Years of occupation of Ukraine by Russia, whatever form it happened in, made Ukraine look close to Russia in all senses to the rest of the world.
International businesses considered this closeness as a marker to optimize operations in Eastern Europe.
In management terms, it often resulted in direct reporting of Ukrainians to Russian offices instead of headquarters. In legal terms, the result was often the corporate control of Russian units of multinational corporations over Ukrainian units or other forms of control such as IP licensing.
Despite the war Russia waged on Ukraine in 2014, that subordination remained legal and usable. Since then, Ukraine has been limiting relations with Russia, but the legal restrictions mainly concerned sensitive areas such as relations with the government-controlled Russian organizations or Russian influence in regulated sectors of the Ukrainian economy.
International businesses with subsidiaries in Ukraine have been able to operate more or less freely while keeping direct ties with the Russian market.
The situation is not likely to continue in the same way as Russia escalated the war in February. This is not to say that every Ukrainian company having ties with Russia will become subject to sanctions. Yet, there already are restrictions on cooperation with businesses connected to Russia, and they're probably going to be more of them.
The most notable of the restrictions is that assets located in Ukraine and owned by Russian government-controlled organizations can be confiscated according to the Law “On Main Principles of Confiscation of Property of Russia and its residents in Ukraine”.
Ukraine has already confiscated the assets of two banks controlled by Russia under this Law. As well, assets of those helping Russia in its war against Ukraine can be confiscated, regardless of whether they are controlled by the Russian government or registered in Russia. The parliament passed the relevant amendments to the Law “On Sanctions” recently.
Some of the other restrictions are listed below:
- The import of goods from the territory of Russia is prohibited without exceptions.
- Most types of money transfers where a party is a Russian resident are prohibited. This includes cases where a Ukrainian resident must pay a Russian resident under import contracts, even if the obligation dates back to the time before the ban was imposed.
- Ukrainian residents cannot perform their contractual or other obligations if a creditor is a Russian resident or a Ukrainian company controlled by it.
- Russian residents and Ukrainian companies controlled by them cannot purchase or sell assets in Ukraine, most popular of which are real estate, land plots, and shares in companies.
- Notaries are prohibited from attesting deeds for the benefit of Russian residents or Ukrainian companies controlled by them. Notarial deeds are mandatory for all real estate, land, and share transfer transactions. Sometimes they are also required to ensure the proper running of a business, for example, to issue powers of attorney, for changes in state registers, for bank transactions.
- As long as there is martial law in Ukraine, goods imported into Ukraine are duty-free. The exemption does not apply to goods originating from Russia. Although there is an embargo on all imports from the Russian territory, this restriction in taxation should be of concern to those who are going to import Russian goods into Ukraine from another country.
- Russian residents and Ukrainian companies controlled by them cannot receive income on securities purchased by them in Ukraine if an issuer decides to pay the income.
- Ukraine denounced the double tax treaty with Russia.
Listen to the wind of change
The writing is on the wall: Ukrainians do not want to facilitate the leakage of resources to Russia and do business with the maniacal aggressor. In addition to the existing restrictions, new ones might follow. Among the discussed, there are stricter KYC policies or limitations on the rights of Russian shareholders of Ukrainian companies, for example, rights to vote or receive dividends.
Even before February 2022, we occasionally received clients’ queries about whether any ties to Russia would impede business from the perspective of Ukrainian laws. The concerns should have risen even more after that.
While legal restrictions are still in place, it is time for businesses with Ukrainian units directly linked to Russia to halt such links.
"To ensure smooth commercial activity in Ukraine (and not only here) in the future but the absence of direct links to Russia should also become a must."
Keeping the current state of things will increase uncertainty in business operations.
This does not mean that any such link would be sanctioned, but it would definitely be an indicator for limiting business operations with relevant counterparties, which we see already.
Belarus is not welcome either
As Belarus helps Russia in its war against Ukraine, the article is also relevant to businesses with links to Belarus. Although the extent of current restrictions for Belarus is lesser than in case of Russia, we recommend eliminating any links between Ukraine and Belarus for the benefit of the Ukrainian part of the business.
Authors: Volodymyr Igonin, Partner, Artem Shmatov, Senior Associate
Published: NV.ua, 10 June 2022