New Global Sanctions Regime After The Ongoing Russia-Ukranie Situtaion

3/29/2022

All Insights
As most people are aware of, on February 24, 2022, the Russian Federation (“Russia”) launched a large-scale air and ground military operation against Ukraine with the support of Donetsk (“DNR”) and the Luhansk People’s Republics (“LNR”) in the Donbas region.
The military operation initiated by Russia was supported by the Republic of Belarus (“Belarus”) and ultimately put on the agenda of the global public. As a result, many European Union (“EU”) and North Atlantic Treaty Organization (“NATO”) countries, especially the United States (“US”), have publicly condemned this military operation against Ukraine and have publicly stated that a wide range of sanctions packages have been passed and will continue to be passed to ensure that Russia’s action does not go unpunished in an international context.

Although the world sanctions sound like an inter-country concept, today, the integration of world trade, the simultaneous interconnected service of multinational company operations to many countries and the integration of countries’ financial systems are much more transnational. Following the Russian operation, the US announced the first sanctions against Russian companies and individuals, and many sanctions packages were reported from the EU and the United Kingdom (“UK”) in the wake of these sanctions. Although these sanctions packages seem to target Russian individuals and companies directly, these sanctions affect the whole world and especially world trade in the globalized trading system mentioned above.

This article will explain the content of the sanctions packages in general, the applicability of these sanctions to Turkish companies and subsidiaries both in Turkey and other countries, the counter-sanctions moves taken by Russia against those sanctions, and their effects. In addition, in the context of this article a roadmap will be driven on how to act as a precursor against new sanctions that may be imposed in the future within the framework of all these sanctions regimes.

(A) SANCTIONS REGIME
The simplest definition in the international legal literature of the concept of sanctions is the set of actions taken to stop the actions of strong actors against another weaker actor or to correct their inaccurate actions. These actions can be taken in various fields and on multiple subjects.
As a rule, in the international law, all states are considered equal, but in today’s real world, there are areas and sectors where states are superior to each other. As an example, many sanctions against Russia's military actions, especially applied by the economically powerful USA and the EU, aim to end the military operation and return from the chaos it has created. These sanctions consist of sanctions that are taken by the official authorities of the states and that have a legal basis, and various sanctions that the sector players take on their own initiative due to both public and political pressures without any legal basis. We believe that these two types of sanctions should be examined separately, especially since they may lead to very different results in future disputes between the parties.

I. LEGAL SANCTIONS
Legal sanctions are the set actions that have a legal basis taken by the relevant state authorities and that are binding by nature. Many of these sanctions are the sanctions applied against Russia and companies, individuals, banks, etc., of Russian origin.

(i) US Sanctions Against Russia
The United States took the most severe sanctions against Russia’s military operations and perhaps permanently changed the balance of world trade. The decisions taken by the United States are divided into finance, energy, business, import and export regimes, customs regulations, defense industry, technology, aviation, and other sectors and are expanding day by day.

Executive Order No. 14.065 issued by the US, which broadens the scope of already existing sanctions regarding harmful foreign activities of Russia that are firstly foreseen by Executive Order No.13660, imposes sanctions issued by the Office of Foreign Assets Control (“OFAC”) in terms of regions defined as DNR, LNR, and Covered Zones (“Covered Zones”). Covered Zones can be simply explained as US embargoed zones. Executive Decision No. 14.065, modeled after Executive Order No. 13.685, which imposed comprehensive regional sanctions on Crimea, imposes a broad embargo on the regions, especially prohibiting the export and import of any goods, services, or technology, as well as related business and transactions. In addition, blocking sanctions are allowed to be applied to individuals, affiliates, and partners found to operate in these regions. Including but not limited to, some significant US sanctions are as follows:
  • US airspace is closed to all flights to Russian airspace.
  • Imports of oil, natural gas, and coal from Russia are banned.
  • The assets of Russian billionaires and family members, publicly known as oligarchs, including Russian President Putin, in the US, had frozen, and they were prevented from using their property. They were also banned from traveling to the US.
  • The US Treasury Department has banned US citizens from trading with the Central Bank of Russia, the Russian National Wealth Fund, and the Russian Finance Ministry.
  • World-renowned Russian banks such as Vnesheconombank (VEB) and Promsvyazbank (PSB) and 42 subsidiaries have been placed on the SDN (Specially Designated Citizens and Blocked Persons) list.
  • As a result, all US assets of all SDN-listed organizations have been frozen, and any money transfers and SWIFT transactions against these organizations have been banned.
  • US Dollar transactions with Central Bank of Russia are prohibited.
Moreover, it has to be noted that US sanctions are continuing to expand and the latest example of the newest sanctions is Executive Order No. 14068 published on 11 March 2022, which broadens the sanctioned trading activities and sectors. The sectors and practices that are not covered by US sanctions can also be tracked from the published exemption list. These lists are expected to be looked at very carefully, and the individuals are expected to determine whether the exemption covers them. For this reason, it is recommended to check the relevant lists up-to-date and constantly.

Please note that; the individuals added to the relevant sanctions and the sanctions list are being updated day by day, and you can reach the official website of the US Treasury Department by clicking here.

(ii) EU and UK Sanctions Against Russia
In line with US sanctions, the EU and UK have announced a series of sanctions packages imposed on Russian individuals, firms, and banks in the territory of EU and UK. These are mainly aimed at the financial and aerospace sectors, but some coincide with US sanctions. Some significant sanctions imposed by the EU and the UK are as follows:
  • The EU has decided to impose sanctions such as freezes and seizures on assets owned by Russia’s wealthiest businessmen. The UK froze the assets of more than 220 Russian-based or affiliated individuals and entities.
  • Along with the US, the UK, and Canada, the European Commission has decided to remove seven Russian banks from SWIFT network, which connects financial systems and enables money transfer between banks.
  • The EU has closed its airspace to all Russian or Russian-controlled aircraft. The UK has banned Russia’s state-owned airline Aeroflot and Russian private jets from British airspace.
  • The EU has banned being involved in or investing in Russian Direct Investment Fund projects. In addition, the UK has banned Russian state-owned and key strategic private companies from raising finance on the UK financial markets.
  • The EU suspended the broadcasting activities of Sputnik’ and RT/Russia Today (RT English, RT UK, RT Germany, RT France, and RT Spanish) in the EU, or directed at the EU.
  • The EU has banned the transactions of Russia’s central bank and freeze all its assets. In addition, the UK suspended export licenses for products that could be used in the military industry.
  • The EU has banned Russian banks from European financial markets. In addition, the UK has imposed balance restrictions on bank accounts opened by Russian citizens in the UK. According to this, Russian nationals is not allowed to have deposits of more than 50,000 pounds ($66,860) at British banks.
  • The EU has banned transporting goods, services, and technology to Russia for oil refineries. The UK has stopped exporting high-tech equipment used in oil refineries.
Please note that; the individuals added to the relevant sanctions and the sanctions list are being updated day by day, and you can reach the official website of EU Sanctions Map by clicking here.

(iii) Russia’s Sanctions Relating to Unfriendly Countries
The Russian government has publicly stated that it has decided to foresee counter-sanctions in various sectors and areas in response to the sanctions imposed on it. Within the scope of the “List of Unfriendly Countries” published by the Russian government in recent weeks, Albania, Andorra, Australia, Great Britain, including Jersey, Anguilla, British Virgin Islands, Gibraltar, EU member states, Iceland, Canada, Liechtenstein, Micronesia, Monaco, New Zealand, Norway, South Korea, San Marino, North Macedonia, Singapore, US, Taiwan, Ukraine, Montenegro, Switzerland, and Japan, related companies, banks, payment related organizations, are determined as the subjects of the counter-sanctions that will be foreseen by Russian government.

As another practice published by the Russian government, exporters are required sell 80% of foreign currency earnings credited from 1 January 2022. In addition, Russian companies are prohibited from importing goods in need of raw materials in the production and construction sector from Unfriendly Countries.

Perhaps the most vocal application of the Russian government is that in response to the withdrawal of many software and technology giants from Russia within the scope of sanctions, Russian citizens are allowed to access patents belonging to these companies and to use these technologies as they wish without any obligation to obtain any license or to pay any price. According to this, a decree has adopted by the Russian Government and it allows local companies and individuals to use inventions, industrial designs etc. held by owners from Unfriendly Countries without their consent and without paying any compensation.

It's also worth noting that the Russian government has announced that any trade deal to be made between the Russian companies and the companies in Unfriendly Countries will be subject to authorization.

II. REPUTATIONAL SANCTIONS
Although it does not have a legal infrastructure, in response to Russia’s military operation against Ukraine, many multinational companies withdrew their operations from the Russian market regardless of whether they were subject to legal sanctions, closed their access to Russian individuals and companies, and cut off the supply of products and goods. In the international law literature, companies’ sanctions without any legal basis, both public and political pressures, are defined as “effective actions for reputational sanctions”. Under these actions, it is usually aimed to maintain sectoral-based reconstruction and reinforce the public perception. Within the scope of the reputational sanctions, many multinational companies aimed at Russian companies, athletes, banks, technology giants, artists, citizens have imposed repetitive sanctions without any legal obligation and unilaterally stopped their transactions. You may see some examples to those actions as follows:
  • US payment card firms Visa Inc. and Mastercard Inc. have blocked multiple Russian financial institutions from their network. All of the Big Four accounting groups, Deloitte, KPMG, EY and PwC, have stated that they will no longer have a member firm in Russia. Top-tier law firm Freshfields also announced that it will no longer work with any clients linked to the Russian state either.
  • McDonald's, Coca-Cola, Starbucks and Heineken halted their business in Russia.
  • International carriers such as UPS, FedEx, and DHL, decided to cease shipping activities to Russia,
  • Volkswagen stopped car production in Russia, while Volvo and Scania suspended vehicle sales to Russia,
  • According to the announcements made by the world’s two largest shipping companies MAERSK, MSC, they suspended their routes to and from Russia, except for food, medical and humanitarian supply deliveries,
  • Major technology companies are also impose some sanctions. Such as, Apple has halted all of its product sales in Russia, and limited other services such as Apple Pay and Apple Maps. Samsung also, suspended shipments to the Russia.
  • International Skating Union (ISU) announced that Russian and Belarusian athletes have been banned from international competitions,
  • According to the announcements made by the International Association of Football Federations (FIFA) and the Association of European Football Federations (UEFA), the Russian national team and its clubs have been banned from international tournaments until further notice.
As such, it can be said that many severe sanctions have been taken for no other reason than reputational concerns. As a result of such sanctions, it is possible for real or legal persons who have a commercial relationship with the companies that impose sanctions to request the performance of their contractual obligations and to request performance from them in such cases. The main reason for this is that such repeated sanctions will not be considered force majeure and there is no legal basis for the non-continuation of the existing obligations for the parties. It is unclear who and where firms will apply in such disputes and how to proceed in their contractual performance requests or the performances requested from them. However, it is clear that both legal and reputational sanctions will give birth to a lot of contractual disputes in the upcoming future.

(B) IMPACTS OF SANCTIONS REGIME ON PERSONS AND BUSINESSES OF TURKISH ORIGIN
Direct implementation of a sanction imposed by the US or another country against Russia and Russian companies will not be imposed directly on Turkish companies under Turkish law. However, it has to be noted that, the fact that these sanctions are not legally applied to Turkish companies, does not mean that Turkish companies will not be affected by such sanctions in their activities and operations. As mentioned above, in today’s global economy, trade is like dominoes, and the overthrow of one of these stones means that the whole system is affected, especially if this domino is one of the most powerful economies in the world. Therefore, we can express the extent to which Turkish companies may be affected by the relevant sanctions, especially in terms of what can be encountered in practice.

To see if Turkish companies established with domestic or foreign capital under Turkish law are affected by the sanctions issued, first, the company’s sector must be identified. Then, some questions should be asked regarding the company’s industry such as: Does the company import or export raw materials or goods? Does the company work with foreign companies in Turkey? Does the company have any contract with the related companies in dollars or rubles (or any currency of a sanctioning country)? The answers to these questions will determine the likelihood of companies being affected by foreign sanctions or even being directly subject to them, even if they are Turkish companies.

It can be said that Turkish companies can be subject to such sanctions regardless of their region, especially if there is a group of companies, subsidiaries, or a company with which they have a business relationship in the sanctioned countries. This implementation is based on the substantial Nexus from Anglo-Saxon law, i.e., the assessment that economic sanctions in international law have cross-border effects. The most basic example given to the concept of Nexus is the US/Dollar connection; for example, a French Bank’s transactions with Iran at the dollar exchange rate may cause the United States to consider the relevant Bank under sanctions through the Nexus connection. As it can be seen, the Nexus doctrine can cause companies to be counted under the relevant sanctions even from very weak connections, so every transaction must be carefully examined.

Another situation that Turkish companies may face is that they may be directly subject to reputational sanctions if a multinational company announces that it will not work with companies that trade with Russian companies without any sanctions due to their Code of Conduct and ends its commercial relationship with the Turkish company if it keeps being involved in the commercial transactions with Russian companies. These kinds of reputational sanctions are regularly seen in international commercial relations, as sanctioning authorities mostly held their domestic actors responsible even from the actions of their business partners or subsidiaries. Therefore, this approach causes multinational companies to conduct broad examinations on their business partners and even work with intelligence companies to investigate the trading activities of their business partners.

The abovementioned explanations can also be considered in Turkish companies operating abroad. However, the first thing that comes to mind is what the consequences will be if Turkish companies operating in Russia receive payments from their accounts in Russian banks, get loans from Russian banks, and receive letters of guarantee.

Since most of the banks linked to Russia and originating in Russia are considered SDNs, it is very problematic for a Turkish company operating abroad to access, transfer to or receive transfers from that account (except between Russian Banks) through other banks. The US has banned companies from working with these banks, but it has also given them a Wind-Down Period to end their transactions with those banks. At this stage, it remains unclear how loan payments from SDN-listed banks will be made, how default interest will work, and whether this will create a force majeure in terms of non-performance of the payment.

(C) ACTIONS SHOULD BE TAKEN
The increasing number of sanctions packages and sectors forces companies engaged in transnational trade to act taking necessary measures, regardless of their origin and make the necessary backup plans. That's why we've compiled our recommendations in the list below, and we believe that following them will significantly reduce the risk.
  • First of all, companies, especially those who encounter global business, should be able to clearly define their work descriptions by taking into account the phrases in the definitions of sanctions.
  • Companies should determine the origin of all companies that have had a contractual relationship to date, and whether they have any connection with Russia.
  • If there is any possibility to use a raw material originating from a banned country, the companies should also determine the origin of the raw materials they use.
  • As explained above, companies should deepen their background checks when choosing their partners abroad by taking into account the existing sanctions.
  • Companies need to reconsider all contractual provisions they have and ensure that legal choices are made that specifically accept force measure in terms of the law to be applied in their contracts and that the force majeure version is interpreted as widely as possible, and if these are incomplete, they should reconsider the amendment of the agreements accordingly.
  • Companies should establish teams in compliance departments or legal departments to monitor existing sanctions, and these teams should be deployed within the organization in order to circulate all the information in a format that the relevant department can actually read daily enforcement updates.
  • Companies should consider taking legal consultancy of local experts before making business decisions regarding the sanctioned areas.
  • Finally, companies should start taking the measures mentioned above early, even if the sector in which they operate is not subject to sanctions, and should always be in a position to keep their backup and alternative plans on the sidelines.

CONCLUSION
Considering all these statements, even if the warm contact between Russia and Ukraine results in a ceasefire, the devastating impact of all these sanctions on global trade is not likely to go away in the near future. Therefore as a result of this, new industry players will emerge, specific markets will shrink and alternative new markets will emerge. All the dark spots that come with and continue to come with sanctions will be exposed by the difficulties in implementation between the parties, and some of the questions that have remained unclear will result in lengthy discussions by the judicial and arbitration authorities. It is one of the most vital survival methods for companies in this environment that always being prepared for these black spots and securing their operations and commercial reputation.

MORAL & PARTNERS
Senior Associate, Aslı Kınsız
Associate, Orçun Turan
Trainee Lawyer, Deniz Yontuk

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