Upper House of Russian Parliament Passes Counter-Sanctions Bill

The upper house of the Russian Parliament, the Federation Council, approved a draft law on counter-sanctions (the “Counter-Sanctions Law”) on May 30, 2018, which appears to be identical to the version adopted by the Duma last week (the approved text was unavailable at the time of distribution). The draft law now goes to President Putin for signature. Given the current language of the draft law and the lack of any mandatory provisions, President Putin is likely to sign the bill into law in the near future. By law, President Putin has 14 days to sign it once it is formally sent to him.

The Counter-Sanctions Law is the Russian legislature’s response to recent sanctions imposed by the U.S. on Russian “oligarchs”, legal entities and state officials in April 2018 and is designed to give the Russian President and Government additional tools to apply counter-sanctions on western states, individuals and entities. As initially drafted, the law could have had a significant impact on international business operating in Russia. The approved draft, however, removed a number of the more severe provisions following input from the business community and analysis of the potential impact of the law on foreign investment and on business generally in Russia. The Counter-Sanctions Law now provides a general framework granting the President and the Government broad powers to impose sanctions, rather than mandatory provisions banning certain business by sanctioned parties from so-called unfriendly states.

A separate bill seeking to criminalize compliance with western sanctions is still under discussion and has not moved past the first reading in the Duma in light of the concerns raised by a number of interest groups and the business community at large. It appears likely that the bill will be revised to replace possible criminal liability (at least in the first instance) with administrative fines for compliance with foreign sanctions laws. 

The Federation Council unanimously adopted the Counter-Sanctions Law¹ on May 30, 2018. Although there is no publicly available text of the adopted draft at this time, it should be identical to the one adopted in the third reading by the Duma on May 22, 2018. The original draft of the law sets out 16 different sanctions countermeasures that could be imposed on parties from Unfriendly States (as defined below)². However, most of these measures were removed from the final draft of the law passed, including the following provisions: (i) the entry of specified sanctioned citizens onto Russian territory, (ii) employment of sanctioned citizens, including highly qualified specialists, (iii) an increase in air navigation charges, and (iv) the exhaustion of exclusive rights to trademarks registered in relation to goods whose right holders are Sanctioned Persons (as defined below) (for more details, please see our recent OnPoint. We would note, however, that the final draft included a “catch all” provision that would still allow the President to impose whatever other measures he deems appropriate. Thus it is possible that such penalties may be considered at some future date if there is a further escalation of tensions between the U.S. and Russia. 

The Counter-Sanctions Law, as adopted by the Federation Council, is generally aimed at the U.S. and other states that, in the view of the Duma, have carried out unfriendly actions towards Russia, its citizens and legal entities, as determined by Russian officials (“Unfriendly States”) and the following sanctioned persons (“Sanctioned Persons”):

(i) officials and citizens of Unfriendly States;

(ii) entities under the jurisdiction of Unfriendly States; and

(iii) entities which are directly or indirectly controlled by Unfriendly States or are affiliated with them, if such officials, citizens or entities have carried out unfriendly actions towards Russia.

The draft grants Russian authorities the power to impose various measures either limiting or prohibiting certain actions of Unfriendly States and Sanctioned Persons. 

The Counter-Sanctions Law, as adopted by the Federation Council, authorizes the President and the Government of Russia to impose the six countermeasures listed below on Unfriendly States and Sanctioned Persons:

1. suspension or termination of international cooperation by Russia and its legal entities with Unfriendly States and Sanctioned Persons in different industries to be determined by separate decisions of the Russian President;
2. a ban or limitation on the import of goods and raw materials to Russia originating from an Unfriendly State or which are manufactured by Sanctioned Persons (the list of goods and raw materials to be determined by the Russian Government);
3. a ban or limitation on the export of goods and raw materials from Russia by citizens of an Unfriendly State or Sanctioned Persons (the list of goods and raw materials to be determined by the Russian Government);
4. a ban or limitation on the provision of services in Russia by Sanctioned Persons for purposes of state or municipal needs, or the needs of separate entities (namely, those that have certain direct and indirect state participation; the list of services shall be determined by the Russian Government);
5. a ban or limitation on the participation of citizens of Unfriendly States and Sanctioned Persons with respect to the privatization of state or municipal property and in the provision of services with respect to the sale of federal property; and
6. other measures in accordance with a decision of the Russian President.

Additionally, if Unfriendly States impose restrictive actions against Russian goods and services, the draft law provides that goods and services coming from Unfriendly States may be deprived of national treatment as provided for under Russian law (i.e. foreign goods and services will be treated the same as Russian goods and services for purposes of taxes and charges, etc.). 

The Counter-Sanctions Law would still allow Russian citizens to import goods which may be affected by the countermeasures for personal use. If enacted, implementation of any particular countermeasure will require additional action, namely the decision of the Russian Government based on a respective decision of the Russian President or a decision of the Russian President based on a proposal from the Russian Security Council. Thus, no counter-sanctions will be immediately imposed on any Unfriendly States or Sanctioned Persons under the draft law, even if adopted in its current form, and ultimately any decision on any restrictive measures will be left for the Russian Government and the President to impose.

While the general wording of the Counter-Sanctions Law is a major improvement over the original draft, a number of provisions are still unclear and will undoubtedly create room for different interpretations and applications of the law in the future. For example, it is not entirely clear what is meant by “control” and/or “affiliation” under the law. Both words are used in the context of describing persons who may be considered Sanctioned Persons (e.g. “entities which are directly or indirectly controlled by Unfriendly States or affiliated with them”). Based on analogies with other Russian laws, control is likely to mean either direct or indirect ownership of 50% or more by an entity or person or the ability to impose binding instructions on an entity. In terms of an affiliated person, it is unclear how broadly this may be interpreted and will require further clarification. The draft law refers to ‘affiliated with them’, however it is not clear who "them" refers to. It may, for instance, include:

(i) the Unfriendly States;

(ii) entities under the jurisdiction of the Unfriendly States; or even

(iii) entities which are affiliated with the entities and which are directly or indirectly controlled by the Unfriendly States.

In the context of the Counter-Sanctions Law, affiliation may be based on the definition provided in Russian competition law, i.e: (i) applying a direct 20%-shareholding threshold; and (ii) persons who are in the same group of persons (e.g. persons holding/having: (a) over 50% of votes, (b) a CEO/managing company (corporate director) position; (c) the right to give the company binding instructions; (d) the right to appoint a CEO/managing company (corporate director) position; (e) the right to appoint over 50% of the management board and/or the board of directors). 

It should be noted that under existing Russian laws and regulations, the Russian President and Russian Government may impose sanctions on foreign persons at any time. Indeed, the President has exercised this right several times over the last few years (e.g. in 2014 following the first round of sanctions when the Russian Government imposed food bans on imports from countries that had imposed sanctions on Russia, the various sanctions that were introduced against Turkey after the Turkish military shot down a Russian plane, etc.). This fact was also highlighted by Mr. Andrey Klishas, Chairman of the Federation Council’s Constitutional and State Construction Committee when addressing the draft, who reportedly stated that he believed the draft law to be unnecessary since the Russian authorities already have the authority to retaliate against western sanctions. Given the foregoing, the Counter-Sanctions Law appears to be more of a political statement/reaction to the sanctions as opposed to a new set of rules providing additional authority to the President and Russian Government to retaliate against the imposition of western sanctions. 

Criminal Liability Draft Law for Compliance with the U.S./Other States’ Sanctions

In addition to the Counter-Sanctions Law, the Duma also adopted in its first reading a separate draft law on May 15, 2018, which introduces criminal liability for compliance with or contribution to sanctions from the U.S. or other countries (the “Criminal Liability Draft Law”). Under current Russian law, criminal liability may only be imposed on individuals. 

The second reading of the Criminal Liability Draft Law has not been scheduled yet and the consideration of this draft law is subject to further discussions and analysis. Nevertheless, it is becoming increasingly apparent that the Russian authorities perceive the potential harm which the law can trigger for Russian and foreign business in Russia, if enacted. Based on recent comments from officials, there is hope that the draft law will be amended either to eliminate any liability for complying with sanctions from the Unfriendly States or to substitute such liability with administrative liability (however, criminal liability would still be possible if administrative liability is imposed several times). It seems likely that a Russian citizen who conducts deliberate acts which contribute to the imposition of sanctions would still be subject to criminal liability. Recent press indicates that if the Criminal Liability Draft Law is split into two separate draft laws (an administrative draft law for compliance with sanctions and a criminal draft law for contributing to western sanctions), the criminal draft law may be adopted by the middle of July, while the administrative draft law will need to be introduced to the Duma and may be adopted before autumn 2018.

In brief, the following actions (inactions) are prohibited under the Criminal Liability Draft Law:

1. Activity (inactivity) aimed at compliance with sanctions imposed by a foreign state, a union of states or an international organization which resulted in a limitation on, or a refusal to enter into ordinary economic transactions on the part of Russian citizens, legal entities, Russia (including, its constituent entities), and persons controlled by them (both foreign and Russian ones) (“Russian persons under sanctions”). 

   As currently defined by the Criminal Liability Draft Law, ordinary economic transactions include those actions aimed at the performance of statutory or contractual obligations and carried out by Russian persons under sanctions within their ordinary economic activity. In particular, contracts which are legally required to be concluded with any person (e.g. consumer contracts) and ordinary operations carried out by market participants, e.g. opening bank accounts, making payments, operations with securities, etc. and/or

2. Performance by a Russian citizen of deliberate acts which contribute to the imposition of sanctions by a foreign state, a union of states or an international organization against Russian private or public persons (and their controlled persons), including by means of the provision of recommendations and transfer of data which contributed to the imposition of such sanctions.

We will, of course, continue to monitor developments closely.