Spanish Companies in Russia Today: The Complex Situation Surrounding Economic Sanctions
June 05, 2023
Russia’s invasion of Ukraine has brought war to the heart of Europe. The European Union (“EU”) has responded not only with military support but also by imposing a series of economic sanctions which are remarkable for their size and display of political unity.
The European Commission has stated that it established these sanctions in the face of the unprovoked invasion in order to “cripple the Kremlin´s ability to finance the war, impose clear economic and political costs on Russia’s political elite responsible for the invasion, and diminish Russia´s economic base”.1
These economic strikes supplement measures already imposed on Russia since 2014, which were intended to condemn the annexation of Crimea but had little economic impact.
According to the European Commission, since February 2022,2 the EU has banned more than €43.9 billion in goods from being sold to Russia and €91.2 billion in goods from being imported, leaving 49% of exports and 58% of imports (compared to 2021) currently sanctioned.
The sanctioned products include technology (e.g. quantum computers, advanced semiconductors, electronic components, software); machinery and transportation equipment; oil refining goods and technology; energy industry equipment and services; aviation and space industry and maritime navigation goods; drones; and luxury goods such as cars, watches, and jewellery.
Prohibited imported goods from Russia include crude oil (since December 2022), refined petroleum products (since February 2023), coal, steel, iron, gold, cement, asphalt, wood, paper, plastics, seafood, vodka, caviar, cigarettes, cosmetics, and of course civil firearms and other military equipment.
In the financial sector, EU leaders expelled the main group of Russian banks from the Society for Worldwide Interbank Financial Telecommunication in hopes that excluding them from this widely used interbank transfer information system will isolate the Kremlin from the global economy and hinder its international trade.
The EU has prohibited companies in Europe from providing Russian organisations with accounting, auditing, business and management consulting, public relations, IT consultancy, legal advice, architecture, engineering, advertising or public opinion polling services.
Whilst companies that conduct the activities described above will be subject to EU sanctions, many other industries remain exempt from surveillance and punishment. To avoid harming Russian citizens in their daily lives, the EU allows companies producing textiles, food, hygiene and cleaning products, beverages, cars and car parts, basic technology components, and entertainment, among other items, to continue doing business as usual.
Following the attack, nearly all Western companies announced their refusal to collaborate with an invading country and their commitment to abandoning operations within the Russian Federation. Over the subsequent weeks and months, however, many explained that they could not leave overnight because they had commitments to suppliers and, above all, to their staff, who otherwise could end up unemployed at a time of great economic crisis.
Out of the total number of companies that announced their withdrawal, more than 200 followed through (by selling their business/assets). Almost five hundred of them interrupted their Russian commitments or left the country, and over 160 paused investments, according to data collected by the KSE Institute or the Rubusiness portal. According to other sources (Yale Chief Executive Leadership Institute 2022 / Jeffrey Sonnenfeld),3 over 1,000 companies have curtailed operations in Russia, but some remain.
Over time, this issue was diluted in the media, almost to the point of vanishing. A safety net for more than 20,000 workers hired by these companies also disappeared, although most eventually managed to keep their jobs through business transfers.
And therein lies a potential problem: the transfer of business from Russian entities to their partners and other strategies that have prevented a complete, unqualified departure from Russia. Some firms have maintained operations by doing business under a Cyrillic name; others have reached temporary sales agreements with local entrepreneurs, with a closed deal requiring the business to revert to its original owner within a set time and at a set price. In other cases, companies continue to sell in Russia through partners working outside the EU, e.g. in Turkey, Kazakhstan, and the United Arab Emirates, which buy Spanish materials and transport them to Moscow.
Can this manoeuvring be considered an honest rejection of Russia? Are these firms in danger of incurring reputational damage? The EU clarifies that products not on the prohibition list, can be imported and exported, and is aware of agreements that allow trade to continue in indirect ways, but there is no obligation to cease activity in the fields that are not indicated. Legal problems could arise, however, if European parties use suppliers, partners, or banks affected by the sanctions.
While there is no legal risk to continue selling authorised goods, companies that declared they would abandon Russia in February 2022 and did not follow through (or found a workaround) could expect to see an impact to their reputation. Public opinion may lean towards denouncing such declarations as a propaganda strategy that was later swept under the rug in favour of profits.
The right information, intelligence, and analysis can make these companies aware of the questionable nature of certain partners, identifying potential reputational, regulatory, and/or legal problems. Investigations, which involve open-source research, human intelligence gathering, analysis, and reporting, are crucial. To successfully navigate this intricate environment, it is vital to adopt a multidisciplinary approach that leverages expertise in business intelligence, forensic accounting, and fraud investigations.
Understanding the political exposure involved in doing business with organisations and people affected by the European sanctions (particularly those with proximity to the Kremlin or an unacceptable position towards Ukraine) is not only feasible, it’s crucial.
June 05, 2023
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