Russian Sanctions: what they mean for you

Since 2014, the sanctions war between Russia and the West has generated much discourse, both in the media and in the business community. However, the nature and impact of these measures are often misunderstood. In this article, we aim to correct some of the most widespread misconceptions. We shall also reveal some of the opportunities that have arisen as a result of sanctions.

If I move to Russia, will the sanctions affect me?

You only need to comply with sanctions if you’re a Russian citizen, a citizen of a country that’s implementing sanctions, or if you’re an owner of a Russian business. It is generally easy to comply with sanctions, as they target very specific business entities and industries. Nevertheless, it’s important to have some idea of what the sanctions are if you fall into any of the above categories.

What is the difference between US and EU sanctions and how do they work?

Both the US and the EU have imposed sanctions on Russia. However, there are some important differences between the two sets of sanctions that you need to understand if you’re a foreign investor.

The US has imposed strict financial sanctions on Russia. These block international financial institutions from providing any financial or technical assistance to Russia. While US citizens are banned from granting loans to the Russian government, they can still lend to Russian corporations (within ‘the language of the law’).

The EU’s sanctions are less restrictive than American sanctions. The EU has focused its sanctions on a blacklist of specific business entities and individuals. It considers them responsible for undermining the territorial integrity of Ukraine and targets sectors of Russian industry that it has linked to the Ukraine crisis. The bloc has also implemented additional, stricter sanctions linked to business activity on the Crimean peninsula, including Sevastopol. Note that Canada, Australia, Switzerland, Norway and Japan have implemented similar sanctions to the EU.

The EU has been careful to ensure that it has made ‘every effort to minimize adverse consequences for the civilian population or for legitimate activities,’ as it stated in its sanctions report.

What does this mean? So long as you don’t do business with any Russian entity or industry that the EU associates with the Ukraine crisis, you should be able to start up your business in Russia without any problems.

Not sure whether you’re affected by the sanctions? Leave us your number and Wagner & Experts can give you more information.

What are the main industries affected by the sanctions?

As previously mentioned, some industries are more affected than others. Due to their role in the Ukrainian crisis, the financial, defence and energy sectors have taken a hit. In addition, the U.S. and EU specifically prohibit all deals related to the exploration and development of Russian deepwater and Arctic offshore projects. US sanctions have also targeted the tech industry because of suspected Russian hacking. Additional EU sanctions concentrated on the Crimea peninsula, in particular tourism and infrastructure. They prohibit the sale, supply, transfer, or export of goods and technology in several sectors from the southern ports.

How bad is the impact on the Russian economy?

Surprisingly, the sanctions war actually benefits foreign investors in several ways. Investment incentives for foreign businesses have increased and there are now gaps in the Russian market that you can exploit directly.

A prime example of this is the growth of the import substitution market and technological development in Russia. With foreign goods now harder to obtain, companies have started producing goods locally to replace those usually sourced from abroad. An industry that has greatly benefitted is agriculture. For instance, Russia has recently become the world’s leading wheat exporter. Furthermore, the current boom in Russia’s cheese industry is archetypal of the current opportunities. European dairy and processed products were banned in the sanctions war. This in turn encouraged Russians to source and produce them locally.

Thanks to government initiatives such as special investment contracts (SPICs) or regional investment projects, foreign investors can look forward to preferential treatment when they localise their goods production in Russia. In addition, many difficult procedures have been simplified in order to attract foreign personnel. In fact, it has become easier to invest in Russia since 2014, due to the Russian state’s efforts to increase foreign investment despite the decline in its relations with the West.

How hard is it to comply with Russian sanctions?

Each country that has implemented sanctions on Russia has its own specific rules determining how to comply with the sanctions. As a result, there’s no single set of rules to follow when working out how to comply with sanctions. Instead, you’ll need to review the sanctions placed by the country you’re representing or doing business with, and check whether or not you’re likely to breach their terms.

One thing that is vital to check is whether your company does business with any customers or third parties who are blocked by sanctions. This includes companies which have an ownership stake of more than 50% by a blocked person or entity.

You’ll also need to check whether or not your business operates in an industry that has been targeted by sanctions. If it does, you will need to find out whether you can get authorization to do business in this area. You’ll have to be very careful if you operate in an industry such as military goods, natural resources or nuclear energy.

Don’t have time to do all this yourself? Wagner & Experts can help out! Send us your number and we’ll help your business get up and running in Russia – while complying with the sanctions!

How will the U.S. elections 2020 affect further sanctions?

Some commentators and Donald Trump himself describe the Trump administration as the “toughest on Russia”. In reality, Joe Biden will almost certainly be tougher. In September 2020, the former vice president said Russia would “pay a price” for interfering in U.S. elections if he wins the White house.

“I don’t think he’s going to try anything like 2009,” – says David Kramer, a former assistant secretary of state in the Bush administration, referring to Obama’s reset policy attempt.

One of the most discussed and feared measures from Washington is the “sanctions bill from hell” – the list of toughest restrictions first introduced in 2018 to punish Moscow over interference in U.S. elections and its activities in Syria and Crimea. In 2019 it was renamed the “Defending American Security From Kremlin Aggression Act” (DASKA) after being delayed for a year. DASKA targets new Russian sovereign debt, state banks such as Sberbank and VTB Bank, Vladimir Putin and figures close to him. The bill also puts the Russian Federation on the list of countries that support terrorism.

However, the COVID-19 pandemic will limit the room for maneuver when it comes to foreign policy. The new president will be forced to focus on domestic issues and the economy first, and Russian sanctions may not be that high on his list of priorities. Bloomberg analysts also agree the United States currently does not have enough resources to create substantial pressure on the Russian economy.

Most experts are not expecting DASKA to go live in the nearest future. The bill can be damaging for both sides and spark more conflicts in the international arena. Instead, potential sanctions will most likely target the “Nord Stream 2”, a new gas pipeline running from Russia to Germany across the Baltic Sea. The pipeline will double Russian natural gas shipments to Europe, potentially increasing the region’s reliance on Russian energy resources. The project is stoking concerns in Washington, as it not only carries a big economic value but also can be used as a political tool by the Kremlin. Additionally, Biden’s Green New Deal promises to put more pressure on Russian businesses, especially if the carbon tax is introduced. Other sanctions might target certain companies and individuals but not the country’s economy in general.

US-Russia relations will not see any improvement under Biden’s presidency. However, the introduction of severe sanctions is also unlikely in the nearest future. 2021 promises a positive growth of the recovery rate of economic activity in Russia, while most forecasts expect the ruble to strengthen in the long term. According to UNCTAD’s World Investment Report 2020, foreign investments in Russia have experienced an enormous increase in 2019. Along with a potential decrease in the external assessment of the risk of investments, Russia will soon become more perspective for foreign business.

Conclusion

Sanctions often sound scary. However, the Russian government recognizes this and has done its best to improve the ease of doing business where it can. For many, sanctions have offered the chance to take advantage of gaps in the market. As long as you know how to cooperate with the sanctions or have someone to help you do so, your business in Russia will be successful.

At Wagner & Experts we have many years of experience dealing with foreign investment into Russia. Send us your details and we will help you to operate successfully in Russia whilst complying with sanctions.