Since the advent of the war in Ukraine, the federal government has increased the scope of sanctions against various corporations and individuals from the Russian Federation.
The sanctions imposed present challenges for Canadians doing business with entities with ties to Russia, particularly in identifying whether a transaction directly or indirectly benefits a sanctioned person, and, if so, how to avoid contravening the sanctions. Moreover, recent legislative changes now prevent Canadians from providing a broad range of services to major Russian industries.
The sanctions regime imposed by the federal government operates through the Special Economic Measures (Russia) Regulations, SOR/2014-58 (the “Regulations”), which target a wide range of persons, corporations, industries and services to respond to Russian aggression in Ukraine. The scope is intentionally broad to counter the opacity of the corporate structures in which many Russian oligarchs operate.
Canadians who fall offside any of the Regulations risk facing significant monetary fines, imprisonment or possibly both. More importantly, given prevailing sentiment, running afoul of the Regulations carries substantial reputational risk.
Targeted Individuals and Corporations
Historically, the Regulations have functioned by prohibiting Canadian companies and citizens from transacting with targeted Russian individuals and corporations. In their current form, the Regulations target more than 1,200 Russian individuals and entities. Expanding upon previous sanctions that largely targeted banks with ties to the Kremlin, the defence sector and the oil and gas industry, the Regulations now specifically take aim at oligarchs and their corporations, many of whom have ties to European companies.
Currently, Canadians cannot deal in property or provide financing that would benefit sanctioned Russians directly or indirectly. Property is defined broadly in a manner that prohibits share purchases or leveraged financing, creating problems for companies with major Russian shareholders. Moreover, the notion of indirect benefit should be broadly interpreted when assessing whether a transaction complies with the Regulations.
Canadians need to be cautious before dealing with companies whose shareholders are sanctioned, as such transactions would be of indirect benefit to the shareholders. However, the corporate structures and shareholdings of Russian oligarchs are often intentionally opaque. Certain sanctioned Russians have made it public knowledge that they have surrendered shares and resigned from directorships of certain European corporations in which they previously held a stake. Absent such public declarations, and even with such information in hand, it is advisable for Canadians to proceed cautiously and seriously investigate whether their transactions will be of benefit to sanctioned Russian individuals or corporations.
Services Ban for Certain Industries
Since July 2022, the Regulations have prohibited the provision of specified services to 15 targeted industries, including the mining, chemical, petroleum, metallurgic and automotive and equipment industries. It is now prohibited for Canadians to provide 30 different services, including technical, computer, engineering and consulting services, as well as services incidental to the manufacturing of equipment, to all Russians operating in the targeted industries.
The industries and services listed by the Regulations are broadly defined and aim to impact Russia’s primary industries, notably its petroleum, mining and fertilizer sectors. The Regulations also target industries providing a supporting role to those primary sectors.
The Regulations in their current form show a shift in the strategy of the federal government. With Canadians unable to provide broadly defined services to most major Russian industries, the federal government has made it very difficult for Canadians to transact with Russians at all, even when the Russians they are dealing with are not otherwise targeted by sanctions.
MLT Aikins continues to closely monitor the development of sanctions applied against Russia. We are available to help clients navigate the complexities of the Regulations to ensure they do not inadvertently contravene the sanctions imposed by the federal government. Contact us to learn more.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.