Foreign sanctions, including secondary US sanctions that are aimed at non-US companies doing business with Russia, are forcing many international companies to carefully evaluate and restructure their contractual relationships with Russian counterparties. In this process Russian antitrust law provides obstacles that may be difficult to overcome sometimes.
Measures considered to comply with sanctions
Among others, sanctions force international companies
- not to enter into business relationships with sanctioned persons,
- to stop or wind down existing business relationships with sanctioned persons,
- not to conduct business in Crimea.
As the future scope of the sanctions is unpredictable and the lists of sanctioned persons may well be expanded, international companies are trying to prepare for the potential future inclusion of their Russian counterparties into such lists. International companies may also try to ensure that their Russian counterparties do not resell goods to sanctioned persons.
These approaches may lead to attempts to, inter alia,
- refuse to conclude contracts with sanctioned persons or with customers located in Crimea,
- terminate contracts,
- provide for contractual termination rights in case sanctions will be adopted with respect to the Russian counterparty, or
- insist on contractual covenants, obliging counterparties not to resell goods to sanctioned persons.
Relevant Russian antitrust laws
Under Russian law the principle of freedom of contract applies, therefore companies are generally free to decide with whom and under which conditions they enter, do not enter or terminate contractual relationships. Antitrust restrictions provide for exceptions from this general principle, some of them are outlined below.
- Resale restrictions: Restricting a purchaser with respect to the further resale of supplied goods is, as a rule, prohibited. This prohibition applies irrespective of whether the resale restriction is contained in a supply contract, distribution agreement, license agreement or elsewhere.
- Dominant market position: Companies with a dominant market position may refuse to enter into a contract or treat counterparties unequally only for economic, technical or other justified reasons. Sometimes a dominant market position can easily be obtained. A market share of more than 35% is required for market dominance, and only in case of more than 50% market share will the market dominance be presumed. A lower market share percentage can suffice in case several companies together are regarded as market dominant. Most importantly, however, the relevant market can be defined very narrowly. On the one hand, there are geographical boundaries determined, for example, by logistical availability, such that a regional dealer's territorial market often does not expand to all of Russia. On the other hand, goods markets can be defined very narrowly: a single medicine with specific characteristics, consumables suitable only for certain equipment, or a spare part suitable only for a specific type of vehicle will likely be regarded as a separate market. As a result, a foreign OEM or its Russian distributor may well have a dominant market position in Russia on the market of ancillary goods such as spare parts or consumables, even in case their market share on the market of the main good is small.
- General prohibition of anticompetitive behaviour: Russian competition law also contains a catch-all clause that generally prohibits any agreements that result or may result in the limitation of competition. Accordingly, an agreement that imposes disadvantageous conditions on the Russian counterparty is prohibited if this results or might result in limitation of competition.
- Coordination of market participants: The coordination by one entity of market behaviour of two or more other entities that are active on another market may be regarded as a prohibited coordination. Usually, industry associations or similar non-commercial entities are regarded as coordinators, when coordinating the behaviour of their members. However, there are several decisions of the Russian antitrust authorities which regard vertical agreements of a producer of goods with its dealers as a prohibited coordination if there are provisions in the dealer agreements which result in division of the market, price fixing, etc. Based on this administrative practice one cannot completely exclude that an international company, by imposing the same sanction-related restrictions to all its counterparties (e.g. dealers) in Russia, may violate Russian antitrust rules.
These restrictions may be relevant in certain sanctions-related scenarios, in particular
- The refusal by a company that is dominant on the relevant product (service, spare part, consumables) market to supply, or to continue to supply, its product to sanctioned persons or customers in Crimea may violate Russian antitrust rules applicable to a dominant market player.
- The contractual covenant imposed on a counterparty not to resell goods to sanctioned persons or customers in Crimea may violate Russian antitrust rules with respect to resale restrictions and the general prohibition of restrictions to competition. Additionally, its implementation by a counterparty may violate rules applicable to market-dominant players, in case the respective counterparty has a dominant market position (either on the market of the main product or, more likely, on ancillary markets of consumables and spare parts) in Russia.
- Imposing sanctions-related restrictions on all Russian dealers by a foreign OEM may potentially lead to a risk of prohibited market coordination.
Potential approaches to Solutions
- Statutory exemptions: An exemption with respect to resale restrictions and general restrictions exists in case each party has not more than 20% (35% in certain scenarios) share on its relevant market. In this respect uncertainties usually apply to the determination of the product market and the geographical market boundaries. A further exemption may apply in relation to counterparties that act under the brand of the foreign supplier based on a registered trademark license agreement. Other exemptions exist, but rarely apply.
- Justification by foreign
- Economic impact: Most of the measures prohibited by Russian rules applicable to a dominant market player as well as, arguably, to the catch-all prohibition of restrictions to competition can potentially be justified by "economic or other [acceptable] reasons". Violations of foreign sanctions can cause hefty fines, hence one could argue that this is a sufficient economic justification. However, technically any potential sanctions-related justification would only apply to the foreign entity on which fines would be imposed, but not to any Russian subsidiary or counterparty. In substance such a recognition of foreign sanctions is quite doubtful too, for the following reasons.
- Comparison with foreign anticorruption rules: In the comparable conflict between foreign anticorruption laws and Russian antitrust laws, it appears that foreign anticorruption laws can in principle be taken into account for purposes of Russian antitrust law (as mentioned in the AEB Code of Conduct for the Pharmaceutical Industry). However, the actual administrative and court practice has instead demonstrated the challenges that companies face under Russian antitrust laws when implementing their global compliance policies in Russia.
- Ordre Public: Most importantly, the Russian Supreme Court has ruled that foreign sanctions contradict Russian ordre public. Therefore Russian courts are likely to disregard sanctions-related arguments not only for laws of contract, but also with respect to the application of Russian antitrust laws.
- "Significant transactions": In order to avoid secondary sanctions, non-US companies may theoretically consider whether certain transactions, e.g. in markets for ancillary products (consumables, spare parts), are not "significant", so that US sanctions would not apply. However, the relevant guidance by OFAC (https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#ukraine) is very general and leaves much discretion to OFAC.
- Restructuring: As an ultimate solution, the Russian counterparty may change its ownership structure to be excluded from the applicability of the sanctions (e.g. if the relevant sanctioned person transfers shares in the counterparty so that the latter is no longer subject to sanctions under OFAC's 50%-rule).
Violations of Russian antitrust laws may result in fines for the entity(ies) involved that are mostly turnover-based, namely from up to 5% of the annual turnover of the respective party on the market concerned (for violation of vertical restrictions) to up to 15% of the annual turnover (for prohibited horizontal agreements or abuse of a dominant market position). Prohibited market coordination may trigger a fine of up to RUB 5 million. Personal fines for key employees of Russian entities may be imposed, and they may potentially be barred from serving as officers of a Russian company.
Approach of the Russian authorities
Currently there are apparently no cases in which FAS is pursuing breaches of Russian antitrust law that were triggered by compliance with foreign sanctions. According to an interview with Mr Artemiev, Head of the Russian Federal Antimonopoly Service (FAS), of September 2014, FAS could have initiated a couple of cases in in connection with the sanctions, but "the position of the Russian government is not to use such tools, at least at this stage, in order not to worsen the relations".
In a case against Google, allegedly abusing its dominant market position with regard to access to Google Play, FAS had reached a settlement with Google to remove restraints connected with access to the Google Play Store. In the wake of that settlement there were discussions in the Russian press as to whether that settlement would oblige Google to offer its Google Play services also in Crimea. However, there is no indication that FAS has tried to force Google to offer its services also in Crimea.
As regards liability under Russian law for obeying foreign sanctions, while criminal liability for the facilitation of the introduction of foreign sanctions will likely become law, the initiative to introduce criminal liability for compliance with the sanctions seems to have lost support. In particular, the Russian President stated that Russia will not punish foreign partners for complying with anti-Russia sanctions – this question had been decided. The State Duma no longer seems to be pushing criminal liability either and is now considering only the less severe form of administrative liability for sanctions compliance. To date however, no draft law for such an administrative liability has been presented. These developments indicate that any upcoming liability for sanctions compliance will likely be significantly less severe than initially proposed (please see our newsflash >>).
It remains to be seen if this softened approach on liability under Russian law for obeying foreign sanctions will also mean a (continued) soft approach to the application of antitrust rules in relation to measures taken by international companies in response to sanctions.
Additional issues can arise under Russian law when implementing sanctions-related measures, for example under laws of contract and consumer laws. Particularly important are validity concerns with respect to sanctions-specific clauses, that may potentially be mitigated by choosing foreign (non-Russian) law and providing for generic termination rather than sanctions-specific termination rights.
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.