WARSAW/MOSCOW Elektrobudowa, a Polish firm that builds power plants, is interested in buying its partner out of a Russian company they jointly own, but there is a problem: the partner firm is owned by a pro-Moscow Crimean politician on the EU's sanctions list.
To buy out the partner would mean Elektrobudowa transferring cash or assets to the owners, and that, say lawyers who specialize in sanctions law, could be interpreted as a violation of the EU measures.
Many Western investors and their banks are facing similar quandaries after the imposition of targeted sanctions by the EU, the United States and a handful of other jurisdictions.
Those measures are supposed to punish Russia's elite for annexing Crimea, but according to people advising companies in this field they have also spread confusion and created awkward predicaments for some foreign investors.
Finnish retailer Stockmann said this week it was freezing plans to open more department stores in Russian cities because of uncertainty and a falling rouble, and other investors may follow suit, either halting or cancelling projects.
A surge in net capital flight - mostly Russians sending their own funds abroad to avoid uncertainty at home - is one of the main factors prompting Russia's central bank to warn that economic growth would likely fall below 1 percent this year.
Western banks involved in global commodity trade flows are also tightening payment procedures for deals with Russia, having already taken similar steps with Ukraine. Some banks now require, for example, that payment for exports of steel or grain be made only once there is proof cargoes have been loaded onto a vessel, as opposed to allowing the transfer of funds for material still in Russia or Ukraine.
"I have experienced huge concern in all the European companies I have been in contact with - both economic concern and about what happens next, regarding sanctions and retaliation," said Lars Christensen, chief analyst at Danske Bank. "The customers are very, very scared. In fact, in 15 years I have never seen the customers this scared about political matters."
Banks, stung in the past for failing to implement sanctions correctly, are particularly wary of falling foul of the rules and are being ultra-cautious about applying them.
U.S. bank JP Morgan agreed to process a payment from Russia's embassy in Kazakhstan to an insurance agency after initially refusing on the grounds that the agency was partly owned by a unit of Bank Rossiya, blacklisted by the White House.
JP Morgan's initial ban caused uproar in Moscow. After consulting with U.S. regulators, the bank relented.
Meanwhile, Visa and MasterCard have resumed payment services for clients of another Russian bank, SMP, which they halted last month because its main shareholders were on the U.S. blacklist, although unlike Rossiya the bank itself was not. Visa said it was told by Washington to lift the restrictions.
DISQUIET IN KATOWICE
The biggest ownership change to come as a direct result of the sanctions so far was that of Gunvor, one of the world's largest commodity traders. Hours after U.S. sanctions were imposed on one of its billionaire co-founders, Gennady Timchenko, the firm announced its other co-founder, Torbjorn Tornqvist, had just bought Timchenko's stake the previous day.
Gunvor said the move was made as part of its contingency planning because it thought sanctions might come, and that its business has not been affected. U.S. officials also made clear they did not want sanctions on Timchenko to affect the firm.
Unlike Gunvor, it is too late for Elektrobudowa to announce that it has already bought out its sanctioned partner. Since 2008 the Polish company has owned a 49 percent stake in Vector, a Russian company that makes electricity transformers at a factory in the Ural mountains region of Udmurtia.
The other 51 percent in Vector is owned by Tavrida Electric, which has its headquarters in Moscow. Tavrida is, in turn, majority owned by a Alexei Chaliy, a businessman who holds a 60 percent stake and has emerged in recent weeks as one of the leading pro-Russian politicians in Crimea.
Chaliy declared himself "people's mayor" of the Crimean port of Sevastopol in February and was installed on April 1 as the acting governor of Sevastopol, now annexed and given the status of a separate region of Russia alongside the rest of Crimea.
Last month, he sat alongside Russian President Vladimir Putin as he signed an agreement on Crimea's annexation at a ceremony in the Kremlin. Dressed casually in a dark sweater while surrounded by officials in suits, he punched the air with his fist when the deal was signed.
He is one of 51 people subject to visa bans and asset freezes under EU sanctions.
Their partner's political activities have caused disquiet at Elektrobudowa's headquarters in the southern Polish city of Katowice. Poland, itself occupied by Russia in the past, strongly backs the authorities in Kiev and opposes Moscow and its associates in Crimea.
Elektrobudowa executives say they are prepared to buy him out of their joint venture, especially as he may no longer want to be seen doing business with NATO member Poland.
"If he decides to sell his stake, we will be thinking about buying it," Elektrobudowa chief executive Jacek Faltynowicz told Reuters in an interview. "We are in regular contact with our Russian partners, and we are planning to visit Russia ... It is hard to tell how much it would cost. We have not worked out any valuations yet."
Reuters sent questions to Tavrida Electric asking if it planned to sell or reduce its stake in Vector, and whether the sanctions on Chaliy had affected its operations. The company said it received the questions, but did not reply.
Chaliy did not respond to requests for comment. His spokesman said he had passed the questions to him.
According to Brian Zimbler, managing partner at law firm Morgan Lewis in Moscow, the sanctions could prevent an EU-based company from transferring money or assets to the benefit of anyone on the list.
"If you are doing business with, or doing anything that benefits anyone on the list, (there is a risk) of violating the sanctions - EU and U.S.," he said.
Payment can be placed in an escrow account, or the assets of the person subject to the sanctions can be placed in a trust and then sold, lawyers say. But how safe these arrangements are would depend on how strictly the regulating authority - in this case the Polish government - interprets the sanctions.
Another potential problem is that, depending on how the rules are interpreted, any dividend received from a firm controlled or majority owned by someone on the list could be seen as a payment from that person, which would be a violation of the sanctions.
Company reports show Elektrobudowa took a dividend worth 1.377 million zlotys ($455,700) from Vector's 2012 profits. The Polish firm's chief financial officer, Adam Swigulski, told Reuters it also expected a dividend from Vector's 2013 profits.
Asked about the impact of the sanctions on any transactions involving Elektrobudowa and Vector, Faltynowicz, the Elektrobudowa CEO, said: "It is far too early for such consultations or analysis of the problem."
Financial sources based in Moscow said that in the days after the sanctions were announced there was a flurry of activity as companies, especially foreign banks, scrambled to work out if they were exposed.
Some smaller investors pulled their money out, even if they were not directly affected, said the sources, but since then things have calmed down. "The bigger guys are OK," said a second financial source. "Funds see this as a buying opportunity."
Andrei Kostin, the chief executive of VTB, Russia's second-largest state bank, said in the previous week he had visits from representatives of five leading U.S. and European banks.
"They said ‘we will keep working with you, we will keep giving you money but will be doing it quietly because political pressure is being put on us'," Kostin told a news conference on Wednesday. "Probably it will be a little more expensive - the risks have increased."
($1 = 3.0214 Polish Zlotys)
(Additional reporting by Annabella Pultz Nielsen in Copenhagen, Oksana Kobzeva in Moscow, Christian Lowe in Warsaw, Maytaal Angel in London and Silvia Antonioli in Lausanne, Switzerland; Writing by Christian Lowe; Editing by Carmel Crimmins, Peter Graff and Will Waterman)