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Loopholes in the Russian-imposed sanctions

October 2014

On the 6th of August 2014 Russia issued its response to the EU sanctions in the form of an embargo on certain Western foods. The ban was imposed through Decree No. 560 “On Application of Certain Special Economic Measures to Guarantee Security of the Russian Federation”, signed into law by Russia's President Vladimir Putin. In practice, however, the relevant provisions have not proven as robust against circumvention as they may have looked at first sight. In this edition of our Newsletter we will summarise the content of the Russian sanctions, and pinpoint any possible room for manoeuvre.

I. Content of the Russian-imposed sanctions

The import of agricultural products, listed by specific product-groups, into Russia is henceforth prohibited if their land of origin is the USA, the EU, Canada, Australia, or Norway.

In particular, the following products are subject to the import ban:

  • Beef
  • Pork
  • Poultry meat and by-products
  • Salted meat, dried meat, smoked meat
  • Fish and shellfish, mussels, and other invertebrate animals
  • Milk and dairy products
  • Vegetables, edible roots, and tuber crops
  • Fruits and nuts
  • Sausages and similar products
  • Processed products, including cheese and cottage cheese based on vegetable oil

The ban has been initially imposed for one year. However, if there are any changes in the political or economic situation the Russian government has reserved the right to change the duration or the content of the imposed measures. Some changes regarding the exclusion of certain products from the list have already been made.

The Russian-imposed sanctions are having a significant impact on retail businesses. The exporters of agricultural products are especially affected. The restrictions are also having an effect on the processing of agricultural products like sausages, marmalade, juice and carbonated beverages, muesli, and potato crisps in Russia. However, unlike with the EU-imposed sanctions, the Russian measures leave room for manoeuvre.

II. Possible Room for Manoeuvre

1. Re-designating the land of origin

The defining criterion for the import ban is the land of origin. This leaves open the possibility of processing, for example, a German product in a non-sanctioned country in a way that that country then becomes the land of origin. Local provisions are decisive in this regard: in the CIS or the Eurasian Economic Union, a sufficient degree of processing is necessary. The goods have to be significantly altered, meaning that simply repackaging the goods will be insufficient to qualify as re-designation.

Processing the product in Belarus and achieving re-designation there, for instance, would legalize the supply of banned products to the Russian market. Such measures have already been put into practice. For example, the import of Norwegian fish to Belarus has tripled since August 2014. Following processing in Belarus – often using processing lines belonging to Russian companies – the fish is awarded a new International Tariff Code which allows for its onward legal transportation into Russia.

2. Delocalisation of production

If the land of origin of the product is a non-sanctioned country, the import ban doesn't apply. A German producer with production facilities in Turkey can therefore reroute German deliveries through Turkey. A partial or full delocalisation of production into a non-sanctioned country or cooperation with a local partner in a non-sanctioned country can also be considered.

3. Lack of systematic border control within the Customs Union.

Remarkably, the Customs Union, of which Russia is a member, has not chosen to collectively join Russia's sanctions regime. Therefore, sanctioned products can cross the external borders of the Union, for example in Belarus or Kazakhstan. The Belarusian recipient can deliver goods onward into Russia without being subject to systematic border control.

However, officially there is an understanding between Russia, Belarus and Kazakhstan that no sanctioned goods should be delivered to Russia from other member countries. Russia has barely introduced any special border controls so far. Delivering sanctioned goods from Belarus into Russia would be a breach of the sanctions, though this remains difficult for Russian officials to control.

III. Conclusion

The sanctions imposed by Russia negatively affect many German companies. Nevertheless, due to the fact that the Russian-imposed sanctions are designed in a different way to the EU or US-imposed sanctions, and they do not contain means of protection against manipulation, various indirect routes, especially through Belarus, still permit the import of sanctioned goods into Russia. Together with our Belarussian colleagues in our partner firm Raidla Lejins Norcus in Minsk, CMS is able to offer you the best possible solutions to your business needs on this matter.

Contact

Dr. Thomas Heidemann
Partner

CMS, Russia
Presnenskaya Nab. 10, block C
123112 Moscow | Russia

T +7 495 786 4049
F +7 495 786 4001
[email protected]

CMS Hasche Sigle
Breite Strasse 3
40213 Duesseldorf | Germany

T +49 211 4934 430
F +49 211 4934 580
[email protected]

Authors

Heidemann Thomas
Dr. Thomas Heidemann
Partner
Duesseldorf