Significant extension of Russia sanctions – winding down operations and contracts with listed entities for reasons of sanctions compliance – numerous challenges under Russian law
On Friday, April 6 OFAC significantly expanded sanctions against Russia by placing a number of important Russian entities and individuals on the SDN List. In our experience, the implementation of these measures in Russia can turn out to be rather complex, as Russian authorities and courts have found at numerous occasions that compliance with Western sanctions violates all sorts of mandatory provisions under Russian law (cf. our news of July 20, 2017).
Escalation of sanctions
The new measures target Russian oligarchs including Oleg Deripaska (owner of one of Russia’s largest industrial groups Basic Element) and Viktor Vekselberg (owner of the large Russian conglomerate Renova Group). Amongst the sanctioned entities are publicly listed companies – Deripaska’s RUSAL and EN+ Group, as well as Vekselberg’s Renova. Newly sanctioned are also the Deripaska companies Russian Machines and GAZ Group. Under OFAC’s 50%-rule, majority shareholdings of these companies are blocked as well.
Given the size and extent of involvement of the above-mentioned companies in the Russian economy, the sanctions will have considerable impact on US companies. For US companies with business relationships to these blocked entities and individuals, action will be required immediately. Many of these business relationships will need to be stopped immediately, others may be wound down in accordance with General License No. 12 until June 5, 2018. This General License lays down requirements for the winding down of current operations and existing contracts. Payments to the listed entities e.g. can only be made to a blocked account in the US.
Implementation under Russian law
In Russia and from a Russian law perspective the winding down of business relationships can turn out to be rather complex:
- Russian courts have so far not recognized US sanctions as force majeure events which free the parties from their contractual obligations, arguing that the sanctions were not unforeseeable for them. It is therefore questionable whether Russian law governed agreements between US companies and the newly sanctioned entities can be unilaterally suspended or terminated based on contractual force majeure clauses. Should the competent Russian courts consider such a unilateral suspension or termination by US companies as a contract violation, they risk to have to compensate damages to the sanctioned entities. Such damage claims could be enforced at the very least on the Russian territory – into all assets of the relevant US companies located in Russia, e.g. shares in Russian entities, goods supplied under retention of title, etc.
- The Russian Constitutional Court has recently stated that compliance with anti-Russia sanctions as such may qualify as bad-faith conduct under Russian law. Since the Russian Civil Code obliges all parties to exercise their civil law rights in good faith, the court’s position may render unenforceable any clauses in existing Russian law agreements, which confer on US companies the right to terminate or suspend the agreements in case of a sanction escalation, e.g. the inclusion of the Russian counterparty into the SDN List.
- Court practice indicates that compliance with US sanctions may contradict the Russian ordre public what can be a ground to refuse the recognition of foreign arbitral awards in Russia. US companies may therefore not be able to wind down operations with sanctioned entities through arbitral proceedings outside of Russia, and then execute the awards against assets located in Russia. This can be problematic for the termination of joint ventures between US companies and sanctioned entities under the widespread two-tier structure, where the joint venture partners hold shares in non-Russian holding companies whereby the actual joint venture assets are concentrated at operative subsidiaries in Russia.
- In response to US sanctions, the Russian government has already been authorized to determine cases, in which Russian individuals and organizations (notaries, companies, public registers, banks, share issuers etc.) no longer have to comply with their statutory obligations to disclose information. Certain sources of information on sanctioned entities have already been restricted (cf. our Corporate ABC Report of March 2018). The absence of publicly available information will further complicate the practical implementation of winding down transactions.
For the future, Russia has announced to support the newly sanctioned individuals and entities, and to take countermeasures. We will keep you posted.