The ripple effect: How German companies are sinking into the vortex of sanctions

The EU has imposed extensive sanctions on Russia and the Russian economy. Most German companies and banks react to this by breaking off business relationships in anticipatory obedience – often without a legal basis. That’s a problem. Not only are companies losing their business partners or loan commitments without need and a wave of claims for damages is piling up: the state could also be held liable.

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“There is no total embargo with Russia,” says Viktor Winkler. He is a lawyer and has specialized in sanctions with his law firm. The sanctions expert previously worked at Commerzbank and the Federal Foreign Office. “From a purely legal point of view, the German economy could therefore continue to maintain many trade relationships with Russian companies.” It is understandable that they do not do this for reasons of morality or reputation. But this is exactly where problems could arise: breaches of contract and later compensation proceedings.

Many banks and companies are aware of these risks and, as a precaution, put long-term business relationships on hold without the contracts allowing this. Why? “In many of these cases, the risk of a lawsuit by the business partner is considered to be rather low,” says Winkler, “very often there is simply ignorance about what the contracts or even the sanctions ultimately allow or not. In any case, I strongly advise against a casual ‘necessity knows no commandment’ in business”.

Flat-rate flight bans: “Legal doubts” at the Federal Ministry of Transport

But the federal government sometimes acts too hastily. Shortly after the start of the war on February 27, the Federal Ministry of Transport (BMDV) issued a three-month flight ban for Russian airlines and pilots in Germany. Things then got serious for one of Winkler’s clients, a company from the metal industry: He could not have his goods flown to his customer in Asia with the usual air bridge cargo shipping company, since Air Bridge Cargo is a Russian company. However, the BMDV acted completely independently of any sanctions, because Air Bridge Cargo was not sanctioned by the EU, nor did the EU sanctions provide for airspace closures. Winkler’s customer has now lost his Asian business partner. This could also be expensive for the BMDV. “Together with the client, we are currently examining whether the extensive closure of airspace at this specific point in time was legal under German law,” says Winkler.

Two other examples from Winkler’s clientele:

• One Bank withdraws a financing commitment in the millions to a German trading company, because it allegedly generates around 30 percent of its sales with Russian companies. “Trade with the Russian companies does not involve any sanctioned goods and none of the Russian contractors are sanctioned or have any remote relationship with any sanctioned company. The client even checked this with great effort.”
• in one In one EU country, a machine builder wants to set up a production line for spare parts. A company has a 30 percent stake in the joint venture, and a Russian company holds a third of the shares. Although this is not affected by the EU sanctions either, a major European bank is interrupting the ongoing financing for the construction of the spare parts factory in the tens of millions, citing “pending compliance assessments” and “until further notice”.

“In both cases there are quite clear breaches of contract,” says Winkler to FOCUS Online: “We are now in direct contact with the banks and are looking for an amicable solution that satisfies all sides.”

Even Putin’s oligarchs are not 100 percent sanctioned

After the annexation of Crimea in 2014, the EU had already imposed export restrictions. Weapons or certain products that can also be used militarily (dual-use goods) were no longer allowed to be exported to Russia. After the attack on Ukraine, on February 23 the EU, together with the USA and other partner countries, issued further sanctions against certain individuals and some companies. In addition, Russian banks were decoupled from the international payment system SWIFT. With the exception of banks, however, the EU did not issue any sanctions for entire sectors.

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“Since there is no total embargo, business partners and goods must be checked individually and carefully to see whether they are permissible under the sanctions,” says Winkler. “There are often misunderstandings or ignorance here. For example, oligarchs – even if they are sanctioned – can continue to receive legal advice. Also, having their assets frozen does not cause a sanctioned person to lose ownership of the asset, only control over it.

It is also little known that companies in which a sanctioned oligarch has a stake of less than 50 percent are not legally sanctioned themselves. Likewise, the EU sanctions by no means cover all Russian banks. Even the big VTB Bank is “only” excluded from SWIFT. “Therefore,” says Winkler, “one could legally supply such a bank with funds in another way, i.e. outside of SWIFT. Whether you actually want to do that from a reputation point of view is another matter.”

Olaf Scholz builds up pressure on the German economy with sanctions

Winkler sees a possible reputational damage as the main reason for the “sometimes hasty decisions” of many companies and banks in the EU: “If a large bank or a well-known company starts to cut all Russian business relationships, then of course that has an enormous pull on others , especially smaller banks and companies.”

Science calls such a wave-like spread the ripple effect. And this effect of imitation is currently running in waves through the entire economy. Only: “Concerns about reputation,” says Winkler, “usually do not justify a breach of contract. In the future, clauses will have to be created that allow exits in comparable political crises. This is a huge task for the future. The contractual partners must also accept that contracts are easier to dissolve. This will be an exciting field for lawyers”.

Conclusion: Banks, contractual partners, clients, suppliers, service providers terminate contracts, end cooperations, refuse loans and services, although the sanction law often does not require this, not even indirectly. The hysterical group dynamics of the ripple effect certainly suit politicians in their efforts to punish Russia. And it is not for nothing that Olaf Scholz set up a task force for sanctions control directly in the Federal Chancellery with State Secretary Jörg Kukies in order to put pressure on the economy. So sanctions are a matter for the boss. Claims for damages too?

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