In today’s global economy, companies must navigate an increasingly complex legal landscape when engaging in international trade. International sanctions and other trade restrictions can have a significant impact on operations. This article explores the impact of sanctions against Russia and their consequences for Australian companies and subsidiaries of companies within the European Union (EU).
Key Takeaways
For Australian companies looking to import or export goods to Russia, it is essential to ensure that the company maintain effective practices to ensure that they keep up to date with the current regime of sanctions being imposed.
Companies within the European Union with foreign subsidiaries face additional challenges in ensuring that its subsidiaries comply with the sanctions in addition to itself. This will require robust due diligence and compliance frameworks, which includes:
- Tracking the origin of individual components of goods, particularly when dealing with complex supply chains;
- Implementing internal compliance procedures to prevent violation of domestic sanctions and applicable EU sanctions; and
- Monitoring import and export activity of Australian subsidiaries to ensure that EU sanctions against Russia are not contravened.
MistryFallahi Lawyers can provide advice on navigating the complex sanctions regimes for Australian companies and parent companies in the European Union.
Australian Sanctions on Imports from Russia
In light of Russia’s invasion of Ukraine, many countries, including Australia, have imposed sanctions against Russia in relation to the import and export of various goods. The Autonomous Sanctions Act 2011 (Cth), Autonomous Sanctions Regulations 2011 (Cth) and Autonomous Sanctions (Import Sanctioned Goods—Russia) Designation 2022 (Cth) imposes various restrictions on the import and export of goods as well as restrictions on certain services with Russia. The following items are prohibited from being imported from Russia:
- Arms or related materials;
- Any goods which originate in or have been exported from captured Ukraine regions;
- Coal, lignite, peat, petroleum oils and gases and other fuel products; and
- Gold in unwrought, or in simi-manufactured forms, or in powder form.
Australian Sanctions on Exports to Russia
Australia prohibits the export of various items to Russia including the following:
- Arms or related material;
- Items suited for use for oil exploration or oil production projects in Russia;
- Aluminium ores, aluminium oxide, aluminium hydroxide;
- Luxury goods; and
- Machinery and related goods which broadly includes any tools whether or not power-operated, nuclear reactors, boilers and mechanical appliances, and electrical machinery and equipment.
Other Restrictions on Russia
Australia imposes additional restrictions against Russia in relation to various activities including the following:
- Dealing with financial instruments issued by Russian banks and specified Russian companies;
- Provide loans or credit to Russian banks or specified Russian companies;
- Providing services assisting with circumventing Russian sanctions;
- Services assisting with Russian military activity; and
- Facilitating the dealing with frozen assets owned by designated Russians.
European Union Sanctions
European Union (EU) sanctions against Russia are governed by the Council Regulation (EU) No 833/2014. These sanctions are broader than the Australian sanctions and include the following additional restrictions:
- Additional restrictions against Russian banks and their assets;
- Prohibitions on exports of dual use goods and advanced technology items that contribute to Russia’s defence and security capabilities;
- Prohibitions on imports of iron and steel, cement, rubber products, wood, aluminium, spirits, liquor, high-end seafood, and diamonds;
- Restrictions on the circumvention of sanctions by exporting to third countries;
- Restrictions on transportation; and
- Additional restrictions on export of goods for use in the oil industry.
The restrictions on the import of iron and steel products include a restriction on the importation of iron and steel products when processed in a third country, which incorporates those iron and steel products from Russia.
It is important for companies to understand when these sanctions extend to Australian subsidiaries operating outside the EU.
Extraterritorial Application of EU Sanctions on Subsidiaries
EU entities are required to use their ‘best efforts’ to ensure that any legal person, entity or body established outside the EU that they ‘own’ or ‘control’ does not participate in activities that undermine the restrictive measures outlined in the Regulations.
The Council of the European Union has clarified that ‘best efforts’ should be understood as actions that are feasible for the EU entity, considering the degree of effective control over the legal entity established outside the Union. Factors determining ‘control’ include having the power to appoint or remove a majority of the members or management of the entity, controlling the majority of members’ voting rights, and exercising dominant influence over the entity. It follows that if an EU entity holds 50% or more of the proprietary rights of an Australian entity, it is considered to ‘control’ that entity, and must take best efforts as described above.
This means that parent companies formed within the EU must actively manage compliance with sanctions across their entire global corporate structure, including Australian subsidiaries. As a result, EU entities have an obligation to enforce policies, controls and due diligence procedures to ensure subsidiaries situated in non-EU jurisdictions do not engage in business activities that may breach EU sanctions.