Secondary US & EU Sanctions against Russia: Practice and Compliance

 

August 8, 2024

BRACE Law Firm ©

 

Secondary sanctions and the practice of their use by US and European Union regulators in current realities represent one of the most critical issues of sanctions law. Secondary sanctions may be imposed against entities that violate a sanctions regime by engaging in transactions with persons subject to sanctions restrictions; therefore, they can potentially affect a broad range of individuals and entities.

As noted in legal literature, "virtually the entire toolkit of sanctions accumulated over recent decades has been applied against Russia. However, fundamentally new measures were also required. For instance, the G7 countries, the European Union, and Australia established a price cap on oil in December 2022, followed by petroleum products. Voluntary sanctions — where over 1,000 Western companies announced a full or partial exit from Russia due to government pressure and fear of reputational risks — were unprecedentedly massive and rapid in their response."[1]

The gradual replication of US secondary sanctions practice — measures to punish individuals or legal entities, including those in other jurisdictions, for violating existing sanctions regimes or maintaining ties with countries or persons already under sanctions — has become a vital phenomenon in recent years. The legal basis for such actions is the violation of US and European Union sanctions regimes against Russia. The number of such cases may grow in the future, demonstrating the heightened relevance of this article.

Types of Economic Sanctions and the Role of Secondary Sanctions

Before examining secondary sanctions in detail, let us consider the types of economic sanctions.

Economic sanctions are prohibitive and restrictive measures of a financial or trade nature imposed by the government of one country against other states, as well as individuals or legal entities.

A single state or an international coalition of countries initiates economic sanctions. Economic sanctions serve as a tool for powerful, advanced, and developed states or their associations to use against developing countries that are more dependent on international cooperation. The resulting asymmetry between the subject and the object ensures the high effectiveness of the sanctions.

The US uses economic sanctions most actively, which is explained by the dominant role of the US dollar in the global economy. The high share of the dollar in international settlements increases the country’s ability to identify violations of sanctions regimes both domestically and abroad, minimizing the likelihood of circumventing US sanctions.

For example, nearly 60% of global currency reserves are held in the US currency. This compels all players in the global market to comply with the US sanctions regime.

Economic sanctions can be divided into trade and financial sanctions. The former impose trade restrictions on the shipment of certain types of goods. Financial sanctions are imposed more quickly and easily, and the state regulates the financial market more effectively. This type of restriction sharply reduces capital inflow, deterring potential investors.

By their method of impact, sanctions are divided into blocking and sectoral sanctions.

Blocking sanctions prohibit any economic relations, leading to colossal costs for businesses due to their exclusion from the global financial system. This type of US sanction is recognized as the most severe measure. For example, under US blocking sanctions, individuals and organizations are added to the Specially Designated Nationals and Blocked Persons List (the "SDN List"), which implies the freezing of assets, loss of access to the US financial system, a ban on transactions in the interest of the sanctions object, and other restrictions.

Sectoral sanctions are targeted restrictions on operations with companies included in the Sectoral Sanctions Identifications List, which represent a strategic interest for the economic sectors of the sanctioned state. Sectoral sanctions allow for a selective impact directly on the target.

In the early 2000s, the primary targets of sanctions were the DPRK and Iran, due to nuclear testing and military buildup. The strengthening of restrictive measures against Iran's economy became one of the prerequisites for the country's change in course and the conclusion of the Joint Comprehensive Plan of Action (the "JCPOA"), which was agreed upon in 2015. The signing of the JCPOA resulted in the removal of most sanctions against Iran, including UN sanctions, as well as US and EU restrictive measures against the country’s oil and gas sector. Restrictive measures regarding arms supplies remained in effect (with some relaxations), as did EU and US sanctions related to allegations of human rights violations.[2]

However, in 2018, the US unilaterally withdrew from the JCPOA and resumed the sanctions. The US authorities fully restored the ban on the import of oil and petroleum products from Iran and refused to extend sanctions exemptions for several allies in 2019. Furthermore, sanctions were imposed on Iran's metallurgical sector, mechanical engineering, textile industry, and construction sector, as well as on any officials appointed by or associated with the country's top leadership. These sanctions remain in effect to date, despite the resumption of JCPOA negotiations. Businesses from the EU and several other countries were forced to cease or reduce their operations in Iran due to the risk of secondary sanctions or criminal and administrative prosecution by US authorities.

After 2014, Russia also became a target state for sanctions,[3] with harsh sectoral sanctions imposed on the financial, energy, defense, and mining and metallurgical industries of the Russian Federation. The sanctions included restrictions on providing loans and investment services (prohibition of transactions with new debt with a maturity of more than 90 days or shares of banks and oil and gas companies with state participation), a ban on the supply of arms, military equipment, dual-use technologies, and high-tech equipment.

Among Russian financial organizations, Sberbank, VTB Bank, Gazprombank, Rosselkhozbank, and VEB.RF, along with their subsidiaries, are on the US sectoral sanctions list. Restrictions on financing and other operations with new debt or new securities have been established for them. Banks on this list can continue to perform certain business operations; however, the status of being on a sanctions list for sectoral sanctions creates specific costs. Their position is complicated by the fact that, in addition to US restrictive measures, EU sectoral sanctions also apply to them. [4]

The main coordinating body for existing US sanctions regimes is the Office of Foreign Assets Control (the "OFAC"), which reports to the US Department of the Treasury.

Other sanctions include transport restrictions—a ban on access to US and EU airspace and maritime space for Russian aircraft and sea vessels—and visa bans for blocked persons.

Additionally, based on the subjects targeted by prohibitions and restrictions, sanctions are classified into primary and secondary sanctions.

Primary sanctions can be bilateral or multilateral, where the country or countries imposing sanctions restrict their trade, investment, or technological flows to or from the sanctioned country.

Secondary sanctions are measures that may be imposed against entities that violate a sanctions regime by conducting significant transactions with companies on sanctions lists. Let us examine them in more detail.

US Secondary Sanctions

The main feature of US economic sanctions is their extraterritoriality. The US extends its jurisdiction far beyond its territory through the tool of secondary sanctions, which are often imposed against third parties and countries. In the event of a violation, organizations will be forced to apply to US regulators to settle all claims from US authorities.

Extraterritoriality in the application of secondary sanctions ensures the extension of state jurisdiction to persons, property, or activities outside their territory. Even the countries applying sanctions recognize that the practice of extraterritoriality contradicts international law norms and that the concept of extraterritoriality as applied to sanctions raises questions regarding its compliance with international law, including international human rights law.[5]

Adhering to a broad geographical approach to the application of sanctions regulations, OFAC provides for several penalties for prohibited activities characterized by presumed ties to the United States, expressed in the presence of the following signs:

• A foreign branch of a US bank;
• US dollars as the primary currency of the transaction or any other operations in US dollars or processing through US financial institutions;
• US information technology infrastructure;
• Goods of US origin (in addition to US export controls).[6]

The mechanism for introducing secondary sanctions was established by the US federal law signed on August 2, 2017, the Countering America’s Adversaries Through Sanctions Act (the "CAATSA"). [7] This law extended the obligation to comply with the sanctions regime to "non-US persons" who cooperate with Russian legal entities and individuals subject to US sanctions.

As noted in legal literature, the US and the EU have long warned about the imposition of secondary sanctions against violating countries helping Russia circumvent sanctions. Abnormally increased trade flows between Russia and neighboring countries serve as a cause for concern. For example, comparing trade indicators for 2022 with the previous period, Kazakhstan's imports from the EU grew by 33.9%, and from the US by 40.5%, while exports from Kazakhstan to Russia grew by 25.1%. Trade indicators significantly increased in the cases of Armenia and Kyrgyzstan as well. [8]

As of the end of the first half of 2024, 494 companies from 57 countries fell under US secondary sanctions for ties with Russia. The primary reasons were the supply of electronics and industrial goods, as well as assistance in circumventing sanctions for persons already subject to them. "Among the top five jurisdictions by the number of companies subject to restrictions, three are 'friendly' and two are 'unfriendly'. Most companies belong to 'friendly' countries that did not impose restrictions against Moscow — 378 legal entities (76.51%). The remaining 116 affected legal entities (23.49%) are registered in 'unfriendly' states or states that imposed anti-Russian sanctions,"[9] which include all 27 EU member states, the UK, Switzerland, Norway, the US, Canada, Australia, Japan, South Korea, and several smaller countries.

The maximum number of such companies is registered in China (107), followed by the UAE (75). Another 66 companies are in Turkey, and 52 are in "unfriendly" Cyprus, which is an EU member. These four countries account for 300 cases, or 60.73%. Fifth place is held by "unfriendly" Switzerland (14). In the "unfriendly" UK, 12 companies fell under US secondary sanctions; in Estonia, 9; in Liechtenstein, 8; in France, 7; and in Germany, 6. [10]

The largest number of cases involving secondary sanctions (252, or 51.01%) is related to the supply to Russia of "high-priority electronic goods, industrial goods, and equipment under the export control of the US Treasury. Essentially, in this case, such restrictions are imposed for circumventing this export control. The second most popular ground is a company’s link to a previously blocked person, i.e., sanctions circumvention. In this case, it often concerns funds, trusts, holding companies, consulting and law firms, management companies, etc. There are 188 such persons, accounting for 38.05%. Third place is held by the provision of logistics services (21 cases, or 4.25%). This is followed by cooperation in the defense sphere, including the supply of unmanned systems and satellite imagery (21 cases, or 4.25%)."[11]

The imposition of secondary sanctions against a business entails significant adverse consequences. Persons subject to secondary sanctions may face enforcement measures ranging from varying degrees of restricted access to US markets to inclusion on the SDN List, which results in the blocking of all accounts in the US and a ban on cooperation with them for US persons. For companies engaged in foreign trade not connected to the US, the primary risks are the refusal of banks and other credit institutions to provide services, the inability to conduct dollar transactions, and the refusal of foreign counterparties to cooperate. [12]

The most dangerous threat now is secondary sanctions against banks. In December 2023, the US President signed an executive order, the main element of which is the US Treasury's authority to impose sanctions on foreign banks for assisting in transactions for sanctioned Russian persons or for facilitating the supply of specific materials and equipment to Russia's military-industrial complex. According to US officials, Russia "uses willing or unwitting financial intermediaries to circumvent restrictions and procure critical components, such as semiconductors, machine tools, chemical precursors, bearings, and optical systems. The US is introducing a tool for the first time that allows for the imposition of secondary sanctions on foreign financial institutions during this conflict". [13]

In third countries, several financial organizations in China, Turkey, and elsewhere are suspending payments precisely under the threat of secondary sanctions for transactions with sanctioned persons. For example, Chinese banks are suspending the opening of new accounts, awaiting an assessment of the situation's severity from their authorities.[14]

Foreign financial institutions include not only banks but also payment card operators, trust companies, insurers, securities brokers, exchanges, etc. To determine whether a transaction (or transactions) is significant, the US Treasury will look at factors such as the size and frequency of transactions, the level of management awareness, and the link between transactions and sanctioned persons.

Currently, the sectors in which a sanctioned individual or legal entity must operate include technology, defense, construction, aerospace, and manufacturing. These five sectors (the list may be expanded in the future) constitute Russia's "military-industrial complex" for the purposes of the executive order.

Notably, during the period CAATSA has been in effect, not a single foreign financial institution has fallen under its action.

The list of goods that foreign banks must not help supply to Russian territory includes:

• Certain machine tools (computer numerical control machines, additive manufacturing machines) and semiconductor manufacturing equipment;
• Certain semiconductor materials (silicon wafers, photoresist materials, substrates for printed circuit boards);
• Test equipment for microelectronics (oscilloscopes, signal generators, spectrum analyzers);
• Certain fuels and chemical precursors for fuel and explosives (nitrocellulose, smokeless powder, RDX, HMX);
• Certain lubricants (turbine oil);
• Bearings (high-precision, angular contact);
• Certain advanced optical systems (thermal imaging sights, thermal imaging devices);
• Certain navigation instruments (inertial navigation systems, inertial measurement units, fiber-optic gyroscopes).[15]

OFAC may impose either full blocking sanctions (adding to the SDN List) or a ban (strict restrictions) on correspondent accounts in US banks against violating banks. However, no such bank has been officially identified yet. The US hopes that "jurisdictions and financial institutions will take action to cease prohibited behavior long before it becomes necessary to use this tool, because the choice between selling a modest amount of goods to the Russian military-industrial complex and maintaining connection to the US financial system is obvious for almost every bank in the world". [16]

Transactions in any currency, not necessarily in dollars, can serve as grounds for sanctions. The US Treasury also published a memorandum for banks, recommending, among other things, selectively requesting confirmations from clients that they do not operate in Russian economic sectors classified as the military-industrial complex and are not engaged in supplying the specified goods (machine tools, bearings, etc.) to Russia.

Previously, the US included the "knowingly" criterion (consciously, intentionally) in the requirements for imposing secondary sanctions, meaning the bank or company must intentionally commit a prohibited transaction. This concept is absent from the new US Presidential Executive Order and OFAC explanatory materials. Banks must make every effort to avoid becoming "unwitting" helpers in circumventing sanctions.

Despite the apparent complexity and intricacy of sanctions policy, the US is guided by several categories when introducing restrictive measures.

First, secondary sanctions (inclusion on the SDN List) may apply if the fact of working with an already blocked person or attempting to circumvent sanctions is identified. In this case, a link to US jurisdiction is not mandatory. For example, the Swiss company TNK Trading International, owned by Rosneft, fell under secondary sanctions in 2020 via inclusion on the SDN List for operating in the Venezuelan oil sector. As a result, US companies and citizens can no longer conduct business with the sanctioned company, and its assets in the US are blocked.[17]

This means secondary sanctions deprive companies of access to the US market, i.e., access to goods and technologies supplied from the US. For instance, in June 2022, five Chinese companies were sanctioned by the US for supplying goods to the Russian military-industrial complex.

Second, companies face heavy monetary fines if payment is made in US dollars involving persons under sanctions. Payment in US currency is an indirect link to US jurisdiction, allowing authorities to impose financial penalties for violating the sanctions regime.

OFAC determines the amount of the fine based on several factors. "The following may contribute to a reduction in the fine: voluntary disclosure of the violation, lack of sanctions history (no OFAC investigation of sanctions violations by the company in the last five years), unintentional nature of the violation, small size of the organization, 'non-egregious' nature of the violations, existence of an internal compliance program, cooperation with OFAC in the investigation, and corrective measures taken by the company. OFAC notes that, as a rule, the fine for voluntarily disclosed violations will be at least half that for undisclosed ones."[18]

An example is the case of the Chinese company ZTE, which US authorities accused of "supplying equipment with US components to Iran without appropriate authorization,"as well as circumventing export control regimes. ZTE was forced to stop working with US suppliers in 2018, as its access to the US market was banned. "Ultimately, the Chinese company paid a $1 billion fine for the right to return to the US market. Additionally, ZTE committed to changing its board of directors and transferring $400 million to a third party as a guarantee that the company would not violate the US sanctions regime in the future". [19]

Third, individuals face criminal prosecution if the committed crime is directly or indirectly linked to US jurisdiction, with intent being the main ground.

In 2019, Russian citizen Oleg Nikitin was arrested in Georgia (the state) on charges of violating the US sanctions regime against Russia. According to the US Department of Justice, Nikitin received an order from the Russian government to purchase a turbine in the US for deep-water drilling in the Arctic, even though such equipment supplies have been prohibited under sectoral sanctions since 2014. In his scheme, he used several intermediaries to hide information about the end-user from the manufacturer. Consequently, the entrepreneur was sentenced to 28 months in prison and a $1 million fine.[20]

European Union Secondary Sanctions

In June 2023, EU regulations (the so-called 11th sanctions package) were adopted, in which the Council of the EU essentially granted itself the power to impose secondary sanctions — sanctions against non-European companies helping to circumvent existing trade embargos against Russia. Additionally, for the first time, the EU granted itself the right to restrict trade with third countries through whose mediation sanctioned European goods systematically enter Russia.

The procedure approved by the Council of the EU for implementing restrictions against third countries is as follows:

• The EU, through "diplomatic engagement" and enhanced technical assistance to third countries that essentially re-export goods to Russia, will attempt to resolve the issue of redirecting prohibited goods;
• If these efforts do not yield the "expected results", the EU will have the right to apply individual restrictions against companies, organizations, or individuals from third countries that help Russia obtain sanctioned European goods (these may include financial sanctions, including asset freezes, and for individuals, visa bans);
• After introducing such targeted measures, the EU must again engage in "constructive dialogue" with the authorities of the affected country to prevent further violations of the sanctions regime against Russia through that country's territory;
• Finally, if this approach does not lead to the cessation of trade sanctions circumvention through structures from a specific country, the EU will be entitled, as a "last resort," to restrict the supply to that country of dual-use goods and technologies or goods that could contribute to enhancing Russia's military, technological, or industrial potential or the development of the Russian defense and security sector (the range of such goods is defined by EU sanctions lists).[21]

Should the Council of the EU decide to resort to the "last resort," specific commodity items from among those already prohibited for export to Russia that cannot be exported to a specific third country will be listed in a separate annex to the sanctions regulation.

The European Commission, in response to questions about the 11th sanctions package, asserts that the EU "does not intend to impose sanctions against third countries or their governments." "The list of goods and technologies affected by this measure prohibiting supplies to a third country will be utilized only if no other solution can be found. This implies close interaction and dialogue with each of the affected third countries," the Commission states. It adds that despite the possibility of targeted sanctions against "foreign operators," Brussels "is not asking operators outside European jurisdiction to comply with EU sanctions."[22]

Under the 12th sanctions package, EU exporters have been required since March 20, 2024, to include the so-called "no-Russia clause" (the "Clause") in contracts for the sale, supply, transfer, or export of certain EU goods to third countries (excluding EU partner states).

The Clause must prohibit the re-export to Russia or for use in Russia of the following goods or products (if applicable to the relevant contract):

• Goods and technologies applicable for use in the aviation or space industry;
• Jet fuel and fuel additives;
• Firearms and other weapons;
• High-priority goods;
• Firearms and ammunition.

The requirement is aimed at restricting the re-export of the above goods to Russia through third countries, such as member states of the Eurasian Economic Union.

The Clause must not be merely declaratory but must be accompanied by appropriate reasonable legal remedies in case of its violation. Additionally, if exporters become aware of a violation of the Clause, they must notify the competent authority of the EU member state as soon as they become aware of the violation.

For contracts concluded before December 19, 2023, the requirement to include the Clause will not apply until December 20, 2024, or until the expiration of such contracts, whichever comes first.[23]

Under the 13th sanctions package, export restrictions were imposed on 27 organizations based on allegations of supporting Russia's military-industrial complex. "They will be subject to tighter export restrictions regarding dual-use goods and technologies." Some of the organizations that the EU claims were involved in circumventing trade restrictions are located in third countries, including: Guangzhou Ausay Technology Co Limited (China); Shenzhen Biguang Trading Co. Ltd (China); Yilufa Electronics Ltd (China); RG Solutions Limited (Hong Kong, China); Si2 Microsystems Pvt Ltd (India); Yildiz Çip Teknoloji Elektronik Elektrik Bilgisayar Malzemeleri Ticaret Sanayi Limited Sirketi (Turkey); Conex Doo Beograd-Stari Grad (Serbia); Thai IT Hardware Co., Ltd (Thailand); TOO Elem Group (Kazakhstan); and Euro Asia Cargo (Private) Ltd. (Sri Lanka). Seventeen of the companies subject to restrictions are Russian. [24]

On June 24, 2024, regulations were published formalizing the 14th package of EU restrictive measures (sanctions).

Most major Russian banks have been disconnected from the SWIFT system, and the Bank of Russia began actively developing a functionally similar System for Transfer of Financial Messages (the "SPFS"), including outside Russia. Since June 25, 2024, EU individuals or legal entities not operating in Russia are prohibited from connecting to the SPFS or other similar systems developed by the Bank of Russia. These persons are also prohibited from conducting transactions with entities established outside Russia that use the SPFS or similar systems. However, they are not prohibited from interacting with Russian companies using the SPFS, provided the EU persons themselves do not connect to the SPFS. In practice, these restrictions may seriously limit the adoption of the SPFS among banks in third countries due to the risk of EU sanctions.

EU individuals and legal entities are also prohibited from conducting any transactions with financial and credit institutions established outside the European Union, as well as organizations providing services in the field of crypto-assets, if these organizations facilitate transactions for the sale, supply, transfer, and/or export to Russia of dual-use and military goods and technologies.

The EU introduced several additional measures aimed at ensuring compliance with EU sanctions by persons from third countries. For example, EU persons are required to make every possible effort to ensure that their subsidiaries established outside the EU do not participate in activities that violate established restrictive measures. Furthermore, EU persons who sell, supply, transfer, or export military goods and technologies are required, as of December 26, 2024, to:

• Take measures to identify and assess the risks of exporting such goods or technologies to Russia or for use in Russia, and ensure that these risk assessments are documented and constantly updated;
• Implement appropriate policies, control measures, and procedures to reduce and effectively manage the risks of exporting such goods or technologies to Russia or for use in Russia;
• Ensure that their subsidiaries established outside the EU that also engage in this activity take similar measures.

Finally, EU persons who sell or otherwise transfer intellectual property rights or industrial know-how for the production of the goods and technologies mentioned above are required, as of December 26, 2024, to include the "no-Russia clause," introduced under the 12th EU sanctions package, in contracts with counterparties.

This prohibition does not apply to the performance of contracts concluded before June 25, 2024, until June 26, 2025, or until their expiration (whichever comes first).

Sanctions Compliance

Under current circumstances, even for bona fide entrepreneurs, there is a risk of violating the sanctions regime when conducting transactions without a sufficient degree of due diligence. To avoid such risks, it is necessary to check for signs that a counterparty may be included in sanctions lists when concluding transactions.

Sanctions lists from different countries can be vague and non-formalized; often, they are maintained solely in PDF files and published on departmental websites. To conduct a comprehensive check, one must manually search for each counterparty in text lists on each relevant department's website, which is time-consuming. Additionally, lists are updated constantly, but not cyclically. Sanctions measures also change. Even if a counterparty appears "clean" today, it does not mean everything will be in order tomorrow or that you will continue to interact with them without issues.[25]

Lists often merely provide the surname, first name, and patronymic of an individual or the name of a legal entity without identifying information. This can lead to mistakes with namesakes or companies with identical names, resulting in a transaction with the wrong person and subsequent secondary sanctions. The lists themselves are annexes to sub-legislative acts. Sanctions measures are specified in the act. With many counterparties, one must constantly search for matches between applied measures and verified counterparties.[26]

In addition to direct sanctions imposed by regulators, there is the so-called "50% Rule." This rule was introduced by OFAC. It states that if a subsidiary is 50% or more directly or indirectly owned by a parent company or individual under direct sanctions, then the subsidiary automatically falls under the same restrictions.

The European Commission provided a clarification on the action of sanctions: "It is necessary to look at aggregate ownership of the company. If one person on the sanctions list owns 30% of a company, and another sanctioned person owns 25%, then such a company must be considered as being under joint ownership and joint control of sanctioned persons. Accordingly, transactions with such a company may be considered an indirect provision of assets and economic resources to persons on the sanctions list."[27]

For businesses, the "50% Rule" creates significant problems: when checking a counterparty in a sanctions list, the company may not find them there, yet restrictions still apply. For businesses, this is fraught with secondary sanctions and their own inclusion on sanctions lists.

A presumed link between companies does not impose sanctions restrictions, but such information is important for some clients as it serves as a trigger for additional control. For instance, if a counterparty's total share of ownership by a sanctioned person is less than but close to 50%, the verifying company might consider whether to take on the risks, as even a minor change in this ownership percentage would lead to secondary sanctions.[28]

In recent years, a practice of refusal by European banks to service accounts due to a client’s link to persons on sanctions lists has emerged. Furthermore, this practice was supported specifically by English, Finnish, and Swiss courts, which accepted the threat of secondary sanctions as a legitimate argument for a party to refuse performance of obligations.

Given established practice, lawyers must not only check whether their counterparty is included in relevant lists but also anticipate situations where US or EU state bodies might consider the company to be in violation of sanctions legislation.

To reduce future sanctions risks, protection mechanisms against sanctions risks should be included in contracts. These can be structured as representations of circumstances, whereby the counterparty confirms that it does not interact with sanctioned persons and does not plan such interaction in the future, and does not enter into prohibited transactions in sanctioned economic sectors. The list of representations is unlimited. In addition to representations of circumstances, a force majeure clause should be included in the contract, which, among other things, will imply sanctions by foreign states. Collectively, these mechanisms will partially mitigate sanctions risks. [29]

In the event of an inability to properly perform an obligation on time, it is necessary to notify the counterparty and propose settling disputed issues in the contract by concluding a supplemental agreement. In the event of a dispute, a court will view such actions by a party to the contract as bona fide and aimed at minimizing losses for the parties. For example, if it concerns a contract for the supply of relevant goods, then in the event of a delay in supplies:

• The counterparty should be offered a postponement of the delivery deadline or a suspension of the contract for an acceptable period, with a condition to waive the accrual of penalties for the period of delay or suspension;
• Alternatively, it could be proposed to purchase a similar product in another market if the product is of foreign origin;
• Or change the price of the product due to the impossibility of importing it into Russia. [30]

When conducting a risk assessment, the specifics of local judicial practice must be considered, as local courts may not recognize the risk of secondary sanctions as a legitimate ground for one party to refuse performance. This was done, for instance, by a Dutch court, noting that the extraterritorial effect of US sanctions legislation is not recognized by the EU, and refusing the plaintiff's recognition of force majeure circumstances. Obviously, the likelihood of a similar outcome is high in Russia as well; accordingly, depending on business interests, arbitration functioning in a jurisdiction whose law provides the best protection for such interests may be chosen as a dispute resolution mechanism. [31]

Over years of active sanctions pressure, Russia has been able to reorient its economic ties toward the countries of the global East and South (China, India, Iran, the UAE, etc.). One way to hinder such transactions is through secondary sanctions against organizations in friendly countries, as well as banks that conduct financial transactions for these deals. The mere threat of such sanctions is perceived more than seriously by foreign partners. This has already led to a constant increase in requirements for Russian clients and a payment crisis. The costs for Russian companies and banks are rising, which directly affects the price of goods and services in Russia.

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References

[1] Blinova, Yu.V. On the Concept and Types of International Sanctions. Russian-Asian Legal Journal, No. 1, 2024.

[2] Timofeev, I.N., Sokolshchik, Yu.S., Morozov, V.A. Sanctions against Iran: Lessons for Russia in New International Conditions. Bulletin of St. Petersburg State University. International Relations, 2022, Vol. 15, No. 4.

[3] Krylova, L.V. Sanctions as a New Reality of the World Economy. Journal Sanctions as a New Reality of the World Economy, 2024, No. 2.

[4] Timoeva, Yu.S. Sanctions and Enforcement Measures of the US Against Companies in the Financial Sector. Financial Journal, No. 4, 2021.

[5] Report of the Special Rapporteur on the Negative Impact of Unilateral Coercive Measures on the Enjoyment of Human Rights at the 78th Session of the UN General Assembly.

[6] Ibid.

[7] U.S. Government Publishing Office.

[8] Sanzhar Kaldarov. Secondary Sanctions on Kazakhstan — What are the Risks? Halyk Finance Analytical Center.

[9] Ilya Lakstygal. July 26, 2024. Since 2022, nearly 500 firms have been affected by US secondary sanctions for ties with Russia. Vedomosti Portal.

[10] Ibid.

[11] Ibid.

[12] Sazonov, V. Why People Won't Do Business with You: US Secondary Sanctions. "Pravo.ru" Blog.

[13] Ivan Tkachev. December 24, 2023. Secondary Sanctions received financial and raw material feeding. "RBC" Portal.

[14] Ilya Lakstygal. July 26, 2024. Since 2022, nearly 500 firms have been affected by US secondary sanctions for ties with Russia. Vedomosti Portal.

[15] What does determination of December 22, 2023, “Determination Pursuant to Section 11(a)(ii) of Executive Order (E.O. 14024)” (Russia Critical Items Determination) do? OFAC Website.

[16] Ivan Tkachev. December 24, 2023. Secondary Sanctions received financial and raw material feeding. "RBC" Website.

[17] August 11, 2022. Secondary Sanctions: What they are, examples, and risks for Uzbekistan. "SPOT" Website.

[18] Timoeva, Yu.S. Sanctions and Enforcement Measures of the US Against Companies in the Financial Sector. Financial Journal, No. 4, 2021.

[19] August 11, 2022. Secondary Sanctions: What they are, examples, and risks for Uzbekistan. SPOT Website.

[20] Ibid.

[21] Ivan Tkachev. June 23, 2023. 11th EU sanctions package. What is important to know? "RBC" Website.

[22] Ibid

[23] Georgy Alexandrov, Semyon Demchenko, Ivan Sezin. December 20, 2023. EU adopted 12th sanctions package against Russia. DENUO Website.

[24] Ivan Tkachev. February 23, 2024. European Union introduced 13th sanctions package against Russia. RBC Website.

[25] Sazonov, V. Why People Won't Do Business with You: US Secondary Sanctions. "Pravo.ru" Blog.

[26] Ibid.

[27] EU expanded sanctions against Russia with the "50% rule": companies with several sanctioned shareholders are now at risk of asset freezes. March 28, 2022. RBC Website.

[28] How to build sanctions compliance in a company. July 19, 2023. Kontur.Journal Website.

[29] Ikaeva, K. Risks of Companies During Sanctions: Recommendations for Risk Management. Journal Joint-Stock Company, No. 05, 2022.

[30] Ibid.

[31] Sazonov, V. Why People Won't Do Business with You: US Secondary Sanctions. Pravo.ru Blog.