ANNEX

1. Overview of Russian and Belarusian assets in the EU (1)

1.1. Russian investments in the EU

In view of the number of transactions completed between 2015 and 2021, Russia was the 11th foreign investor in the EU accounting for 0,9% of the number of investments and 0,7 % of the value of investments from all non-EU jurisdictions. This represents 643 deals with a total value of EUR 15bn (value is missing for 34 % of the deals) including mergers and acquisitions, minority, portfolio and greenfield investments. While in recent years the inflow of Russian investment appears relatively limited, based on 2020 data, Russian individuals or entities control about 17 000 EU companies (2), and have potentially controlling stakes (3) in another 7 000 companies and minority stakes in a further 4 000 companies (4). In many instances companies have multiple Russian shareholders, each of them with a percentage stake below 50 %, but all of them summing up to more than 50 % of the capital of the EU business. In 57,7 % of the EU companies under Russian control or influence, assets are held by a natural person, in 9,7 % by a company and in 1,1 % by a public authority/state.

Table 1

Number of EU27 companies with Russian influence or control, detail by type of controlling entity

Type of controlling entity (Global Ultimate Owner) Number of companies Share One or more known individuals or families 17 510 57,7 % Not available 9 204 30,4 % Corporate companies 2 931 9,7 % Public authorities, States, Governments 343 1,1 % Financial company 149 0,5 % Mutual & Pension Fund/Nominee/Trust/Trustee 83 0,3 % Bank 81 0,3 % Foundation/Research Institute 18 0,1 % Insurance company 1 0,0 % Private equity firms 1 0,0 % Source: JRC analysis, based on Bureau van Dijk data. Figures based on 2020 balance sheets data. Data extracted in March 2022. In case of Russian influence (not control), the EU company can be controlled by an entity from any other country. The missing cases (‘not available’) refer to EU companies with Russian influence that do not report any majority shareholder.

Assets held by the Russian government are in ‘corporate companies’ (5) for 79,9 % of the cases, and in banks or other financial institutions for the remaining (Table 2).

Table 2

Number of EU27 companies with Russian government control or influence, detail by type of controlled EU company

Entity type of the EU company Number of companies Share in total (%) Corporate companies 262 79,9 Financial company 37 11,3 Bank 17 5,2 Mutual & Pension Fund 11 3,4 Private equity firms 1 0,3 Source: JRC analysis, based on Bureau van Dijk data. Figures based on 2020 balance sheets data. Data extracted in March 2022.

The sectors with the largest presence of Russian control are Wholesale, Real Estate, Professional Scientific and Technical activities and Finance and Insurance. The sectors with the largest presence of Russian influence are very comparable: Wholesale, Real Estate, Professional Scientific and Technical activities and Manufacturing (Table 3).

Table 3

Number of EU27 companies with Russian influence or control. Detail by target sector, 2020

EU27 Control Influence Total Sector Number of companies Number of companies Stake (*1) % Number of companies Agriculture, forestry and fishing 137 137 62 274 Mining and quarrying 19 15 28 34 Manufacturing 904 883 56 1 787 Electricity, gas, steam and air conditioning 61 45 40 106 Water supply; sewerage, waste management 32 24 56 56 Construction 744 621 50 1 365 Wholesale and retail trade; 4 530 3 607 63 8 137 Transportation and storage 666 417 51 1 083 Accommodation and food services 612 675 52 1 287 Information and communication 763 668 55 1 431 Financial and insurance activities 1 199 625 46 1 824 Real estate activities 2 714 2 470 70 5 184 Professional, scientific and technical 1 721 1 272 60 2 993 Administrative and support services 886 746 55 1 632 Public administration and defence 1 6 35 7 Education 103 76 56 179 Human health and social work activities 70 56 46 126 Arts, entertainment and recreation 160 170 50 330 Other service activities 254 245 52 499 Source: JRC analysis, based on Bureau van Dijk data. Figures based on 2020 balance sheets data. Data extracted in March 2022. In case a company has several Russian shareholders holding minority stakes, the sum of stakes for all Russian shareholders for that company is computed.

1.2. Belarusian investments in the EU

Based on 2020 data, Belarusian individuals and entities control about 1 550 EU companies, and have potentially controlling stakes (6) in another 600 companies and minority stakes in 400 companies (7). Similarly to Russian investments, some companies have multiple Belarusian minority shareholders which together hold more than 50 % of the capital of the EU business. In 63,2 % of the EU companies under Belarusian control or influence, assets are held by a natural person, in 5,1 % by a company and in 0,4 % by a public authority/state (Table 4).

Table 4

Number of EU27 companies with Belarusian influence or control, detail by type of controlling entity

Type of controlling entity (GUO) Number of companies Share One or more known individuals or families 1 687 63,18 % Corporate companies 135 5,06 % Public authorities, States, Governments 11 0,41 % Bank 1 0,04 % Mutual & Pension Fund/Nominee/Trust/Trustee 1 0,04 % Financial company 1 0,04 % Foundation/Research Institute 1 0,04 % Not available 833 31,20 % Source: JRC analysis, based on Bureau van Dijk data. Figures based on 2020 balance sheets data. Data extracted in March 2022. In case of Belarusian influence (not control), the EU company can be controlled by an entity from any other country. The missing cases (‘not available’) refer to EU companies with Belarusian influence that do not report any majority shareholder.

Assets held by the Belarusian government are mainly in Wholesale as detailed below in Table 5.

Table 5

Number of EU27 companies controlled by state or public authority from Belarus, detail by sector of controlled company

Sector of activity of the EU company Number of companies Total assets (million euro) Wholesale trade of motor vehicle parts and accessories 1 1,49 Wholesale on a fee or contract basis 1 N.A. Agents involved in the sale of fuels, ores, metals and industrial chemicals 1 2,80 Wholesale of agricultural machinery, equipment and supplies 2 38,98 Wholesale of solid, liquid and gaseous fuels and related products 2 26,14 Wholesale of chemical products 1 4,23 Air transport 1 N.A. Passenger air transport 1 0,22 Source: JRC analysis, based on Bureau van Dijk data. Figures based on 2020 balance sheets data. Data extracted in March 2022.

The sectors with the largest presence of Belarusian control are Wholesale, Professional Scientific and Technical activities, Transportation and storage, and Real Estate. The sectors with the largest presence of Belarusian influence are very similar: Wholesale, Real Estate, Professional Scientific and Technical activities, and Manufacturing (Table 6) .

Table 6

Number of EU27 companies with Belarusian influence or control. Detail by target sector, 2020

Control Influence Total Sector Number of companies Number of companies Stake (*2) % Number of companies Agriculture, forestry and fishing 7 10 48 17 Mining and quarrying 1 0 N.A. 1 Manufacturing 73 100 51 173 Electricity, gas, steam and air conditioning 1 3 53 4 Water supply; sewerage, waste management 4 4 32 8 Construction 107 76 54 183 Wholesale and retail trade 568 377 60 945 Transportation and storage 122 91 61 213 Accommodation and food service 45 32 46 77 Information and communication 97 74 55 171 Financial and insurance activities 48 26 51 74 Real estate activities 109 108 53 217 Professional, scientific and technical 141 116 47 257 Administrative and support services 73 41 55 114 Education 7 4 75 11 Human health and social work activities 5 7 32 12 Arts, entertainment and recreation 17 5 69 22 Other service activities 22 22 54 44 Source: JRC analysis, based on Bureau van Dijk data. Figures based on 2020 balance sheets data. Data extracted in March 2022. In case a company has several Belarusian shareholders holding minority stakes, the sum of stakes for all Belarusian shareholders for that company is computed.

2. Effect of restrictive measures (sanctions) to foreign direct investments from Russia and Belarus and due diligence of EU companies

EU restrictive measures apply, inter alia, to any person inside or outside the territory of the Union who is a national of a Member State, to any legal person, entity or body, inside or outside the territory of the Union, which is incorporated or constituted under the law of a Member State, and to any legal person, entity or body in respect of any business done in whole or in part within the Union.

EU restrictive measures can affect foreign direct investments from Russia and Belarus in several ways. They can take the form of individual listings, or of sectoral measures.

Certain Russian and Belarusian persons and entities are targeted by individual financial restrictions, which include an asset freeze and a prohibition to make funds or economic resources available, directly or indirectly, to those listed persons and entities.

Designated persons or entities are unable to use their funds (i.e. financial assets and benefits of every kind) and economic resources (assets of every kind) that are frozen and no funds or economic resources shall be made available to them. This means that EU citizens and companies must not make payments or supply them with goods or other assets. In effect, business transactions with designated persons or entities cannot legally be carried out unless the legislation exceptionally allows them.

The Commission takes the view that the asset freeze extends to the assets of any non-designated entity, which is owned or controlled by a designated person or entity, unless it can be proven that the assets concerned are in fact not owned or controlled by the designated person or entity. Similarly, funds or economic resources should not be made available to a non-designated entity owned or controlled by a designated person or entity, unless it can be proven that the funds or economic resources will in fact not reach the designated person (8). Interest and dividends are considered ‘funds’ that are to be frozen.

In addition, banks incorporated or constituted under the law of a Member State or doing business in the EU shall freeze payments received from any designated person or entity (subject to an asset freeze) which is listed in Annex I to Council Regulation (EU) 269/2014. This means that transfers originating from a designated person, or originating from a non-designated person but made through a designated bank (9), are not rejected nor the funds are returned to the sender; rather, those funds remain frozen in the EU bank. It is possible to request from the national competent authority for sanctions the release of those funds, for instance under the derogation foreseen in Council Regulation (EU) 269/2014 (10) concerning the payment by a designated person or entity due under a contract concluded before the date of designation.

The Union has also adopted sectoral restrictive measures. For example, certain Russian and Belarusian banks have been decoupled from specialised financial messaging services, notably SWIFT, which greatly hinders their possibility to engage in international payments. Restrictive measures have also curbed financial inflows from Russia and from Belarus to the EU, by prohibiting the acceptance of new deposits exceeding certain values from Russian and Belarusian nationals or residents and legal persons, entities or bodies established in Russia or in Belarus, the holding of accounts of Russian and of Belarusian clients by the EU Central Securities Depositories, as well as the selling of euro-denominated securities to Russian or Belarusian clients. Moreover, EU operators are prohibited from providing financing, including equity capital, to non-EU operators active in the energy sector in Russia. This may indirectly affect foreign direct investment in the EU depending on the specific financing arrangement envisaged.

Furthermore, the release of controlled technology (including knowledge or intangible items) to foreign persons is a kind of Intangible Technology Transfer also known as a ‘deemed export’. Council Regulation (EU) No 833/2014 and Council Regulation (EC) No 765/2006 and their subsequent amendments prohibit to sell supply, transfer or export, direct or indirectly, certain goods and technology subject to the measures to any natural or legal person, entity or body in Russia and Belarus, or for use in Russia and Belarus respectively. The requirements for the control of technical assistance also extends the control to foreign nationals in the EU. Therefore, companies should restrict the access of Russian and Belarusian staff to such knowledge or technology if such knowledge and technology would be used in Russia or Belarus.

EU companies are prohibited from participating, knowingly and intentionally, in activities the object or effect of which is to circumvent the restrictions. In all situations, EU companies, and in particular those with stakeholders of Russian or Belarusian nationality should perform adequate due diligence on their business partners and the final destination of funds or economic resources. These procedures may include screening, risk assessment, multi-level based due diligence and ongoing monitoring.

3. Screening of foreign direct investments from Russia and Belarus on grounds of security or public order under the framework set out in Regulation (EU) 2019/452

Regulation (EU) 2019/452 (11) (the ‘FDI Screening Regulation’) covers foreign direct investments from third countries, i.e. those investments ‘which establish or maintain lasting and direct links between investors from third countries including State entities, and undertakings carrying out an economic activity in a Member State’ (12).

Cases only involving investments by one or more entities established in the Union do not fall within the scope of the Regulation. Such transactions could fall under the scope of the national screening laws of the Member States, within the limits of the provisions of the Treaty on the Functioning of the European Union (TFEU) on the right of establishment and capital movements. In particular, the Treaty allows the Member States to maintain measures necessary on grounds of public policy or public security or measures based on overriding reasons in the public interest recognised in the case-law of the Court of Justice of the European Union. The right of Member States to adopt such measures restricting the free movement of capital is explained further in the next section. The status of being established in the European Union i.e. a European Union company for the purposes of the TFEU is based, under Article 54 TFEU, on the location of the registered office, central administration or principal place of business and as well as the legal order under which the company is formed, not on the nationality of its shareholders. Investments by such companies do not fall within the scope of the FDI Screening Regulation. The FDI Screening Regulation provides one exception to this rule: investments by EU entities may come within the scope when they fall under the anti-circumvention clause. Circumvention is not defined by the Regulation as such; however, its Recital (10) specifies that anti-circumvention measures ‘should cover investments from within the Union by means of artificial arrangements that do not reflect economic reality and circumvent the screening mechanisms and screening decisions, where the investor is ultimately owned or controlled by a natural person or an undertaking of a third country’. Thus, it is important to ascertain whether the investor is part of a scheme of circumvention set up with the objective result of avoiding the application of the Regulation. Some foreign investors for instance specifically state that the direct investor is a European holding company that they have set up for the purpose of the proposed transaction. Such an arrangement might be created for legitimate business reasons. However, even if evidence of a subjective intention to circumvent the Regulation is not available, the lack of economic activity of the investor company and the objective capability of the arrangements to avoid the rules laid down in the Regulation are sufficient to create the presumption that the arrangement is artificial. The most common example of circumvention in the sense of Recital (10) is the case where foreign investment into the Union is channelled through an EU-based pure ‘shell’ or ‘letterbox company’, which has neither directly nor indirectly a genuine economic activity but serves solely the purpose of being the legal vehicle (13) for the investment. The existence of circumvention must be established on a case-by-case-basis, having regard to the specific circumstances of each case and on the basis of relevant evidence.

The FDI Screening Regulation applies to all sectors of the economy and is not subject to any thresholds. The need to screen a transaction is often independent from the value of the transaction itself. The Regulation empowers Member States to review investments within its scope on the grounds of security or public order, and to take measures to address specific risks.

The terms ‘security’ and ‘public order’ are not defined in the Regulation. Article 4 of the Regulation however specifies the factors for consideration when determining whether an FDI is likely to affect security and public order. These factors include the potential effects of the FDI on critical infrastructure, critical technologies, supply of critical inputs, access to sensitive information and the freedom and pluralism of the media. Aspects related to the investor are also relevant for this assessment, such as whether the foreign investor is controlled by a government. For example, in determining whether a foreign direct investment is likely to affect security or public order, Member States and the Commission may take into account whether the foreign investor is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country, including through ownership structure or significant funding; whether the foreign investor has already been involved in activities affecting security or public order in a Member State; or whether there is a serious risk that the foreign investor engages in illegal or criminal activities.

The review and, when required, the adoption of measures prohibiting or conditioning an investment within the scope of the Regulation on grounds of security of public order is the ultimate responsibility of Member States. The Commission may address opinions recommending specific actions to the Member State where the investment takes place, in particular when there is a risk that the investment affects security or public order in more than one Member State or projects and programmes of Union interest.

In the current circumstances, there is a significantly heightened risk that FDI by Russian and Belarusian investors, in particular by government controlled entities may pose a threat to security and public order because the Russian and Belarusian government may have a stronger incentive to interfere with critical activities in the EU and to use their ability to control or direct Russian and Belarusian investors in the EU for that purpose. Therefore, such FDI should be systematically checked and scrutinized very closely in order to identify any possible threats.

While screening by Member States is usually undertaken before the completion of the FDI transaction, the FDI Screening Regulation allows Member States to maintain mechanisms which provide for the screening of an FDI transaction after its completion. If a Member State launches the formal screening of an FDI, it is subject to the cooperation mechanism irrespective of its planned or completed status. Furthermore, the cooperation mechanism may be initiated within 15 months after the investment has been completed when an investment is not subject to screening at national level (14), This may occur when the Member State does not have a screening mechanism or when the Member State maintains a screening mechanism but the specific FDI transaction was not submitted by the parties for ex-ante screening. This can lead to the adoption of measures by the Member State where the investment has taken place, including the necessary mitigating measures.

4. Possible actions to restrict investments within the limits provided for by the rules on free movement of capital and establishment

Article 63 TFEU provides for the freedom of capital movements not only within the EU but also between Member States and third countries. Similarly, Article 49 TFEU protects the freedom of establishment of nationals of a Member State in the territory of another Member State. Both provisions prohibit all restrictions on the movement of capital unless they pursue legitimate public policy objectives. Such objectives are defined in the Treaty or in the case-law of the Court of Justice of the European Union as overriding reasons in the public interest. Such objectives should not be purely economic (15).

Member States may screen investments that do not fall within the scope of application of Regulation (EU) 2019/452, i.e. portfolio investments or intra-EU direct investments such as those ultimately controlled by Russian or Belarusian entities, provided such screening is done in compliance with Union law and in particular the Treaty provisions on free movement of capital and establishment. Portfolio investments, which do not confer the investor effective influence over management and control of a company might also be of relevance in terms of public policy or public security, depending on the circumstances.

Member States can rely on grounds of public policy and public security (set out in Article 65(1)(b) TFEU) to restrict investments only if there is a genuine and sufficiently serious threat to a fundamental interest of society (16) and if less restrictive measures are insufficient to address such threat.

The Court of Justice clarified that the concept of public security under Article 65(1)(b) TFEU covers both the State’s internal and external security (17). Restrictions to capital movements may also be taken to address threats to financial stability (18).

In the analysis of justification and proportionality, restrictions on the movement of capital to and from third countries may be based on different considerations compared to restrictions to intra-EU capital movements (19). Consequently, under the Treaty, additional reasons justifying a restriction may be acceptable in the case of restrictions on transaction involving third country.

5. Compliance with anti-money laundering rules

Member States are urged to ensure full compliance with the requirements of the EU Anti-Money Laundering Directive (AMLD) (20) to prevent the misuse of the EU financial system, including in relation to customer due diligence and international cooperation. Moreover, an effective transparency of beneficial owners of legal persons and legal arrangements, as provided by the AMLD, is required to ensure effective application of sanctions.

In this context, this becomes even more crucial to improve the detection of suspicious transactions and activities, and to close loopholes used by criminals to launder illicit proceeds through the financial system. This is in line with the AML package adopted by the Commission in July 2021.

6. Cooperation between Member States’ national competent authorities for sanctions, screening authorities and promotional banks and institutions as well as relevant international financial institutions

Member States’ screening authorities and national promotional banks and institutions (NPBIs), as well as international financial institutions (IFIs) of which Member States are shareholders should exchange information and maintain close cooperation (via the ministries or bodies those institutions depend on and/or their governance bodies) in order to identify FDI, in particular from Russia and Belarus, that could affect security or public order in that Member State. Member States screening authorities are invited to raise awareness of the factors that may be taken into consideration to determine whether an FDI is likely to affect security or public order.

Ensuring close cooperation between Member States’ national competent authorities for sanctions, screening authorities, NPBIs and IFIs of which Member States are shareholders, including the European Investment Bank and the European Bank for Reconstruction and Development, will contribute to protect the Union’s security and public order and facilitate full compliance with the sanctions in activities supported by the aforementioned public investment entities.

(1) For the purpose of this analysis, the term ‘assets’ refer to any company registered in the EU that is controlled/influenced by a Russian or Belarusian investor.

(2) EU companies are approximately 23 million (latest available year 2018, Eurostat business demography)

(3) This is the case of multiple Russian shareholders with an aggregated stake higher than 50 %, but where no one individually holds a stake above 50 %.

(4) We observe an additional 2 000 companies with a reported non-controlling Russian shareholder, for which the amount of stake is not reported.

(5) This category includes all companies that are not banks or financial companies nor insurance companies.

(*1) The figures in the table are the average stakes across companies in each sector. In a conservative approach, we take into account only stakes at the first level of ownership (direct stakes), disregarding higher-level stakes, i.e. shareholders of shareholders.

(6) This is the case of multiple Belarusian shareholders with an aggregated stake higher than 50 %, but where no one individually holds a stake above 50 %.

(7) We observe an additional 100 companies with a reported non-controlling Belarusian shareholder, for which the amount of stake is not reported.

(*2) The figures in the table are the average stakes across companies in each sector. In a conservative approach, we take into account only stakes at the first level of ownership (direct stakes), disregarding higher-level stakes, i.e. shareholders of shareholders.

(8) https://ec.europa.eu/info/sites/default/files/200619-opinion-financial-sanctions_en.pdf

(9) https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/190704- opinion-freeze-of-funds_en.pdf

(10) Council Regulation (EU) No 269/2014 of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine (OJ L 78, 17.3.2014, p. 6).

(11) Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (OJ L 79I , 21.3.2019, p. 1).

(12) See Recital 9 of the FDI Screening Regulation.

(13) To address the issue of shells in the EU, the Commission put forward a proposal on 22 December 2021 for a Council Directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU, COM(2021) 565 final. Member States may draw inspiration from the transparency standards the proposal establishes around the use of shell entities, such as income, staff and premises.

(14) In practice, a foreign investment completed now (March 2022) could be subject to ex post comments by Member States or opinions by the Commission until June 2023 (15 months after completion of the investment).

(15) Case C-463/00, Commission v Spain, ECLI:EU:C:2003:272, para. 35

(16) See Cases C-54/99, Église de Scientologie, ECLI:EU:C:2000:124, para. 17 and C-503/99, Commission v Belgium, ECLI:EU:C:2002:328, para. 47, C-463/00, Commission v Spain, ECLI:EU:C:2003:272, para. 72.

(17) Case T-315/01, Kadi v Council and Commission, ECLI:EU:T:2005:332, para 110.

(18) See the Commission Statement on the capital controls imposed by the Greek authorities of 29 June 2015, available at: https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_15_5271.

(19) Case C-446/04, Test claimants in FII Group litigation, ECLI:EU:C:2006:774, para. 171.

(20) Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC (OJ L 141, 5.6.2015, p. 73).