Introduction

International sanctions and export controls of the US, EU, UK and other jurisdictions, although generally not directly binding on Kazakhstan companies, nevertheless can have a strong impact on their business. This results from implications for banking and insurance, sanctions compliance clauses, supply chain and logistics issues, the risk of secondary sanctions and other reasons. Despite the fact that international sanctions have been in place for some time, we felt it useful to discuss this issue once again due to the increased activity on sanctions enforcement by the countries that imposed the sanctions.

Since the escalation of the conflict in Ukraine in February 2022, there has been an increase in the volume of trade of certain goods from Western countries to countries located close to Russia (such as Kazakhstan in addition to other Central Asian countries, Armenia and Turkey) and a corresponding increase in the volume of trade of certain goods from those “third countries” to Russia. For example, according to a recent report by the European Bank for Reconstruction and Development (EBRD), exports from the EU, UK and US to Kazakhstan increased by more than 80 percent in 2022 while, during the same period, Kazakhstan increased its exports to Russia by more than 22 percent. There is a concern from Western authorities that such trade flows may be in part being directed in order to circumvent sanctions restrictions on imports into Russia and exports from Russia, for example in relation to “dual-use items” which can be used for military purposes.

As a result of this, we have seen recent moves by the US and EU authorities to enforce their Russia-related sanctions with respect to activities undertaken in “third countries” that may have the effect of circumventing those sanctions. So far, the number of sanctions enforcement actions involving countries in Central Asia is few. However, a precedent was set following the imposition by the US in June 2022 of secondary sanctions on an Uzbek company involved in exporting electrical components to Russia, and considering a recent increase in enforcement actions by US, EU and UK authorities relating to the Russia-related sanctions generally, there is a possibility of more cases being initiated against persons and companies based in Central Asia, potentially including Kazakhstan.

In light of the above, we have written this article for the purposes of setting out a brief summary of some of the principal risks for Kazakhstan-based businesses related to the US, EU and UK sanctions against Russia and in order to set out some practical steps that Kazakhstan-based businesses may consider taking in order to help mitigate these risks.

Summary of principal sanctions risks for Kazakhstan-based businesses

We see the following being some of the principal risks for Kazakhstan-based businesses relating to the US, EU and UK sanctions against Russia:

• Restrictions on exports to Russia. The US, EU and UK have imposed restrictions on exports of certain items to Russia, including all “dual-use items.” Examples of such dual-use items include many microchips, computers, software with encryption functions and telecommunications equipment. One important point to note is that the EU and UK restrictions only apply to exports/transfers from the EU/UK (albeit including indirect exports/transfers via a third country), whereas the US restrictions also apply to re-exports and may also apply to in-country transfers. Therefore, the US restrictions could, for example, apply to the export of a regulated item from Kazakhstan to Russia, and also then to the sale of such item within Russia. The US restrictions “follow the item,” and items produced in a third country are subject to the restrictions relating to Russia if they contain more than 25 percent US-origin controlled content.
• Restrictions on exports from Russia. The US, EU and UK have imposed restrictions on exports of certain items from Russia, including the export of gold, coal, steel and wood.
• Oil price cap. The US, EU and UK have imposed a “crude oil price cap” that limits financial or technical support (e.g., insurance or shipping) for exports to third countries.  Imports of crude oil and some other hydrocarbons into the US, EU and UK are partly or completely banned, depending on the jurisdiction, regardless of the price.
• Blocking sanctions / SDNs. The US, EU and UK have imposed blocking sanctions and asset freezes against various Russian companies (for example, many of the prominent Russian banks, Russian Railways and Aeroflot) and individuals (and hence many large Russian companies are caught by such blocking sanctions due to being owned or controlled by such individuals).

Kazakhstan companies are themselves generally not required to comply with US/EU/UK sanctions except when acting in the relevant jurisdiction since the US/EU/UK sanctions generally apply to entities incorporated in, and individuals that are citizens or residents of, such jurisdictions as well as entities and individuals that are located in such jurisdictions.

However, Kazakhstan companies could still face significant issues due to US/EU/UK sanctions against Russia in the following circumstances:

• Nexus for related individuals / companies. A Kazakhstan company could become subject to US/EU/UK sanctions in relation to a particular transaction if, for example, one of its employees or directors acting on such transaction is a citizen or resident of the US, UK or an EU country. Equally, a similar effect may occur if a US, UK or EU affiliate of the Kazakhstan company were to become involved in any particular transaction, for example, acting as approving parent company or guarantor/security provider.
• Involvement of US/EU/UK financial system. If any particular transaction involves US/EU/UK banks, insurers or financial institutions then they may be barred by applicable sanctions from carrying out the transaction. If a transaction provides for payments in US/EU/UK currency, other than as an intrabank transfer, this will normally involve a correspondent bank in that jurisdiction. If their compliance department does not flag the transaction, a “causation” risk may arise. Furthermore, it is worth noting that engaging in transactions with a sanctioned party or in a sanctioned jurisdiction may void insurance cover (including under re-insurance).
• Overcompliance by financial institutions and counterparties.  Sanctions are complicated, and many companies choose to err on the side of caution rather than risk an inadvertent breach. As a result, even in cases where a financial institution or other counterparty would lawfully be able to carry out a transaction, involvement is lawful under relevant sanctions, their compliance department may slow or refuse transactions due to their own exposure, potentially for valid reasons, but sometimes also due to “de-risking” or “overcompliance.”
• US Export restrictions. As mentioned above, certain of the US export restrictions “follow the item,” and items produced in a third country are subject to such restrictions if they contain more than 25 percent US-origin controlled content, and such restrictions apply not only to exports from the US, but also re-exports (e.g., from Kazakhstan to Russia) and, in some cases, in-country transfers—which includes transfers of dual-use goods and certain other goods within Russia. Thus, a transaction with no obvious US nexus may still breach such export restrictions.
• Trans-shipment via Russia. Due to geography and infrastructure constraints (e.g. pipelines), it is difficult for some Kazakh goods to reach Western markets without transiting Russia. EU and other sanctions authorities have confirmed that transshipment alone would not cause Kazakh goods to be treated as “Russian” goods for the purposes of the Russia sanctions but have also warned about the risks of blending, falsification of certificates of origin, etc. Therefore, extra scrutiny should be expected in such cases. In the specific case of oil transshipped via Transneft, US/EU/UK authorities have confirmed (especially with respect to KEBCO) that Kazakhstan oil blended with Russian oil due to technical constraints won’t be subject to import bans or price caps.
• US secondary sanctions. Under the US sanctions regime there is a risk of US authorities imposing “secondary sanctions” (i.e., designating an entity (e.g., a Kazakhstan company) itself as a sanctioned entity under blocking sanctions). Secondary sanctions can be imposed even when there is no apparent US nexus under the US sanctions regime. Secondary sanctions may be imposed on non-US persons that, among other things (a) are foreign financial institutions that knowingly facilitate a “significant transaction” involving an entity subject to US blocking sanctions or (b) are entities that provide “material assistance” to an entity subject to US blocking sanctions. The US authorities have clarified that secondary sanctions won’t be imposed for transactions that US persons could do without a specific license or involve only sectorally sanctioned entities and no “deceptive practices.” To date, actual imposition of secondary sanctions has been rare, but the US authorities have signaled they may increase. 

Practical steps for mitigating sanctions risks

Kazakhstan-based businesses may want to consider taking some of the following practical steps in order to help mitigate the abovementioned sanctions risks:

• Monitor the current status of sanctions. It may be useful to set up a sanctions compliance team for the purpose of keeping track of the current set of US, EU and UK sanctions against Russia.
• Sanctions clauses. Sanctions-specific clauses could be included in transaction documents, such as, a requirement for a counterparty to inform of a breach of sanctions, and a right for a party to terminate a contract if there is a breach of sanctions.
• Internal policies to eliminate sanctions nexus. As mentioned above, there is a risk of there being a US, EU or UK nexus if affiliated companies that are incorporated in, or individuals who are citizens or residents of, those jurisdictions become involved in any particular transaction. Therefore, it may be advisable to set up an internal policy creating “firewalls,” or something similar, to ensure that any companies or individuals within a company’s group will not, as a matter of course, become involved in any potentially sanctioned transactions. This policy should include ensuring that any parent companies with a US, EU or UK nexus do not actively approve any such transaction.
• Currencies and financial system. As mentioned above, in order to minimize sanctions risks or problems associated with banks’ sanctions “overcompliance” it may be useful in some cases to use a transaction currency other than a currency of the US/EU/UK. Using those currencies for notional or reference purposes is generally not a problem.
• “Red flags” for avoiding sanctions circumvention transactions. Kazakhstan-based businesses may want to consider the following set of “red flags,” which the US authorities have stated may indicate an attempt by a potential counterparty to circumvent US sanctions against Russia:

• The use of shell companies to conduct international bank transfers, often with the involvement of banks in jurisdictions where the buyer company is not registered
• The buyer’s reluctance to provide data on the end use of the product, including refusing to fill out a form with information about the end user
• Refusal of basic installation, training and maintenance of purchased goods
• The difference between the IP address of the client and the location it is based in
• Nonrepresentation on the Internet (or weak representation) of the organization with which the transaction is concluded
• Receipt of payment from a company or from a country not listed as an end user

• Using existing wind-down licenses or applying for new licenses. In cases where a US, EU or UK sanctions nexus is unavoidable, it may be necessary to seek to use any existing wind-down licenses that are currently in place or, if this is not possible, instead to apply for a specific license from the relevant sanctions authority in order to carry on any necessary transactions with sanctioned entities. For example, if a Kazakhstan company is a borrower under a loan agreement including a lender or facility agent that is a Russian bank subject to blocking sanctions, then it may not be permitted under the applicable sanctions for that borrower to continue to service its debt under such loan. This could lead to the risk of the sanctioned Russian lender or facility agent in question seeking to enforce its loan (and any related guarantees and security) against such borrower. In order to mitigate this risk, the borrower may want to check if any wind-down licenses remain in place that will allow for continued servicing of the debt and, if not, the borrower may want to consider applying for a new specific license from the relevant sanctions authorities to allow it to service its debt by paying the relevant lender (if necessary, via the relevant facility agent).  If a license will be sought, it should be noted that there are specific features of the licensing regimes in each of the US, EU and UK.  For example, US licensing practice would generally require any payment to be paid into a blocked account (which may not be a good discharge of the borrower’s obligation to repay) and a general EU-wide license won’t be available in the EU (instead it would be necessary to apply to the national competent authority of the relevant EU member state).

We hope the above is useful in helping Kazakhstan-based businesses negotiate the risks related to the US, EU and UK sanctions against Russia.