A Story of Desperate Moscow?
by Maia Otarashvili
The Russia and Crimea sanctions continue to make the region’s business environment a turbulent one to navigate. In June, Siemens, a German manufacturer and a major multinational company, found itself under fire in a scandal involving Russia and Crimea. The scandal broke after Siemens-manufactured electricity turbines turned up in Crimea, the Russian-annexed peninsula in the Black Sea. This event is in direct violation of the EU sanctions on the illegally annexed Ukrainian territory. The story is yet another reminder of just how far the Russia-West relationship has deteriorated, and how the sanctions regime is failing to moderate Russia’s behavior even after three years.
THE PARALYZING CRIMEA SANCTIONS
On February 23, 2014, pro-Russian demonstrations were held in the Ukrainian city of Sevastopol in the Crimean peninsula. Within days, masked Russian troops (without insignia) took over the local parliament, and installed a pro-Russian government. The new government declared Crimea’s independence from Ukraine in early March, and immediately held a referendum on “reuniting” with Russia. This series of events constituted Russia’s illegal annexation of Crimea—an act officially condemned by the international community. The Crimea crisis ushered in a new era of hostile Russia-West relations, or as some prefer to call it, “the new Cold War.”
Two major factors have kept Crimea in a limbo since the events of March 2014. The first factor is the international community’s non-recognition of the peninsula’s new status as a part of Russia as well as Russia’s refusal to “return” Crimea to Ukraine. The second factor is the heavy burden of Western sanctions imposed on the peninsula itself, aside from those imposed on Moscow by the U.S. and the EU. Together, these factors have led to Crimea’s isolation, delaying much needed progress there, literally keeping the land of 2.2 million inhabitants in the dark at times.
The sanctions imposed on Crimea by the EU are extensive. Under the sanctions regime, the EU prohibits imports on products originating from Crimea, EU-based companies cannot invest in Crimea, nor can they purchase real estate. They are also banned from financing and servicing Crimean companies. This ban includes prohibition on tourism services as the sanctions ban European cruise ships from calling at ports in the Crimean peninsula. Another major EU restriction involves oil, gas, and mineral resources industries; EU companies are prohibited from exporting goods, services, and technologies pertaining to these industries.
Despite the fact that the Russia and Crimea sanctions have been in place for over three years, Western companies still continue to find themselves in sanctions-related blunders. First, Exxon Mobil was found guilty of disobeying the sanctions regime, and now, Siemens, a German manufacturing giant, is facing scrutiny over its turbines turning up in Crimea.
SIEMENS UNDER FIRE
Arguably, out of all European states, Germany has the largest business ties to Russia. Its exports to Russia are currently valued at $24 billion. While that number is large, it has actually been dramatically affected by the sanctions regime and the worsening economic conditions in Russia; the figure is only half as much as it was in 2012.
The German industrial giant Siemens is one of Russia’s largest and most reliable foreign investors with a long history of doing business there. Siemens’ Russian business dealings date back to the 1850s—well before the Soviet Union was formed—when the company built a telegraph network there. More recently, Siemens revenues in Russia have amounted to billions of findollars annually. But much like Germany’s exports to Russia, that number has been declining in the recent years, and now, a new development threatens the stability of that relationship all together.
In June, Reuters reports placed Siemens-made electricity turbines in Crimea, the company said it had become “an unwitting pawn in a scheme to evade sanctions.” As part of its business dealings in Russia, Siemens holds a 65% share in a Russian joint venture, Gas Turbine Technologies LLC. Thirty-five percent of the joint venture is owned by the Russian company named Power Machines. The joint venture produced electricity turbines which were sold to the Russian state-owned company Technopromexport. According to Siemens there was a written contract which stated that Technopromexport would be taking the turbines to a power plant construction in Southern Russia, to the city of Taman. A Siemens spokesperson stated that the company had no reason to expect Technopromexport to send the turbines to Crimea and violate the sanctions regime. But the turbines were indeed diverted to Crimea and unloaded at Sevastopol port. According to Reuters, the preparatory work is now underway at power plant sites (in Simferopol and Sevastopol) to install and commission the turbines.
While this may look like a traditional Russian clever maneuvering, betraying partners and breaking contracts, it is also a story of desperation. Crimea’s annexation by Russia came at a high cost for its residents in the form of loss of stable energy supply among other things. In 2015, Ukrainian nationalists blew up the power lines that supplied electricity from Ukraine to Crimea. While some of the lines were later restored, Russia still had to create an “energy bridge” in order to remedy the situation. The bridge utilized a series of cables along the seabed across the Kerch Strait, which separates Russia from Crimea. In May 2016, Putin declared that Crimea had now become free of reliance on Kiev for power. However, his declaration was premature, as he counted on timely completion of the energy power plants in Simferopol and Sevastopol. It’s been more than a year since Putin made that speech, and two years since the $1.3 billion power plant projects were approved, but Russia has been unable to deliver the turbines necessary to complete the projects as it could not find a manufacturer willing to violate the EU restrictions. It has been known for a while now that the plants couldn’t be built without the Siemens turbines. The company, however, has repeatedly stated that it had no intention to supply the turbines and violate the EU sanctions. Moreover, according to Siemens official statements, Technopromexport had repeatedly reassured Siemens that the turbines would not be sent to Crimea.
While Siemens is accusing Russia of misleading the company, the Kremlin denies any wrongdoing, claiming that the turbines were made in Russia from Russian parts and were thus not subject to sanction restrictions. However, according to Siemens, the contract under which the turbines were made did subject them to the sanctions. “This development constitutes a blatant breach of Siemens’ delivery contracts, trust, and EU regulations,” the company said in a statement. It is unclear whether or not Siemens will suffer any consequences over this sanction violation, but it is clear that Russia has endangered this long-standing relationship with an important foreign investor.
While in the past the Siemens Company has been able to successfully toe the sensitive line between business and politics in view of the deteriorating Russia-EU relations, this scandal is forcing it to make some serious changes. In an effort to clear its name of any wrongdoing, Siemens has announced that it will be making some major changes to its business dealings with Russia. The company intends to stop delivering power plant equipment to state-controlled firms in Russia, at least temporarily. Moreover, in the future, Siemens intends to only deliver equipment that would be installed by its own workers. Siemens has also stated that it intends to sell its stake in the Russian firm which sells and maintains technology for power plants, and plans to bring criminal and civil proceedings in Russia in order to punish those responsible for diverting the turbines to Crimea.
It’s not just European companies who find it difficult to function under the sanctions regime. In a recent case, Exxon Mobil, a Texas-based oil giant, was found guilty of violating the U.S. sanctions on Russia, and was fined $2 million by the U.S. Treasury Department. According to the U.S. Treasury, in May 2014, shortly after the sanctions were imposed, Exxon signed a contract with Russian oil magnate Igor Sechin who is the chairman of Russian energy company Rosneft. The Russia sanctions are separate and somewhat different from the Crimea sanctions. The Russia sanctions have targeted a long list of companies and individuals, blacklisting them and prohibiting European and American entities from doing business with them. In this instance, the sanctions were violated by Exxon because it signed a contract with Sechin, a blacklisted individual. Here too, much like in the case of Kremlin’s dispute about the legalities of Siemens turbines turning up in Crimea, Exxon is disputing the charges citing issues with interpretation of the sanctions. However, the Treasury department has noted that its warnings about the dangers of entering into contracts with people on the blacklist have been very clear.
Functioning under a sanctions regime, no matter how long they’ve been in place, is not standard or normal for international businesses and entities. Sanctions disrupt vital globalization processes and are generally bad for businesses as well as local communities who end up having to exist in limbo of delayed progress and isolation. However, sanctions, once it is decided to place them, require this sacrifice, and they lose their effectiveness when their terms are violated. Ukraine had used the electricity factor as a bargaining chip in some of its negotiations about reuniting with Crimea. That option is now gone as Crimea is on its way to becoming energy-efficient thanks to the illegal Siemens turbine delivery. The three years of punishment that Crimea’s residents had to put up with—living without electricity security—may have gone in vain.
Whether or not one supports them, the Russia-Crimea sanctions are here to stay, at least for now. It is therefore important for multinational companies like Siemens and Exxon Mobil to learn how to navigate through them without getting into trouble or jeopardizing highly sensitive political talks. In June 2017, the EU prolonged its sanctions against Crimea until June 23, 2018, and the Russia sanctions have also been extended to the end of 2017. This means that this unfortunate business climate is here to stay, at least in the mid-term.
*Maia Otarashvili is Research Fellow and Program Manager of the Eurasia Program at the Foreign Policy Research Institute in Philadelphia. She holds an MA in Globalization, Development, and Transitions from the University of Westminster in London, UK. Her current research is focused on the post-communist countries of the Eurasia region, including the Black Sea and Caucasus states.