Benjamin Bathke | Elena Barysheva with material from Reuters
May 15, 2018
Go along with US sanctions, and you'll face jail — that's the warning Russian lawmakers have for those who adhere to or facilitate business sanctions. Foreign companies have much to lose in this catch-22 situation.
Washington imposed sweeping sanctions on some of Russia's biggest companies, businessmen and officials on April 6, striking at allies of President Vladimir Putin to punish Moscow for its alleged meddling in the 2016 US presidential election and other "malign activities." They are the latest in a series of sanctions imposed by the United States, European Union and other countries since Russia seized Crimea and backed armed separatists in eastern Ukraine in 2014.
Russia has since been considering how to respond. On April 13, a bill on countering "unfriendly actions by the United States and other foreign states" was submitted to the State Duma, the lower house of the Russian parliament. The first draft of the bill, which is co-sponsored by leaders of all four parties in the legislature, was adopted on Tuesday. Pending Putin's approval, the retaliatory sanction legislation would give the government and the president extensive powers for future counter-sanctions.
Russia readies the counterattack
Moscow-based economist Vladislav Inozemtsev believes the law about criminal punishment for adhering to sanctions is simply a means of intimidation that can be applied to many people thanks to the vague wording of the draft bill. "The government wants to have those people on the hook," Inozemtsev told DW.
The legislation envisages jailing any individual or the representatives of any legal entity in Russia who refuses to supply services or do business with a Russian citizen citing US or other foreign sanctions.
Such a crime would be punishable by up to four years in jail or other limits on an individual's freedom or by a fine of up to 600,000 rubles ($9,730 or €8,133), Russian news agencies reported.
The same legislation, which faces two more votes in the Duma and one in the upper house before it goes to Putin for his signature, would also make it a criminal offence for Russian citizens to help foreign governments sanction Russia by providing advice or information. Some Russian opposition leaders have criticized the bill sharply saying they were the target.
That offence would be punishable by up to three years in jail or other restrictions on an individual's freedom or by a fine of up to 500,000 rubles, Russian news agencies said.
Consequences for European companies
The US sanctions from April are targeting seven Russian oligarchs (and some of their close relatives), twelve companies controlled by them, 17 Russian government officials, a state-owned arms manufacturer and a bank. Non-US citizens, and hence European companies, could also become the target of sanctions — provided they have knowingly facilitated "significant transactions" on behalf of the individuals or companies on the sanctions list. So far, Washington hasn't defined what it means by "significant."
Michael Harms, the committee's director, said if enacted, the law would be a "heavy burden" for German companies as they would be facing the difficult question whether to terminate the contracts at very short notice, as demanded by the US administration. If they do, they could lose "hundreds of millions of euros" worth of income.
Moreover, the short-term termination of contracts with suppliers could lead to "production losses along the entire production chain," Harms told DW in an email.
A sector that could be hit particularly hard is the European aluminium processing industry. Sanctioned Russian aluminium maker Rusal, which the committee says has covered 30 to 40 percent of European demand to date and runs factories in the EU, could suffer "production shutdowns." The ramifications could include "price hikes and follow-up costs worth hundreds of millions of euros," according to Harms. Aluminium is vital to the automobile and aviation industries.
The US sanctions and the new Russian law will put European companies in a catch-22 situation: If they continue to do business with people on the sanctions list, on the one hand, they risk running afoul of US sanctions as well as damaging their reputation; if they comply with US sanctions, on the other hand, they risk violating the Russian law and face jail time or fines, provided the law comes into effect. Amid this pressure from two fronts, doing business in Russia could be a precarious undertaking for foreign companies.
Alexis Rodzianko, president of the American Chamber of Commerce in Russia, said each foreign company ought to comply with the laws and sanctions of its home country, although he admitted that the choice is "quite difficult" as companies — and governments — could face a lose-lose situation.
"Both the Russian and the American governments are in a phase where additional sanctions can only hurt their own interests even more," Rodzianko told DW.
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Fears about Russian economy
Prime Minister Dmitry Medvedev said last month he backed the idea of making it a criminal offense to observe US sanctions. He also said that the government should support sanctions-hit Russian companies to ensure that jobs were not lost.
However, lawmakers are expected to water down other proposed measures by removing earlier language that targeted specific goods and sectors — including US pharmaceutical and agricultural products, alcohol and tobacco — amid fears about how such measures might hurt Russian consumers and industries.
They could also remove a proposal to restrict the employment of US citizens in Russia.
Moreover, there were concerns that specific measures targeted against US goods might prompt Washington to enact more sanctions on Moscow. It is unclear whether the current draft law may yet undergo further dilution.
Michael Harms said the economic outlook for Russia was "increasingly bleak." He also warned that the tit for tat trade actions between the US and Russia would "spill over into international trade."
Harms hopes both German Chancellor Merkel and economic affairs minister Altmaier, who are traveling to Moscow this week, will try to get their Russian counterparts to rethink the planned counter-sanctions. In an email to DW, Harms urged the federal government and the EU to "speak out clearly against the extraterritorial application of US sanctions."