Yuri Shumilov (YS Advisors): “It would be dangerous to assume Russian sanctions only concern EU companies with Russian trade”

Leaders League: What are the main challenges facing EU businesses which have remained in Russia?

Yuri Shumilov: Many European businesses have either suspended their exit plans from Russia or are waiting for the situation to stabilize. European Union companies with Russian subsidiaries face a dual challenge. First, they must undertake best efforts to ensure that their Russian subsidiaries don’t undermine EU sectoral sanctions, an obligation strengthened by the 16th sanctions package. Now, EU operators must also use their best efforts to ensure their Russian subsidiaries don’t undermine individual restrictive measures against Russian companies and individuals. Given the extensive EU sanctions, conducting business in Russia without undermining these sanctions requires rigorous compliance monitoring and, as recently clarified by the EU Commission, employing a high degree of effort exceeding typical contractual standards of what constitutes ‘reasonable effort’.

Simultaneously, Russian subsidiaries and their management must deal with Russian countermeasures taken in response to EU sanctions, which affect daily operations and restrict dealings with EU parent companies, including dividend payment limitations. Every significant business decision requires carefully balancing local regulatory requirements, EU parent-company compliance obligations and the Russian business’ best interests.

What challenges do EU businesses with subsidiaries outside the EU face?

It would be dangerous to assume Russian sanctions only concern EU companies with Russian subsidiaries or direct Russian trade. While EU sanctions lack direct extraterritorial effect (unlike US sanctions), they achieve similar outcomes by requiring EU operators to ensure non-EU subsidiaries don’t undermine sanctions through compliance processes, monitoring and violation reporting.

When an EU operator has transferred IP rights or trade secrets to non-EU subsidiaries, they must prevent these subsidiaries from supplying restricted goods and services to Russia. This may require blocking IP and trade-secrets usage by modifying license agreements to prohibit restricted Russian trade and include automatic termination clauses for violations. Ideally, sublicensing should require EU parent-company consent.

To ensure compliance, ongoing monitoring of IP rights and trade-secrets usage by non-EU subsidiaries is advisable through corporate rules and policies. This monitoring should include regular shipment reporting, destination reviews and spot checks of contracts and documentation.

What challenges do EU businesses face when trading through contractual partners outside the EU?

EU sanctions prohibit knowing participation in activities circumventing regulations or activities where circumvention may be the object or effect. This broad definition requires extreme vigilance in selecting, onboarding and trading with partners, especially non-EU counterparts.

While many EU companies have improved counterparty screening processes, each round of sanctions shifts focus toward combatting circumvention in known “circumvention hubs.” The EU has now sanctioned companies in China, India, Kazakhstan, Turkey and Uzbekistan. EU operators should assess how such counterparties trade with Russia, whether patterns have changed and if partners risk EU sanctions. This assessment is challenging as partners may withhold information, making corporate intelligence databases valuable and reluctance to disclose information a potential red flag.

For contracting, “no exportation to Russia” clauses are a must for businesses producing restricted goods but may be recommended for any EU businesses as a means to combat the circumvention of sanctions. For IP usage by counterparties, similar controls as with non-EU subsidiaries should be implemented through license agreements, with non-compliance resulting in immediate license suspension and penalties.