Do you need to see clearly what sanctions mean and how they affect business with Russia? Find out the differences between US, EU and Swiss sanctions toward Russia and how the scope of sanctions concretely impacts the Russian economy as well as trade and export opportunities with Western countries:
Concretely, which activities are hit ?
Since 2014, Russia has been subject to sanctions from the USA and the European Union mainly, including restrictive and economic measures. These sanctions targeted sectoral cooperation and exchanges with Russia, namely the financial, military, technology and energy sectors.
Financial sanctions restrict the access of Russia to European capital markets and forbid individuals and companies to trade financial stocks emitted by a bank whose majority shareholder is the Russian State. It also prevents Russia to finance important projects that require long term investments, such as energy-related projects in the oil and gas industry.
Military sanctions are an embargo on the import and export of military equipment or any equipment or technology that could be used for military purposes. It includes every dual-use equipment, which is designed for another purpose but could be used by military end-users.
The export of technology and energy related equipment is subject to EU States’ veto. Export licenses are denied for equipment designated for the exploration and production of deep-water oil, shale gas and such activities in the Arctic. It is also forbidden to sell any equipment to Russia if the equipment is to be sent to Crimea, as the EU forbids any commercial relation with the peninsula.
The restrictive measures concern visa bans and asset freezes that apply to 164 individuals and 44 organizations that the EU considers responsible or having supported or provided support to Russian decision makers around the conflict in Ukraine, as well as to 13 entities that were confiscated in Ukraine by Russia or whose ownership was transferred to Russia. These measures prohibit businesses to have any commercial activity with people under sanctions, including their companies.
What do sanctions really mean for business?
Sanctions on Russian individuals also extend to the companies they own.
And forbid US and EU citizens to trade with them. Among the 164 individuals under sanctions, there are business owners whose activities are directly impacted by restrictions induced by sanctions.
Rusal, the world 1st exporter of aluminum, could have been driven out of the market
because his owner, Oleg Deripaska, fell under sanctions. He was forced to reduce his stake in the company’s capital, as well as in the parent company En+ and power company EuroSibEnergo, in order to free them from the sanctions. To keep control over the company, shares might have been transferred to other stakeholders who will represent Oleg Deripaska’s interest, even though the American Treasury required proofs that he severed his control on his companies and that the chairman resigned.
Private companies in Switzerland got sanctioned under the same scheme.
When Viktor Vekselberg was added to the sanctions list, the swiss company Sulzer in which he had majority stakes faced the same restriction but could avoid sanctions by reducing his share in the company below 50%. He is also the majority owner of Oerlikon (high-tech industry) and Schmolz + Bickenbach (steel products) with a stake below 50%, thus they were not hit by sanctions but seemed very concerned.
The defense sector was also influenced by US sanctions.
Igor Rotenberg reduced his major share of about 40% down to 20% at Tula Cartridge Plant just before being sanctioned, to protect this business from sanctions. The company produces cartridges for firing training, self-defense, sport and hunting and realizes 50% of its turnover in North and South America, European Union, Australia, Middle East and CIS countries.
European businesses are increasingly producing in Russia.
Through its import substitution policy, Russia advantages its domestic companies over foreign ones in public tenders. In addition, imports became more expensive because the ruble weakened, which at the same time supports the competitivity of the Russian production for exports.
How is Russia supporting its domestic industry?
Import substitution is a governmental program aimed at reindustrializing the country.
As Russia implemented counter-sanctions, it opened great opportunities to companies active on the domestic market to increase sales and develop production capacities. Initially implemented in the automotive industry in the early 2000’s, the policy of import substitution aims at reducing the share of imported components and equipment for the production of finished products in Russia.
The introduction of sanctions in 2014 outlined the lack of Russian producers
and stressed out the fact that Russia lags behind in terms of technologies and production capacities. Also called „Localization“, this policy has gained traction over recent years and currently spreads across 20 industries such as agriculture, aerospace and MedTech among others.
The Russian government implements its policy using the stick and carrot strategy:
on the one hand, companies investing in production capacities are strongly supported with subsidies, tax holidays, priority in state procurement and other perks. On the other hand, exporters face several trade barriers such as certification, taxes and discrimination in public tenders. For example, new procurement laws stipulate that:
- foreign-made goods will be rejected if at least two Russian solutions are on offer (third odd one out rule) for medical equipment and pharmaceutical products
- all Russian made pharmaceutical products are awarded a 15% pricing preference in the framework of public tenders. Winning bidders offering foreign made products must grant an additional 15% discount on the price of these goods
In the pharmaceutical industry, the target is to localize 90% of the production
of strategic drugs by 2020, which forced many pharmaceutical corporations to localize part of their production in order to avoid being excluded from public tenders. Big names like Novartis, Pfizer, Takeda, Roche, Bayer or Merck over the last years either opened their own Russian plant or started producing with local partners.
Companies exporting to Russia will have to localize part of their production there.
Or will be forced out by competitors who did. As foreign companies localize their production in Russia and domestic companies grow and modernize their assets, demand rises for production equipment, high-tech components, goods and services from developed economies. This demand is supported by large and well-funded federal programs aimed at modernizing the Russian industry, for instance, in the machine-tool, MedTech or automotive industries.
European SMEs with niche products still have plenty of business opportunities ahead.
Russia will not be able to localize and manufacture everything on its own. For instance, major automotive manufacturers currently cannot find enough local suppliers and are still sourcing an important part of high-tech components from abroad. In the machine-tool industry, Russian producers are still lagging behind European competitors despite substantial support from the State. The same goes in the MedTech industry, in agriculture with production and food-processing equipment, etc.
The Russian government implemented different instruments to attract foreign investments, such as Special Economic Zones with a special legal status and preferential tax regimes according to the local activity: SEZ specialized in industry, in technology development, in logistics or in tourism.
What is Switzerland’s position toward Russia?
„Switzerland adopted measures to prevent Russia from bypassing EU sanctions“
In reality, it repeated most of the sanctions taken by the EU, with a three months delay though. Switzerland also suspended negotiations concerning the free-trade agreement with the previous custom union (Russia, Belorussia, Kazakhstan) right after the sanctions were imposed in 2014. Whereas a few swiss banks decided to withdraw from commercial relations with Russia as a precaution, the most active banks in the oil trade industry (often foreign banks with subsidiaries in Switzerland) decided to abide by stricter sanctions from the EU according to their corporate policy.
Swiss exports to Russia decreased from 3.5 to 2 billion CHF from 2014 to 2018.
According to the Swiss Federal Council, the diminution of trade between is mainly due to the economic crisis, lower oil revenues for Russia, a devaluated ruble plus a decreasing consumption, rather than a direct consequence of economic sanctions. For example, the export of Swiss food products concerned by the Russian embargo amounted to 200 million CHF per year from 2012 to 2014 and decreased only by 2% from September 2014 to December 2017.
Russian diplomats understand the Swiss position.
And did not stop any diplomatic relations as they want to minimize the impact of sanctions on business. Switzerland, unlike the EU and US, did not impose any export ban in the energy sector. So-called „dual-use technologies“ (lasers, machines, components…) are however subject to restrictions and close control. For example, exporting machine-tools is subject to a formal authorization from the State Secretariat for Economic Affairs, which must have a proof that they will not be used to manufacture weapons in Russia.
Swiss banks applied financial sanctions but not asset freezes nor visa bans.
Even though, media falsely communicated about the Credit Swiss freezing bank accounts in 2018. Switzerland is a good destination for Russian companies willing to dissociate from the Russian government and develop their business in a politically neutral environment. For Swiss companies, the business environment with Russia is uncertain because of the threat of further sanctions, but the fact is that Russia still offers multiple opportunities in a wide array of domestic markets and industries independently from sanctions.
How did Russian companies and government react to sanctions?
One of the first Russian companies to move to Switzerland in 2014 was Luxoft.
A software development company, with over 12.000 employees. The decision was taken as Switzerland is a neutral country, thus not politically exposed, plus the easiness to do business in Switzerland, which led his leader to relocate the company there. However, there are no statistic nor figures yet about how many companies proceeded this way. The cyber-security company Kaspersky Lab also moved its core infrastructures to Zurich, opening a Transparency Center for customers’ data from Europe, North America, Japan, Australia and South Korea. The decision was taken to show the company was not related to the Russian government.
The Russian government replied with an embargo on agricultural products.
From the USA, EU and countries who followed the US sanctions. The sanctions were then considered as an opportunity for Russian entrepreneurs to produce locally what Russia historically imported, and this has worked: 3 years after, Russia is almost completely self-sufficient for food and increasingly processes raw products domestically for its own needs or export markets. The sanctions also gave a massive impulse to the import substitution policy, which was already in place but lacked proper funding and strong will from the government, which now multiplies initiatives to stimulate multiple sectors.
Long lasting sanctions: what to expect?
Stiffer sanction mechanisms against Russia could be implemented in 2019.
The US Congress has to review two bills concerning the DETER (Defending Elections from Threats by Establishing Redlines) and DASKA (Defending American Security from Kremlin Aggression) acts, which is likely to increase sanctions should the US government consider that Russia interferes in US elections. The DETER act would restrict transactions with Russian state banks, including a ban on correspondent accounts, asset ban on big energy companies and transaction on state-company debt. The DASKA act would also impose new sanctions on investment transactions in energy projects outside of Russia that the Russian government directly or indirectly supports.
The Russian government stated that sanctions will last until 2024 at least.
The situation is not likely to change anytime soon as sanctions depend on the resolution of the conflict in Eastern Ukraine. The USA and the EU stated their conditions toward an amelioration of the political relations around Crimea, and the Minsk agreement to resolve the conflict in Eastern Ukraine is not respected by Russia nor Ukraine.