spolek pro přístupné a srozumitelné právo

After almost three years of the aggressive war of the Russian Federation against Ukraine, in which the Russian armed forces commit acts of terrorism, war crimes and genocide, as well as due to the increasingly clear threat of a possible future attack by the Russian Federation on allies of the Czech Republic within NATO and the EU, possibly directly to the Czech Republic, it is necessary to take concrete restrictive measures in the commercial and economic sphere resulting from the redefinition of relations with the Russian Federation, both at the level of relations between the Czech Republic and the Russian Federation, and possibly at the level of relations between the EU and the Czech Republic.

SUMMARY OF KEY POINTS

• No free trade with undemocratic countries that threaten our security.^[1]
• Definitive end of the Investment Protection Agreement with Russia.^[2]
• New special ‘levies’ for financing Czech defense from trade and financial transactions with Russia.^[3]
• New ‘levy’ on profits of Czech companies paid to Russia.^[4]
• New ‘levy’ on transactions between Czech and Russian companies.^[5]
• New ‘levy’ on profits of Russian branches of Czech companies.^[6]
• Mandatory publication of contracts of Russian branches of Czech companies with other Russian companies, including Russian state-owned companies.^[7]

FURTHER POSSIBLE MEASURES AGAINST RUSSIAN FEDERATION

1. Linkage of new steps and measures and leadership in their promotion and implementation. As a result of the increasingly global interconnectedness of economic relations, many of these steps in the trade and economic area will be more effective if they are replicated at the EU level, or at the level between EU member states and the Russian Federation. EU member states that are directly adjacent to Russia or Belarus or have historical experience with military occupation by the Soviet Union can be leaders in this area in promoting specific measures and steps within the EU. This, of course, means that Czech authorities need to set an example and take measures as the first ones.

2. New steps and measures at the level of the Czech Republic. At the level of the Czech Republic, in accordance with the Resolution of the Government on the redefinition of relations with Russia of 21/06/2023, concrete steps must be taken and concrete measures taken in the trade and economic area that will contribute to the 'international isolation of Russia' and 'to the prevention of the emergence of new vulnerabilities and dependencies' as a result of bilateral economic relations with Russia'. It makes no sense and is contrary to the security interests of the Czech Republic for the Czech Republic to consider the Russian Federation as its 'business and economic partner' and to try to maximize the profits of Russian entities from trade with by Czech entities, when the Russian Federation uses taxes to finance the production of weapons that are used against Ukraine and which, based on statements by representatives of the Russian public authorities, could not be used against the Czech Republic or its allies in NATO and the EU.

3. Unsustainability of the current situation. From the point of view of the security interests of the Czech Republic, it is not possible to continue to 'develop mutual business cooperation' until the moment when the Czech Republic or one of the of its allies in NATO and the EU, 'the first missile will arrive from Russia', and only then take appropriate protective or retaliatory measures in the trade and economic sphere. In a situation - such as the current one - when we know that there is danger from the Russian Federation in the future, and when the Russian Federation spends more than a third of its budget expenditures on armaments^[8], it is necessary to:

• end the trade and economic partnership regime with the Russian Federation leading to the mutual maximization of economic resources, so that the Czech Republic does not thereby contribute to increasing the economic resources of the Russian Federation, from which it can produce weapons that can be used against the Czech Republic is then financed;
• start reducing the economic resources of the Russian Federation, even at the cost of possible negative economic impacts for the Czech Republic, instead of continuing in further mutual increase of economic resources of both countries through direct or indirect cross-border trade.

 1.A.   Creation of a new trade and economic framework for 'transitionally unfriendly countries' outside the EU and NATO

1. Starting points. Currently, there is a lack of a generally defined transitional framework for trade and economic relations with countries that, such as the Russian Federation, behave in a hostile way towards the Czech Republic or its EU or NATO allies, without being at war with the Czech Republic or any of its EU and NATO allies, so called 'transitionally unfriendly states' should be gradually reduced. Those States that, through the statements of their representatives, military doctrines and/or their armed activities, threaten the security of the Czech Republic or its allies within EU and NATO, cannot be granted the advantage of 'the freest possible commercial and economic international relations with the Czech Republic', which serves to economically enrich such third state; this advantage cannot be granted to them, especially in a situation where it cannot be ruled out that such a 'temporarily unfriendly state' would in the future use its economic resources obtained from commercial and economic trade for the purpose of development or manufacturing of weapons that it could use against the Czech Republic and its NATO and EU allies.

2. Character and consequences. To this end, it is necessary to define a new framework for a new general regime of trade and economic relations with 'temporarily unfriendly states', such as the Russian Federation. This new 'transitional framework' would not yet be 'fully warlike', but, at the same time, it would not be a business as usual regime‘ either. This 'transitional framework' would be characterised as a 'slightly negative economic mode', which would unable the Czech Republic, and possibly other EU states, to use administrative measures to reduce the economic resources of another third country, which would be characacterised as 'temporarily unfriendly'. The purpose of this special transitional regime would be to reduce the economic resources drawn from a mutual trade and economic exchange by such a 'temporarily unfriendly country', and would not allow such third country to get enriched by of international economic exchange. The practical consequence of the inclusion of a certain country, which is not an EU or NATO country, in the 'temporarily unfriendly country' regime would be the application of one or more measures, if relevant, listed below in sections B. to D. or possibly other similar measures.

3. Possible conditions for a third country to pass under the status of 'transitionally unfriendly state'. The following list represents an indicative list of general requirements, which can be further specified, upon the fulfilment of which, the government or foreign ministry would decide to grant a given third country outside the EU or NATO the status of a 'transitionally unfriendly state', as a result of which a limitation of trade and economic exchange with this country would start. The requirements are the following:

(a) the extent of the country's production of weapons capable of affecting or threatening the territory of the Czech Republic or threatening the Czech Republic or its NATO and EU allies;

(b) statements by the representatives of the given country to the Czech Republic or the Czech Republic's allies in the EU and NATO that the given weapons could be used against the Czech Republic or the Czech Republic's allies in the EU and NATO;

(c) in the absence of possession of nuclear weapons or missiles with a range to the Czech Republic capable of carrying nuclear warheads or hitting the Czech Republic even without these nuclear warheads, the probability of the ability of the military forces of the given country to realistically threaten the Czech Republic or its allies in the EU or NATO;

(d) the intensity and volume of direct and indirect trade and economic exchange with the given country and the Czech Republic, or with another EU country.

In addition, the introduction of a 'security-political traffic light' for third countries outside the EU and NATO can also be considered: under this ‚traffic light‘, the fulfilment of the above-mentioned criteria would be monitored, which would ensure an even deeper intensity of predictability of future trade and economic development with the given third country outside the EU and NATO.

4. Advantages and possible challenges in defining a special transitional trade-economic framework for 'transitionally not friendly states'. The key advantage for the business environment would be predictability, because if a certain state were to reach the status of 'temporarily unfriendly country', or within its framework a ‚red colour‘ in the aforementioned 'security-political traffic light', or it would be close to such status, it would be a sign that in such a state foreign investors should stop investing. When introducing a special transitional trade-economic framework for 'transitionally unfriendly state' outside the EU and NATO, it is necessary to ensure compliance with EU and WTO law within the framework of relevant exceptions under which it is possible to limit the free movement of goods, services or capital, which should not be unfeasible.

1.B.   Suspension of implementation and withdrawal from the Agreement on the Protection of Investments with the Russian Federation of April 5, 1994 (as a result of a substantial change of circumstances under Article 62 of the Vienna Convention on the Law of Treaties of May 23, 1969^[9])

5. Meaning and purpose of the Agreement between the Government of the Czech Republic and the Government of the Russian Federation regarding the Support and Mutual Protection of Investments of April 5, 1994^[10], i.e. "the desire to develop mutually beneficial economic cooperation, intending to create favourable conditions for investments by investors of one Contracting Party in the territory of the other Contracting Party; the parties, aware that the support and mutual protection of investments will stimulate business initiative in this area" in the current geopolitical situation is in direct contradiction both to the reality of the internationally illegal aggressive war of the Russian Federation accompanied by terrorist acts against Ukraine and to the security interests of the Czech Republic: the Russian Federation declares a directly hostile relationship towards the Czech Republic and threatens it and other states with nuclear annihilation.

6. The implementation of this Agreement regarding the Support and Mutual Protection of Investments contributes to increasing the resources of the Russian Federation, from which it finances the war and from which it can also finance a war against the Czech Republic and its EU and NATO allies in future. The security interests of the Czech Republic therefore require the application of a policy whose goal is the direct opposite of the meaning and purpose of the aforementioned Agreement: this means a maximum reduction of financial and economic resources for the Russian Federation, so that it lacks means to implement its current aggressive war actions, nor in future its hostile intentions declared towards the Czech Republic.

7. This Agreement, despite the provisions of its Article 5 regarding investors‘ ownership protection, does not necessarily protect against the expropriation of the assets of Czech companies in the Russian Federation, since the Russian authorities, for example, expropriated the assets of the Danish company Carlsberg in the Russian Federation, despite the fact that Denmark had a similar agreement with the Russian Federation on the protection of investments like the Czech Republic^[11]. From this and other facts, it is clear that the Russian Federation under the current political leadership does not respect its international obligations and will also not respect any decisions of international judicial or arbitration bodies that would eventually decide on compensation for the illegally expropriated assets of Czech and other foreign investors from the Russian perspective.^[12]

1. C.   The policy of 'special offset allowances and measures' towards the Russian Federation to reduce its income used to finance its arms industry and, on the contrary, to create resources for financing the defence arms industry of the Czech Republic or, possibly, the allies of the Czech Republic in the EU and NATO

8. The prerequisite for the application of the following measures is the suspension of the implementation with immediate effect of the Agreement on the Protection of Investments with the Russian Federation (with the possible exception of the suspension of the implementation of Article 6) and withdrawal from this Agreement. The income from the special defence allowances described below would not go to the budget of the Czech Republic, but directly to 'the war in Ukraine' or to the financing of the defence arms industry.^[13] The following measures are of a 'discriminatory nature' on the basis of 'national origin' in the sense of Article 14 of the European Convention on the Protection of Human Rights, however, as it follows from the jurisprudence of the European Court of Human Rights, despite this 'strict prohibition' of discrimination, measures can be taken , which violates it, if the purpose of such a measure is to preserve peace and prevent ethnic cleansing and genocide^[14], while the following measures pursue this purpose, as they want to contribute to achieving peace in Ukraine and preventing the aforementioned ethnic cleansing and genocide committed there by the Russian army; in addition, the Russian Federation withdrew from the European Convention for the Protection of Human Rights^[15] and withdrew from the Council of Europe^[16].

C1. Special defence levy from profits paid directly or indirectly by Czech business corporations to Russian parent companies

9. In order not to increase the income of the Russian Federation from corporate taxes or, where appropriate, from a special war tax, it is necessary to reduce as much as possible the income and profits of Russian legal entities to whom profits from Czech companies are paid via dividends or in another similar way, either directly or indirectly through chains of ownership passing through EU or non-EU countries. The current withholding tax of 15%^[17] could be increased to, for example, 80%; 80%, not 100%, so that the withholding tax in such an amount cannot be considered a hidden confiscation measure.

10. To ensure that this special defence levy is not circumvented, on the one hand, and on the other hand, that the internal market of the EU is not disrupted (for example, in a situation where a Russian-owned Czech trading company would be sending its profits to an Austrian company ultimately owned by the same Russian company via an intermediary parent Seychelles company, would not be affected by the mentioned 'defence levy'^[18]), it is necessary to propose within the EU that other countries in the EU accept a similar 'defence levy' on the same or similar conditions. For this purpose, it is necessary to monitor the ownership chains of Czech business corporations and business corporations from the EU going outside the EU.

C.2. A special defence levy in the form of a 'double VAT' for a natural or legal person who is a resident of the Czech Republic and makes a transaction with an entity from Russia

11. If any Czech business person carries out a transaction with a business natural person domiciled in the Russian Federation or with a business corporation domiciled in the Russian Federation, as a result of which the said Russian person or Russian corporation deducts from the added value of such transaction any tax – not a customs duty – in particular a value added tax in favour of the budget of the Russian Federation (of which 30% goes to Russian war budget), this Czech person would have to pay extra, for example 30% of the added value from this transaction as a 'special defence levy' to the defence budget of the Czech Republic to 'zero' (' offset') the economic resource it provided to the Russian Federation for its war efforts. Also, in this case it would be possible to replicate this 'special defence levy' elsewhere in the EU.

C.3. Special 'offset' defence levy from entities operating both in the Russian Federation and the Czech Republic (or in the Russian Federation and another EU member state)

12. A special 'offset' defence levy would be established for legal entities in the Czech Republic that are part of a concern, the real owner of which applies unified management to at least one legal entity in the Czech Republic and at the same time to at least one legal entity in Russia or if such companies are managed on a consolidated basis from the EU. This levy would be equal to the amount that the aforesaid legal person in Russia paid under corporate taxes and special war taxes for the benefit of the Russian budget.

13. Some groups of companies (concerns) operate both in the Czech Republic and in the Russian Federation, as well as possibly in other EU countries or outside the EU, while in the Russian Federation they generate profits that are taxed there, whether via a standard corporate tax, special war tax or other taxes: thanks to the creation of taxable profit in the Russian Federation, they help it to finance the production of weapons that the Russian army uses in Ukraine and which, according to the statements of some representatives of the Russian Federation, could be used against the Czech Republic or against its NATO allies in the future.

14. Example (based on information from the media): For example, the Raiffeisen banking group, which is managed on a consolidated basis by an Austrian company, has subsidiaries in the Czech Republic and, at the same time, subsidiaries in the Russian Federation, which generated a profit in the Russian Federation for the year 2022, from which they paid about EUR 600 million ^[19] to the budget of the Russian Federation for the mentioned year; as a result, the Russian subsidiaries of the Raiffeisen Group contributed approximately EUR 300 million^[20] to Russian armaments. In order for the contribution of the Raiffeisen group to the Russian defence, which also includes armed offensive activities, to be 'zeroed' (offset), the mentioned Czech companies of the Raiffeisen group should pay the same amount as they paid for arming the Russian Federation to the Czech Republic, i.e. the amount of EUR 300 million^[21].

1. D.   Other accompanying measures: mandatory full transparency of contracts with Russia of related entities operating in Russia, which are part of a group in the Czech Republic or the EU

15. Finally, it is worth mentioning one more accompanying measure: the requirement of full transparency of contracts consisting in the obligation to publish all their contracts, including private ones, for legal entities that are part of a group, which includes at least one jointly controlled^[22] legal entity in the Czech Republic and at the same time at least one controlled legal entity in the Russian Federation or such companies are managed on a consolidated basis from the EU. The purpose of this possible obligation for Russian legal entities that are part of such a group is to find out whether these Russian legal entities controlled from the Czech Republic or from a group in the EU with the presence of part of such a group in the Czech Republic do not participate in the Russian war effort by supplying goods or services to the Russian war industry or to Russian sanctioned persons or whether they do not supply products or services to companies that subsequently supply goods or services to the Russian military industry^[23].