputation and credibility may be challenged. The reputational and ethical question of whether to opt out of the Russian market should be part of your company’s overall strategy. The answer to this question will depend on multiple aspects, including the company’s corporate values, responsibility towards Ukrainian and Russian employees, and overall business model.

After a legal assessment and deciding on your ethical stance, further considerations may come into play. Considering the increased compliance costs and practical challenges such as, for example, supply chain disruptions or the need to engage a different banking institute, it may simply no longer be economical to continue your business operations in the sanctioned countries.

In conclusion

The first 9 questions above ultimately present the legal bottom line in the current sanctions’ environment – am I still allowed to do business with Russia and Belarus? But your internal evaluation should not stop there. Even if you answer yes to this question, and you have the appropriate compliance system in place to navigate the complex sanctions framework, there are other non-legal aspects that will play into your decision. This will involve a cost-benefit analysis in the face of increased cost and complexities while considering supply chain disruptions, compliance costs, financial uncertainties but also legal repercussions due to an early termination of contracts. It is ultimately also an ethical question that companies need to evaluate against their corporate values.

New sanction packages have been published by the EU Council every week since the invasion of Ukraine. The situation is very fluid and extremely complex. Automated solutions do help with the screening of business partners, but they are usually not implemented overnight.

Companies which don’t operate a mature Trade Compliance Framework are not equipped to navigate this sudden, highly complex and risky challenge and should refrain from doing business with the sanctioned countries. Trade Compliance functions need to be at the highest level of alert. The situation must be closely monitored; existing business partners and trade flows should be reviewed in detail to protect your company from violating the current sanctions packages.

If your company is trading with Russia or Belarus or you operate local branches or subsidiaries, a cautious and risk-based attitude should prevail.