Exclusive: How EU firms skirt sanctions to do business in Crimea

[September 21, 2016]  By Anton Zverev, Gleb Stolyarov and Olga Sichkar

SIMFEROPOL, Crimea/MOSCOW (Reuters) - Products for sale in the Crimean stores of two European retailers are being shipped there from Russia via a ferry and port that are subject to EU sanctions, people involved in the transportation said, suggesting companies are finding ways around the punitive economic regime facing Moscow since 2014.

Products carrying the brands of Germany's Metro AG and Auchan [AUCH.UL] of France are visibly for sale on the shelves of the retailers' Crimean subsidiaries.

People involved in transporting the goods say they arrived via a ferry that serves the Crimean port of Kerch. European companies are banned from doing business with the ferry and the port under EU sanctions imposed on Russia after it annexed Crimea from Ukraine.

Both retailers said they were not violating the sanctions because the stores are operated by their Russian subsidiaries, which are not subject to the EU sanctions.

A representative of the Kerch port referred questions about Metro and Auchan to the ferry operator, saying the port only controls shipping, not cargo. A representative of the ferry operator said it does not have contracts with Metro or Auchan and does not know if they use the ferry.

Legal experts said the transfer of goods to Crimea may fall in a gray area of the sanctions regime because the relationship between parent companies and sub-contractors is often hard to define.

In emailed comments in response to questions, Metro and Auchan did not contest that their goods were being shipped via the Kerch ferry and port to their subsidiaries' stores in Crimea.

A spokesman for Metro said Metro stores in Crimea are operated by independent Russian entities and staff that are not subject to EU sanctions.

He said Metro is "fully aware of and complies with the EU laws and regulations, and, in this particular case, the applicable sanctions."

A spokesman for Auchan, which operates one store in Crimea, said the company always operates within the rules that are in force, including European Union decisions.

Asked about the activities of the EU retailers in Crimea, an EU official, who spoke on condition of anonymity, said: "This is against the spirit of the sanctions. But in the absence of a trade embargo, there is always a fine line between compliance and non-compliance."

A European Commission spokeswoman, Maja Kocijancic, asked if Brussels was worried about whether the sanctions were being respected, said implementing sanctions was the responsibility of EU member states.

The French government had no immediate comment. Germany's Economy Ministry said it could not comment on specifics, but that violators of EU sanctions face penalties. It said in cases involving a German firm, it was up to the German Customs Investigation bureau to asses if sanctions have been breached. The bureau declined to comment.

EU SANCTIONS

The EU sanctions on Russia do not bar European firms and citizens from doing business in Crimea. They do restrict some new investments and dealings with certain designated people and entities such as the Kerch ferry company - the main transport link between Russia and Crimea - and the port of Kerch.

According to several transport companies providing services to Auchan and Metro, as well as sources in the two retailers' Russian units, and a western food company, trucking firms load up at the retailers' distribution centers in Russia.
 

The goods then cross to Crimea on the ferry, then trucks disembark at Kerch, then deliver the goods to the Metro and Auchan stores in Crimea.

Reuters has no evidence of any payment from Metro or Auchan to the sanctioned entities.

The goods are transported by sub-contractors, and the stores in Crimea are operated by Russian-registered units of Metro and Auchan, not by the parent companies. The Russian units are not subject to EU sanctions.

"In general, EU-based parent companies can be held liable if they have instructed their local unit to act in violation of the sanctions," said Artem Zhavoronkov, partner at law firm Dentons.

METRO GOODS

The two Metro stores in Crimea are operated by Metro Group entities incorporated under Russian law - Retail Property 5 (RP5) and Retail Property 6 (RP6).

Aleksey Kormilicyn, CEO at Metro Group's RP6, said by email RP6 was using logistics firms to arrange transportation of goods to Crimea and they were "instructed not to use any sanctioned entity when supplying goods."

He did not reply to an emailed question on how the unit ensures the sub-contractors comply with that instruction.

Metro Group is not involved in "local operational details" concerning the stores, according to the spokesman for the group. Metro said most products in its Crimean stores, including Metro branded goods, were sourced from Russian suppliers.

But when a Reuters reporter visited the Metro store in Simferopol, Crimea, in August, she saw on the shelves Italian rice, EU-origin chocolate, pastry, and packaged groceries, all imported into Russia by Metro's Russian unit registered in Moscow, according to their labels. A source at Metro Group Logistic, the retailer's Russian logistics unit, who spoke to Reuters on condition of anonymity, said Metro contracts third-party transport companies to truck goods from its distribution centers in southern Russia via the ferry to Crimea. This arrangement was confirmed by sources at a Metro supplier and at one of the transport companies involved, Transcargo.

Auchan has similar arrangements for supplying some of the goods to its Crimea store, according to transportation companies and a source in Auchan Russia.

On the shelves at Auchan's store in Simferopol when a Reuters reporter visited were fruit and vegetable conserve, chocolate, coffee, ketchup, olive oil, crackers and frozen pizza - all carrying the in-house Auchan-BIO brand.

The Auchan spokesman said the store is operated by Auchan Retail Russia, the firm's Russian unit.

The company did not respond to detailed questions from Reuters about the store's supply logistics.

(Additional reporting by Maria Kiselyova, Olesya Astakhova, Lidia Kelly, Anastasia Teterevleva in MOSCOW, Matthias Inverardi in DUESSELDORF, Gabriela Baczynska and Robin Emmott in BRUSSELS, Rene Wagner in BERLIN, and John Irish and Leigh Thomas in PARIS; Writing by Maria Kiselyova; Editing by Christian Lowe and Giles Elgood)

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