Russian Federation: Business Implications Of Russian Sanctions Against Turkey

Last Updated: 18 July 2016
Article by Yana Dianova

Orçun Çetinkaya, Partner at Moroğlu Arseven, discussed the details and business implications of recent Russian sanctions against Turkey with Yana Dianova, Director of Corporate and Commercial Law in the Moscow office of GRATA International Law Firm.

Orçun Çetinkaya: Following the incident of a Russian Su-24 jet being downed by Turkish F-16 fighters on 24 November 2015 causing the Russian aircraft to crash in the Bayirbucak region of northern Syria, Russia imposed a series of economic measures and sanctions against Turkey. What are those sanctions?

Yana Dianova: Sanctions comprise a number of special economic and administrative measures against the Republic of Turkey. The sanctions were imposed by Decree No. 583 signed the President of the Russian Federation ("the RF President") on 28 November 2015 in connection with the events that took place near the border between Syria and Turkey and detailed in the decisions of the Government of the Russian Federation ("the RF Government") in accordance with this Decree.

Decree No. 583, which came into force on the date of its signing, provides, inter alia:

  1. a ban or restriction on foreign trade operations related to importing certain goods originating from Turkey into Russian territory;
  2. a ban or restriction for organisations under the jurisdiction of Turkey as well legal entities controlled by Turkish nationals or organisations under the jurisdiction of Turkey, on performing (provision) certain types of works (services) in Russian territory;
  3. a ban for employers and customers of works (services) not included in the list approved by the RF Government on engaging Turkish nationals who are not in employment and(or) civil-legal relationships with such employers, customers of works (services) as of 31 December 2015, in employment relations, performance of works and provision of services, effective from 1 January 2016;
  4. suspension from 1 January 2016 of the Agreement between the RF Government and the Government of Turkey for the terms and conditions of mutual trips of citizens of the Russian Federation and nationals of Turkey dated 12 May 2010, in terms of travels by Turkish nationals to Russia without visas, with certain exceptions.

Connected to this, the RF Government was instructed to take measures:

– to introduce the ban on charter flights between Russia and Turkey;

– to strengthen the control over the Turkish road carriers in Russia territory to ensure safety;

– to strengthen control in Russian waters and seaports in the Azov-Black-Sea basin, including in order to prevent illegal staying and movement of marine and other vessels over there.

Decree No. 583 also required tour operators and travel agencies to abstain from selling tours to Turkey to Russian citizens.

Orçun Çetinkaya: The sanctions caused massive media coverage in Turkey. They are interpreted as though the trade between Turkey and Russia has come to an end. Who is affected by the sanctions?

Yana Dianova: The bans and restrictions under Decree No. 583 and the RF Government's related decisions affect:

  1. wholesale suppliers and buyers (importers) of banned goods;
  2. organisations under Turkey's jurisdiction (i.e. established and existing under Turkish laws), as well legal entities controlled by Turkish citizens or organizations under Turkey's jurisdiction, branches and representative offices of such organizations in Russia, that perform/provide the works/services which are banned in Russian territory;
  3. employers and customers of works (services) in Russia that engage Turkish citizens starting from 1 January 2016, irrespective of their nationality, except for those specifically exempted from the RF Government's decisions;
  4. travel agents, tour operators and other parties engaging in charter flights between Russia and Turkey, as well as those who organize Turkish trips and tours for Russian citizens;
  5. airline companies providing charter flights between Turkey and Russia1;
  6. automotive carriers providing bilateral carriages between Turkey and Russia2;
  7. Turkish nationals traveling on business and other trips to Russia for up to 30 days. An exception applies for those with a temporary residence permit or a residence permit for the territory of Russia, as well as for those involved in Turkish diplomatic and consular missions in the territory of Russia, provided they have valid official and special passports, together with their families.

The criteria for organisations being under control of Turkish citizens are determined in accordance with the Federal Law N57-FZ "On the Procedure for Foreign Investments in the Business Entities of Strategic Importance for Russian National Defence and State Security". Accordingly, having control over a business entity refers to the ability to directly or through third parties determine the business entity's decisions, by means of:

– controlling the business entity's voting shares (stock), or

– participating in general shareholders (members) meetings, or

– participating in the business entity's board of directors (the trustee council) and other management bodies, or

– entering into a contract with the business entity regarding exercising the functions of its executive manager (the managing organization) or a similar agreement.3

Orçun Çetinkaya: Can you explain the measures that have been put in place in the auspices of sanctions which I can give a clearer picture to Turkish businessmen who have interests in Russia regarding the consequences and implications of sanctions.

Yana Dianova

Import bans for certain Turkish goods

Decision No. 1296 from the RF Government, which came into force on 1 December 2015, outlined a list of agricultural products, raw materials and foodstuffs, originating from Turkey, which became prohibited from being imported to Russia from 1 January 2016.

The list includes several types of vegetables, fruits and berries, as well certain poultry meat and its by-products, salt and chewing gum.

Importing the listed products for personal use is permitted, to the extent allowed by laws of the Eurasian Economic Union.

Ban on performing or providing certain types of work and services

Decision No. 1457 from the RF Government (dated 29 December 2015) outlined a list of types of works and services which become banned from being performed or provided in the Russian Federation's territory by organisations under Turkey's jurisdiction, as well as organisations controlled by Turkish citizens, effective from 1 January 2016.

Prohibited work and services include:

– construction of buildings, construction of engineering and special construction works;

– activities regarding architecture and engineering design, technical testing, research and analysis;

– activities of travel agencies, as well as other organisation providing services in the tourism sector;

– operation of hotels and other places of temporary residence;

– work performed and services rendered for state and municipal needs;

– woodwork.

The ban does not apply to work or services envisaged by contracts entered into prior to adoption of Decision No. 1457, for the duration of such contracts.

Ban on employing Turkish nationals

From 1 January 2016, Russian employers and customers of works (services) may not engage Turkish nationals who were not in such employment and(or) civil-legal relationships on 31 December 2015, in employment relations, performance of works or provision of services.

The RF Government has issued a list of exempted Russian legal entities, branches and representative offices of non-Russian companies (Decision No. 1458, dated 29 December 2015).

Decision No. 1458 states that the number of employees who are Turkish citizens, employed or engaged for performance of works (provision of services) by employers included in the exemption list must not exceed the number of employees who were employed or engaged for performance of works (provision of services) by 31 December 2015.

Decision No. 1458 was amended 6 May 2016 by Decision No. 396, with amendments entering into force on 24 May 2016. Accordingly, two different exemption lists are now provided:

– employers which are exempt from the ban on employing Turkish citizens, provided the employment contracts were signed before 31 December 2015 and the number of Turkish employees does not exceed the number employed as at 31 December 2015. The list includes 46 Russian legal entities, 6 branches and 2 representative offices of Turkish companies, most of which are engaged in construction (such as Renaissance Construction, Delta Construction, Enka, Yamata). The amendment includes 7 new banks: Denizbank JSC, ISHBANK JSC, Credit Europe Bank JSC, YAPY CREDIT BANK JSC, Guarantee-Bank Moscow JSC, ProKommertzBank JSC, ZeeratBank JSC.

– employers which are exempt from the ban on employing Turkish citizens, provided the employment contracts were signed before 31 December 2015. The list includes 11 Russian legal entities and 3 branches of Turkish companies, mostly engaged in construction.

Ban on charter flights and tours to Turkey

Decision No. 1296 banned charter flights between Turkey and Russia, effective from 1 December 2015.

The Federal Agency for Tourism of the Russian Federation (Rostourism) issued an information letter on 24 November 2015 in which it recommended Russian tour operators and travel agents suspend promotion and sales of tourist products and separate tourism services to Turkey, including those provided through third party countries.

In performance of the Decree No. 583, Rostourism excluded 19 tour operators from the Uniform Federal Register of Tour Operators, effective from 1 January 2016, thereby banning them from selling tours in Russia (Rostourism Order No. 569-Pr-15, dated 30 December 2015). The excluded tour operators include Pegas Toristic, Anex Tour, Coral Travel and Sunmar Tour.

Orçun Çetinkaya: Sanctions have been debated heavily in Turkey among legal, business and political circles. However, sanctions are one of the most effective trade remedies which are used by sovereigns to force their counterparts to comply with their regulations or policies having international reach. Prior to the Russian sanctions, Turkey in general, goods from Turkey, Turkish citizens and companies in particular, were not the subject of a foreign country's sanctions. Are sanctions generally used by Russia as a trade remedy against the subject of other sovereigns? Are there any other countries sanctioned by the Russia Federation?

Yana Dianova: The Decree of the RF President No. 560, dated 6 August 2014, banned importing certain agricultural products which originated from countries that imposed economic sanctions on Russia.

It applies to agricultural products, raw materials and foods originating from: Albania, Australia, Canada, Iceland, Lichtenstein, Montenegro, EU member-states, Norway, the Ukraine4 and the United States.

Agricultural products, raw materials and foods banned for import in Russia (referring to the Foreign Economic Activity Commodity Classification of the Customs Union) originating from these countries (the "banned products") include:

– meat of cattle and pork (fresh, chilled or frozen);

– meat and edible by-products of certain poultry (fresh, chilled and frozen);

– salty, dried, smoked meat and meat in brine;

– fish, shell fish, mussels and other aquatic invertebrates (with some exceptions);

– milk and milk products, including prepared products like cheese and cottage cheese (with some exceptions);

– vegetables, edible roots and tube crops;

– fruit and nuts;

– sausages and other products from meat, meat by-products or blood; food products prepared on their basis;

– milk-containing food products and products on the basis of vegetable oils;

– food or finished products manufactured with the use of cheese production technologies and containing 1.5 and more weight percent of milk fat.

The Federal Customs Service of the Russian Federation ("FCS") controls compliance with the import prohibition for the banned products.

According to FCS Order No. 1496, dated 7 August 2014, the heads of regional customs offices and customs directly reporting to the FCS must:

  1. determine the country of origin of the products imported into the customs territory of the Customs Union5 according to the established procedure, including actual control within the risk management system, if required;
  2. if declaration of banned products is detected, refuse to release such products according to the declared customs procedure and take measures for their immediate export from the customs territory of the Customs Union.

The RF President extended these sanctions till 5 August 2016 (Decree of the RF President No. 320, dated 24 June 2015).

From 6 August 2015, any banned products imported to Russia became subject to destruction (Decree of the RF President No. 391, dated 29 July 2015).

The products imported by individuals for personal consumption, or involved in customs transit for transport to third countries, are exempt from Decree No. 391, provided:

– veterinary and phytosanitary accompanying documents for such products are authentic and comply with the products;

– authorities have grounds to believe the products will actually be delivered to a place outside the territory of Russia, in accordance with the conditions for the customs procedure of customs transit.

The Decision of the RF Government No. 1458 approved the Regulations on destruction of agricultural products, raw materials and food products included in the list of products originating from Albania, Australia, Canada, Island, Lichtenstein, Montenegro, EU member-states, Norway, the Ukraine and the United States that are prohibited for import in the territory of the Russian Federation (Decision No. 774, dated 31 July 2015).

The decision to confiscate and destroy banned products is made by authorized officers of the FCS, the Federal Service for Veterinary and Phytosanitary Supervision, or the Federal Service for Supervision in the Domain of Consumer Rights and Human Welfare. These parties will make such a decision upon detecting performance of foreign economic operations which contemplate importing the banned products, irrespective of whether or not the person(s) performing such operations has been detected.

Orçun Çetinkaya: Is there any indication about lifting or loosening the sanctions?

Yana Dianova: The special economic measures against Turkey were introduced without limitation of term, based on Federal Law No. 281-FZ dated 30 December 2006 "On Special Economic Measures" and Federal Law No. 390-FZ dated December 2010 "On Security".

The RF President is authorized to establish the term of effectiveness for special economic measures and to decide on lifting the respective measures if the circumstances that served as grounds for introducing such measures no longer exist (Art. 5 of Federal Law No. 281-FZ).

According to the Russian Federation's Minister of Economic Development, Alexey Oulukaev6, Russia will not introduce any additional sanctions unless Turkey aggravates political tensions.

The RF Government has developed draft rules (the "Draft Rules") for selecting contracts which are exempt from the sanctions imposed under Decree No. 583 (Decree of the RF President No. 669, dated 28 December 2015). The Draft Rules apply to contracts being entered with organisations under the jurisdiction of Turkey, under control of Turkish nationals and/or organisations under the jurisdiction of Turkey for supply of goods and performance of works (services).

According to the Draft Rules, contracts with Turkish entities and the entities under control of Turkish entities or nationals can be exempt if they meet one of the following criteria:

– the contract's goods, works (services) are banned or restricted by the RF Government; or

– if a contract is not entered, it will impact performance of the Russian Federation's internal or external obligations and it is not possible to replace the respective goods, works, service, or replacement from the other sources will involve disproportionately high expenses; or

– the contract affects the Russian Federation's security interests or interests of a significant number of consumers in the Russian Federation and it is not possible to replace the respective goods, works, service, or replacement from other sources will involve disproportionately high expenses; or

– prevention on entering the contract will involve material difficulties for implementing the Russian Federation's economic, technical, financial or innovation programs, or a constituent entity thereof.

Selecting contracts for supply of goods will be made by the sub-committee for customs-tariff regulation and non-tariff regulation, protective measures in foreign trade of the Government committee for economic development and integration. Contracts for performing works and providing services will be selected by the Inter-agency committee, under the Ministry for economic development of the Russian Federation.

The Draft Rules provide that for a contract to be included in the exemption list, a Russian entity, a federal executive body of the Russian Federation, or an executive body of a constituent entity thereof, should submit documents to the Ministry for economic development as required in a schedule to the Draft Rules, as well as a letter justifying the necessity to enter the respective contract.

The Draft Rules have undergone all necessary hearings and appraisals. However, the date of their adoption by the RF Government and entry into force is not known yet.

Orçun Çetinkaya: Given that Turkish companies are understandably concerned about their future in Russia, do you expect any exits due to the sanctions?

Yana Dianova: To our knowledge, there have not been announcements so far on the part of business entities controlled by Turkish entities or nationals of their exit from Russia. It appears that until the political disaccords between Russia and Turkey subside, the general trend is to wait and, if applicable, adapt to the restrictions imposed by the sanctions.

Major tour operators Pegas Toristic, Anex Tour, Coral Travel and Sunmar Tour were excluded from the Uniform Federal Register of Tour Operators from 1 January 2016. According to their public announcements, they continue to operate in Russia either through partner tour operators or subsidiaries7.

1. The ban on such flights was introduced by the Decision No. 1296 of the RF Government, effective from 1 December 2015.
2 The Decision No. 1296 of the RF Government restricted the number of permits for such carriages to be issued in 2016 to Turkish automotive carriers to 2000.
3 Note: with respect to a Russian business entity of strategic importance which exploits subsurface areas with federal status, "control" means the ability of a foreign investor or a group of persons to directly or indirectly control 10% or more of the business entity's total voting shares (stock), or the right of a foreign investor or a group of persons to appoint a sole executive body and (or) 10% or more members of a collegial executive body of such a business entity, or absolute ability of a foreign investor or a group of persons to elect 10% or more members of the boards of directors (the trustee council), or other collegial executive body of such business entity.
4. Sanctions apply from 1 January 2016 for the Ukraine.
5. According to Article 2 of the Customs Code of the Customs Union, the common customs territory of the Customs Union comprises the territories of the Republic of Armenia, the Republic of Belarus, the Republic of Kazakhstan, Kyrgyz Republic and the Russian Federation (the member states of the Customs Union), as well as artificial islands, installations, fixtures and other facilities located outside the territory of the member states of the Customs Union with respect to which the latter have jurisdiction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Yana Dianova
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