The impact of economic sanctions against Russia on Dutch trade

This article was originally published at Emerce by Georgianna Verhage and David Schreuders on 7 of March 2022.

On 24 February 2022, the world was rocked by the Russian invasion of Ukraine. Soon the EU and a number of countries (including the UK, the US, Canada, Australia, New Zealand and Japan) responded with the political instrument of so-called sanctions. The EU uses these sanctions, also known as 'restrictive measures', to ensure that a country changes or stops policies and actions by targeting entities and individuals responsible for malicious behaviour by that country. Contrary to what one might — and to how the affected entities and individuals may experience these — EU sanctions are not punishments. However, they entail obligations for companies that operate from the EU and therefore also the Netherlands. Violation of this obligation constitutes a criminal offense. Companies would therefore do well to keep a close eye on the rapidly changing developments and their consequences for the business. This contribution offers several practical tools.

International sanctions regimes

The EU sanctions relevant to Dutch companies fall into four categories: arms embargoes, travel restrictions, asset freezes (also known as financial sanctions) and other economic measures such as restrictions on imports and exports (also known as trade sanctions).

The EU sanctions imposed on Russia since 24 February 2022 complement the sanctions that have existed since 2014 in response to Russia's illegal annexation of the Ukrainian territory of Crimea. The new, more severe, sanctions against Russia target, inter alia, the financial, energy and transport sectors, including an export ban on certain equipment, technology and services for these sectors and a ban on the provision of certain services. In addition, a number of Russian banks have been cut off from SWIFT. Russian parliamentarians, politicians and influential people who make up the circle around President Putin, including the super-rich oligarchs, have also been added to the list of people with whom no business may be done. Finally, assets of President Putin himself and other high-ranking individuals have been frozen.

In addition to the sanctions against Russia, there are many other restrictive measures against organizations and individuals in other countries. The United Nations currently has 14 sanctions regimes in place, including against North Korea over the humanitarian situation in the country. In 2020, the EU imposed sanctions against North Korea, China and Russia, due to hacks aimed at EU member states (including the WannaCry ransomware). Four Russians were banned in 2020 because they are suspected of having tried to break into the systems of the Organisation for the Prohibition of Chemical Weapons (OPCW) in The Hague during the investigation into the downing of flight MH17 over Ukraine.

Another important player in the field of sanctions is the US, which is the only country in the world to have sanctions against Cuba and which still has heavy sanctions against Iran in place (the EU sanctions against Iran were largely suspended in 2016). We will not discuss the operation and scope of US sanctions against Russia in this article, but experience shows that it is wise to take into account US imposed sanctions if there is a legal relationship with the country.

How are international sanctions regulated by law in the Netherlands?

The Netherlands implements and enforces UN sanctions, as well as the directly effective EU sanctions, on the basis of the Sanctions Act 1977. In addition, the Netherlands can independently impose sanctions, as it did against more than 100 persons and institutions suspected of terrorist activities or their (financial) support. With regard to the Russian invasion of Ukraine, the Netherlands has not yet imposed its own sanctions.

The Sanctions Act stipulates that in order to comply with treaties, decisions or recommendations of bodies of international organizations and international agreements, rules may be established by general administrative order with regard to, among other things, the movement of goods, services and financial goods, and shipping and aviation. Under the EU Treaty, a Decision of the European Council is directly binding on a Member State; a European regulation, such as the one imposing sanctions, is therefore directly applicable to all persons and entities in the EU.

Violation of the Sanctions Act is an economic offence. Under the Economic Offences Act (WED), an intentionally committed economic offence can be punished with a fine of up to 10% of the annual turnover of a company. Financial sanctions are enforced by supervisory authorities The Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). Customs is engaged in the supervision and enforcement of trade sanctions by means of control of imports and exports. The Public Prosecution Service (Functional Public Prosecutor's Office) acts in the context of criminal enforcement of the Sanctions Act.

Strategic goods

In addition to sanctions, there are also regulations regarding so-called dual-use goods, dual-use goods, which are also called 'strategic goods'. Dual-use goods are products, services and technologies that can be used for both civil and military purposes, for example cyber surveillance technology. The purpose of this legislation is to control who receives these potentially dangerous products and how the transport runs. For example, the Netherlands does not issue licenses for the export of military goods to Saudi Arabia because of its involvement in the war situation in Yemen, while no sanctions are in force for this.

Sanctions differ from dual-use legislation in that they are specific regulations imposed on a particular country or group as a means of coercion. The restrictive measures may go beyond military or dual-use goods.

For the Tech sector, the topic of 'dual use' is of great importance. On 25 February 2022, the EU tightened the ban on the sale, supply or transfer to and export to Russia of 'dual-use goods and technology', which has existed since the 2014 sanctions. The original regulation still contained the circumstance that 'the goods are or may be intended, in whole or in part, for military use or for a military end user'. This addition has been deleted from the text of the new Council Regulation (EU 2022/328). It is now prohibited to sell, supply, transfer or export, directly or indirectly, dual-use goods and technology, whether or not originating in the EU, to natural or legal persons, entities or bodies 'in Russia or for use in Russia'.

The U.S. Department of Commerce imposed an export ban on computer chips on 24 February 2022. The Bureau of Industry and Security (BIS) under this ministry announced on 2 March 2022 that it would give an increased priority to monitoring prohibited exports of this technology to Russia.

Points of attention when doing business with Russia

The war in Ukraine and the subsequent sanctions against Russia are certainly forcing Dutch businesses to pay increased attention to international business and to tighten up the implementation of compliance policy. The Netherlands Enterprise Agency (RVO) has opened a helpdesk for entrepreneurs and the European Commission published guidelines and best practices on sanctions.

For the practice of international business, especially with Russia, the following practical tips can be helpful to avoid liability and reduce risks:

• Tightening internal compliance
  Compliance should be high on the Board's agenda. It must be assessed whether the compliance systems need to be renewed or refreshed.
• Directors must strike the right tone from the top
  It is important that the rules are complied with internally, even if that could mean a loss of turnover. The risks of enforcement and punishment are very high and reputational risks should also be considered.
• Assess the exposure of the business
  What is no longer allowed? Do sanctions apply to suppliers, customers, third parties? Also assess whether other regimes apply outside the EU sanctions regimes, such as the US ones, and whether they may also apply.
• What are the legal consequences of breaking contracts?
  It is conceivable that termination clauses apply, or that 'unforeseen circumstances' can be invoked. The sanctions regime may make an exception for contracts prior to the introduction of the sanction measure.
• Be extra vigilant on trade in dual-use goods
  Assess whether an exemption or permit can be obtained.
• Is cyber security in order?
  Although the National Cyber Security Centre has indicated that so far there are no concrete indications that digital attacks will have an impact on the Netherlands, it does not exclude possible consequences and attacks in the Netherlands. Make sure that your digital resilience is in order, for which the NCSC has prescribed a number of basic measures. After all, it cannot be ruled out that Russia will retaliate through cyber-attacks on the West.
• Assess the effectiveness of screening tools and customer hiring procedures
  Pay particular attention to counterparties with complex ownership and control structures (the issue of UBOs). For example, under certain circumstances, non-sanctioned parties can be controlled by sanctioned parties, and can therefore also be regarded as sanctioned. Control can exist, among other things, if a sanctioned party has access to the majority of the assets of a company.