As the Russo-Ukrainian war conflict continues and escalates, the sanctions against Russia by the European Union (as well as many other countries) remain in place. And there is more to that: since Russia’s annexation of Crimea in 2014, there have been a series of new measures; most recently, on 23^rd June 2023, the Council of the European Union passed its 11^th Sanctions Package against Russia (the “11^th Sanctions Package”).
 
Like its predecessors, the 11^th Sanctions Package is a massive piece of legislation, comprising 648 pages.¹ These can be categorized into the following themes: (i) economic and individual restrictive measures; and (ii) cracking down on the circumvention of these measures.
 
This note explains why Malaysian companies:

Why are companies in Malaysia affected?
While the EU Sanctions primarily apply to companies incorporated in the EU, they also affect:

The first category is most relevant: it is important to remember that for nationals of an EU Member State, their place of work is irrelevant. More specifically, even though they work in Malaysia for a Malaysian company, the EU Sanctions apply to them in their entirety. As such, all larger employers in Malaysia are affected in some way. By way of example, Petronas alone employs over 46,000 employees around the world – and many of them come from European Union Member States. The moment any of these employees acts in violation of the sanctions, there are grave consequences for such employees, with consequences for the employer also.
 
Equally, the second category has relevancy. Although physically located in Malaysia, branch offices and representative offices set up here are not legally separate from the EU company which established them. Therefore, irrespective of whether the persons involved in their activities are Malaysian citizens or from a European Union Member State, the EU Sanctions apply fully.
 
Why is circumvention of the EU Sanctions an issue?
A law can only be effective when it cannot be circumvented. If it were possible to simply work around a law and thereby avoid its applicability, this would not be much different from there not being any law at all.
 
The EU took note that its sanctions and that of other countries has not developed the effect originally anticipated. This is, among others, because many companies have simply circumvented the sanctions. The easiest way to do so was to provide sanctioned goods and services to a company established in a third country instead of a company established in Russia. This third country company then acts as an intermediary and exports the relevant goods or services to the Russian company, which was the intended recipient, but could not be the direct contract partner.
 
By way of example, one country whose companies have raised suspicion about being involved in the circumvention of the EU Sanctions is Kyrgyzstan: exports from the European Union to Kyrgyzstan were consistently below USD 400 million between 2015 and 2021. In 2022, the first year of the Russo-Ukrainian conflict, exports suddenly jumped to USD 1.23 billion – an increase of several hundred percent.²
 
The largest items exported were (i) vehicles other than railway, tramway; (ii) machinery, nuclear reactors, boilers; and (iii) electrical, electronic equipment.³ Although it is not clear which products were specifically involved, all three categories are, at large, affected by the EU Sanctions.
 
What is the European Union doing against the circumvention of EU Sanctions?
Having realised that circumvention is hindering the EU Sanctions from being fully effective, the 11^th Sanctions Package is aimed at cracking down on any entity attempting to circumvent the EU Sanctions.
 
The 11^th Sanctions Package thus contains a new anti-circumvention tool which will allow the European Union to restrict the sale, supply, transfer or export of specified sanctioned goods and technology to certain third countries. These countries are considered to be at continued and particularly high risk of circumvention (which is currently not the case for Malaysia).
 
In addition to a general anti-circumvention tool, the 11^th Sanctions Package also adds another 87 entities, which are now subject to tighter export restrictions. It is noteworthy that in addition to Russian and Iranian entities already listed, this list now also covers entities registered in China, Uzbekistan, the United Arab Emirates, Syria and Armenia. This underlines the European Union’s seriousness on the crack-down of circumventions.
 
It is also important to note that now, companies/persons which “otherwise significantly frustrat[e the EU Sanctions]” may be listed as companies/persons circumventing EU Sanctions. This is a much wider scope than strict circumvention.
 
What is the impact for Malaysian companies?
Russia is not a country with which Malaysia has traditionally held close ties when it comes to trade. As such, the Ministry of Economy’s statistics for March 2023 show that Russia did not make it to the Top 30 of Malaysia’s export partners for the first quarter of 2023. Russia ranked 21^st for imports to Malaysia and the value of imports dropped by around 10% in comparison to the first quarter of 2022.⁴

However, the total amount of trade between two countries as such is not relevant. A single transaction in breach of the EU Sanctions could lead to significant consequences. By way of example, as was reported in the news in February 2023, the US imposed sanctions on a Malaysian company involved over its alleged production, sale and shipment of Iranian petrochemicals and petroleum. Two Singaporean companies were equally affected.⁵ This should serve as a stern reminder to Malaysian companies that other nations do not hesitate to impose harsh measures when breaches of sanctions are involved.
 
What should Malaysian companies do to protect themselves?
While not being able to do business with EU-based companies may not impact an affected Malaysian company significantly, the reputational damage that comes from being sanctioned is potentially devastating. As such, when the US imposed sanctions against a Malaysian gloves manufacturer in 2022, even the shares of its purchasers plummeted.⁶
 
Here are some of the actions that Malaysian companies should do:
 

In Malaysia, so-called “Bumiputra agents” are regularly used in trade. Their role is typically limited to that of an “intermediary” and it would not be surprising if a Malaysian company requested to assume that role were to let its guard down and would happily get its commission. This would be a grave mistake as by acting as an intermediary to facilitate exports to Russia, that Malaysian company could be considered a party to the circumvention or frustration of EU Sanctions. It could thus find itself on the list of sanctioned entities.
 
The request to act as an intermediary should be a red flag. However, other circumstances that have the same effect could equally amount to a circumvention or frustration of EU Sanctions. We therefore highly recommend remaining cautious at all times.
 

As highlighted above, citizens are always covered by the scope of the EU Sanctions, irrespective of where they are and who their employer is. To the extent possible, Malaysian companies should consider not involving citizens from an EU Member State in any dealings with Russia as these employees may be personally affected by the EU Sanctions.
 
Companies are under a duty to protect their employees. Those companies which do not protect their employees not only run the risk of lawsuits from employees; they also risk protests, reputational damage and a fall-out with their entire staff if an employee were to face a prison sentence because they did not take the necessary precautions (in other words: failed to protect that employee).
 

A company in Malaysia with ties to the EU – be it through an employee or because it is a subsidiary/affiliate of an EU company – but also any Malaysian company with a subsidiary or operations in the EU, should undergo a thorough due diligence compliance exercise with qualified experts to make sure that its activities do not fall foul of the EU Sanctions. The EU Sanctions are just one sanctions regime of many. Above all, sanctions by the US are a significant risk-factor.
 
It is important to remember that the sanctions laws are a live issue and thus constantly evolving – as can be seen from the 11^th Package. It is very likely that further changes will be made in the coming months. As such, the European Union has already announced its plans to make the breach of EU Sanctions an EU crime in late 2022.⁷
 
Due diligence can only assess the current status. The process should therefore ideally be repeated every time there is a change to the sanctions framework or where there are changed business opportunities with any Russian individual or entity.
 

When working with a distributor in Russia, a company’s influence over who ultimately receives its products is limited. As a result, sanctioned entities may receive the product. It could also be combined with another product, which then would fall foul of the EU Sanctions.
 
While this does not necessarily mean that the seller is in violation of the EU Sanctions, it is recommended to reduce the risk by contractually obliging a distributor in Russia to not do anything that could even imply that there is a breach of EU Sanctions. Other contractual measure, such as the right to audit or perform a post-sale due diligence on the exports made may also be useful.
 

The consequences of a breach of EU Sanctions are significant and potentially become graver every time another sanctions package is passed. In addition to the above measures, the best course of action could also involve a full legal assessment of the risks a company is facing.
 
In comparison to the benefits from a company’s business in Russia, these benefits may be minimal. In this case, given the risks, it could be the better decision business-wise to terminate one’s business in Russia altogether or put any such activities on hold whilst for as long as the EU Sanctions are in place.
 
At Skrine, we regularly advise our clients on sanctions and how to protect themselves. If you would like to receive further information on how your business is affected by EU and other sanctions regimes, do not hesitate to contact the author of this note.

Article by  Dr. Harald Sippel, Head of Skrine’s European & North Asian Desk, Foreign Lawyer (Malaysia), Attorney-at-law (Austria).

---