Risky Russia

The US Departments of State, Treasury, Commerce, and Labor recently issued a business advisory warning firms and financial institutions about the serious legal, financial, and reputational risks of doing business in Russia. According to the State Department’s assessment, Russia’s kleptocratic environment undermines fair competition and the rule of law, exposing businesses to the risk of extortion, appropriation of assets, and US law enforcement action. Although rigorous due diligence can somewhat mitigate those risks, substantial reputational and financial damage is likely to remain. 

Sanctions Risk 

The United States and its partners since Russia’s invasion of Crimea in 2014—and particularly since its full-scale attack on Ukraine in 2022—have used sanctions to limit Russia’s access to resources and hinder its war efforts. Thousands of individuals and entities have been designated, services and activities such as legal consultations and new investments in Russia have been prohibited, the Crimea, Donetsk, and Luhansk regions of Ukraine that were illegally annexed by Russia have been embargoed (the EU and the UK have also imposed comprehensive geographic prohibitions on Kherson and Zaporizhzhia), and stringent trade controls have been implemented to limit Russia’s ability to equip its military. Firms and financial institutions must understand their sanctions risks or face possible enforcement actions or financial penalties. 

• The Justice Department, marking the second anniversary of Russia’s war, took several actions to target Russian sanctions evasion in the United States, indicting several Russian oligarchs and their facilitators for illegally transacting in the United States. Task Force KleptoCapture during the past two years restrained, seized, and obtained judgments to forfeit nearly $700 million in assets from Russian enablers and charged more than 70 individuals for violating international sanctions and export controls levied against Russia, according to Deputy Attorney General Lisa Monaco.  
• California-based virtual currency exchange, CoinList Markets LLC, in December settled with the US Treasury’s Office of Foreign Assets Control (OFAC) for $1.2 million because it processed nearly 1000 transactions on behalf of users in the embargoed Ukrainian region of Crimea. 
• US President Biden in late December issued Executive Order 14114 authorizing OFAC to impose secondary sanctions on foreign financial institutions that facilitate significant transactions relating to Russia’s military-industrial base. 

Strategic Trade Controls 

The Commerce Department’s Bureau of Industry and Security (BIS) since the beginning of Russia’s invasion has implemented stringent trade controls aimed at restricting Russia’s access to equipment and technologies that help it conduct its war against Ukraine. The joint business advisory warns that the export, re-export, or transfer to Russia or Belarus of thousands of categories of dual-use goods, technologies, machinery, parts, equipment, and luxury goods is tightly restricted. It also flags several joint alerts, advisories, and guidance documents to help stakeholders comply with export controls related to Russia and Belarus. 

Money Laundering and Corruption 

Businesses that transact in the Russian market must be aware of the risk of money laundering and other financial crimes, including the misappropriation of assets and bribery. The advisory encourages firms and financial institutions with proximity to the Russian market to conduct enhanced due diligence, ensuring that they comply with relevant laws, such as the Foreign Corrupt Practices Act, to mitigate the risk of legal liability. 

Risk of Being Implicated in Violations of International Law 

Businesses and individuals transacting in Russia or any of the illegally occupied territories in Ukraine risk being implicated in human rights abuses, war crimes, and crimes against humanity. The advisory reminds stakeholders that the UN General Assembly has condemned Russia’s invasion as a violation of international law, and that investigations conducted by the UN and prominent media outlets have documented multiple violations, including alleged genocide, the kidnapping and “russification” of Ukrainian children, rape, torture, and murder. 

• The International Criminal Court in March 2023 issued arrest warrants against Russian president Putin and his Commissioner for Children’s Rights Maria Lvova-Belova for the unlawful transfer of children from occupied areas of Ukraine to Russia. 
• The UN in October published a report on the human rights violations in Ukraine since Russia’s attack, including  missile attacks against residential areas and vital infrastructure and grain and agricultural facilities, the destruction of the Khakovka dam, widespread torture of civilians and POWs, and other horrors. 

Russia has also committed human rights violations at home, intensifying efforts to eradicate dissent about the war in Ukraine or the Kremlin’s domestic policies, according to Human Rights Watch. Russian businesses are known for using prison labor and forced labor used as punishment for dissent, and the Russian government has prohibited all expression related to LGBTQ issues. The UN’s Special Rapporteur for Russia, Mariana Katzarova, in September cited almost 200 sources detailing the deterioration of civil and political rights in Russia and highlighted the lack of judicial independence and the right to a fair trial in the country. 

• After the death of anticorruption crusader Alexey Navalny in a Russian penal colony this month, Russian authorities have been arresting those attending vigils in his memory, and its censorship agency, Roskomnadzor, has been deleting articles with Navalny tags. Russian prison colony officials have been sanctioned by the West for their part in Navalny’s death. 
• Russian authorities in late February sought to imprison veteran 70-year-old human rights advocate Oleg Orlov to nearly three years for speaking out against the war in Ukraine. The prosecution is demanding that Orlov be convicted of repeatedly discrediting the Russian army. 
• The failed mutiny by the Wagner mercenary group last year prompted the Kremlin to admit that the group, known for serious human rights abuses in its overseas operations and for recruiting Russian convicts to fight in Ukraine in exchange for amnesty, was fully funded from Russia’s budget. 

• Opposition politician Ilya Yashin in early December 2022 was convicted for being a vocal critic of the Kremlin and sentenced to more than eight years in prison, with a ban on using the Internet for an additional four years. In addition, Moscow has used the COVID epidemic to ban anti-war protest in the country. 

Transacting with Russian entities that are known for engaging in human rights violations, as well as those that support Russia’s military, enabling further human rights violations and bloodshed in Ukraine, can damage the reputation of firms and financial institutions that continue to operate in the country.  

Seizure of Assets 

The joint business advisory also reminds companies that their exit could be considered by Russia as “unfriendly” and could result in legal hurdles and outright confiscation of assets. Media reports in September said that Russia is imposing increasing costs for foreign banks wanting to exit the Russian market, demanding they first unfreeze Russian assets. Russia last year also seized control of the Russian subsidiaries of French yogurt company Danone and Danish beer company Carlsberg, after Moscow introduced new legislation allowing it to seize the assets of firms from “unfriendly” countries. The companies are only authorized to sell their Russian assets for a maximum of half their value and must make a 5-10 percent  “voluntary contribution” to Russia’s war chest of the sale price. 

The business advisory details other risks companies transacting with Russian entities face and recommends extra research to comply with OFAC sanctions, the Bank Secrecy Act, and other pertinent regulations.