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EU sanctions against Russia - Options for action by German companies

The EU has adopted tough sanctions against Russia since February 23, 2022. They go far beyond the sanctions already adopted by the EU since 2014 - especially after Russia's annexation of the Crimean peninsula.

Overview of the main sanctions

1. The main sanctions are:

  • Sanctions lists. On the one hand, targeted sanctions were issued against specific individuals and groups of individuals. These include those in the Russian government or military, all members of the Russian State Duma and various oligarchs. In particular, this is accompanied by travel bans, asset freezes, and prohibitions on the provision of funds.
  • Donetsk and Luhansk. In principle, goods originating in the Donetsk and Luhansk regions are subject to import bans into the EU. In addition, unless an exception applies, the provision of (indirect or direct) financing or financial assistance and (re)insurance in connection with the import of such goods is prohibited. In addition, there are investment restrictions with regard to certain sectors of the economy (transport, telecommunications, energy, prospecting, exploration and production of oil, gas and mineral resources) as well as export and trade restrictions for certain goods and technologies (Annex II of Regulation 2022/263 of February 23, 2022). A ban on the provision of, among other things, tourist services also applies.
  • Financial sanctions. In addition, the sanctions make it more difficult for Russia to access capital and financial markets. The financial sanctions now affect approximately 70% of the Russian banking market. In particular, the partial exclusion from the SWIFT payment services system or sanctions against the Russian Central Bank (e.g., the freezing of assets of the same) should be mentioned here. In addition, transactions related to the management of foreign exchange reserves as well as assets of the Central Bank of Russia, including transactions with legal persons, entities or bodies acting on behalf of or at the direction of the Central Bank of Russia, are prohibited.
  • Sectoral Restrictions. There are also extended trade/export restrictions or prohibitions related to certain goods and technologies. These include, for example, those for military use, aerospace industry use, oil refinery modernization, semiconductors, or dual-use goods.
  • Airspace. The EU has also decided to close airspace to Russian aircraft.

2. In coordination with the EU, other countries, such as the USA, Great Britain, etc., have also imposed sanctions against Russia, which essentially affect the same institutions and individuals. In the future, however, it cannot be ruled out that sanctions imposed by the U.S. or the U.K. may be more far-reaching than those imposed by the EU.

Options for action by German companies

Against the backdrop of the sanctions against Russia described above, companies based in Germany or the EU are urgently advised to review their business relationships with Russian contract partners.

1. If business relationships exist with partners from Russia, the relevant contractual partners should first be checked against the currently valid sanctions lists (especially those of the EU and the USA). This is because a sanctions list hit - which must then be checked for actual correspondence with the sanctioned person - can under certain circumstances have the consequence that no business may be concluded or executed with the contracting partner concerned at present. In the event that the Russian contractual partners are companies, it is also highly recommended to check the managers and ultimate beneficial owners (UBO) of such a company against the sanctions lists.

2. In the event of a sanctions list hit or if the products or services offered fall under a sanctioned industry sector, the associated consequences should be carefully reviewed.

  • Before completing this review, it is not recommended to accept new orders or conclude new contracts prematurely. This is because fines or imprisonment are conceivable under German law for violations of sanctions regulations, and there is also the threat of exclusion from contract award procedures or even by other customers and suppliers.
  • In the case of existing (framework) contracts with Russian contractual partners, the options for action depend on the respective contractual provisions. First of all, it should be checked whether special clauses exist for the case of sanction regulations issued after the conclusion of the contract. As a rule, this is accompanied by extraordinary termination/suspension options. A force majeure clause included in the contract could - depending on the content of this clause - also justify a right not to fulfill the contractual obligations for the period of validity of the relevant sanction regulations or for the period of the Ukraine war or to adjust the contract accordingly (advance payment, different sharing of the transport risk). If such special clauses are not to be found in the contract, it is conceivable under German law that the principles of "cessation of the basis of the business" could be applied, according to which termination, suspension and adjustment of the conditions are also conceivable. 

3. The situation is different, however, if a German company is not prevented by the sanctions regulations from fulfilling concluded contracts. This may be primarily because the contractual partner is not on any sanctions list or because the products to be supplied are not subject to the sanctioned industrial sectors. In this case, a precautionary discontinuation of deliveries to Russian customers for orders that have already been confirmed should be treated with caution, especially if the contract contains contractual penalties.

However, an adjustment of the contract according to the principles described above remains possible. Due to the aforementioned SWIFT exclusion and the threat of payment delays, it is strongly recommended to demand advance payment. In addition, some logistics service providers refuse to deliver goods to Russia. Therefore, attempts should generally be made to pass on the transport risk to the customer. The Incoterms regulations EXW or FCA Germany are recommended.

4. In framework agreements, attention should be paid to whether the seller has the expressed right to reject new orders. Furthermore, the ordinary/extraordinary termination options must be checked.
Due to the constant changes in sanctions, companies are well advised to constantly monitor the current legal situation.

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