Assessing the Potential Risks of Paying Salaries to Russian Employees: What You Need to Know
With the evolving international landscape, the potential risks associated with paying salaries to Russian employees are becoming increasingly evident. Especially on the occasion of the second anniversary of the Russia-Ukraine conflict outbreak, countries like the United States and the European Union have been continuously escalating sanctions against Russia. This poses more complex payment challenges for businesses when employing Russian personnel. Gonex will analyze the potential risks of paying salaries to Russian employees from various dimensions and provide corresponding recommendations for businesses.
On February 23rd, the U.S. Department of the Treasury announced new anti-Russian sanctions, imposing trade restrictions on 93 individuals and entities from Russia (63), China (8), Turkey (16), the United Arab Emirates (4), Kyrgyzstan, India, and South Korea.
Amid current international sanctions, the primary risk when paying salaries to Russian employees for businesses is the obstruction of payment channels. Due to financial sanctions imposed by countries like the United States, Russian bank accounts are restricted in their use within the international payment systems. This implies that companies might be unable to transfer salaries to Russian employees through traditional international bank transfers, undoubtedly increasing the difficulty and cost of payments.
Under the backdrop of international sanctions, the payment risks encountered by companies when employing Russian staff can be illustrated through a specific case:
Imagine a global technology company with a research and development center in Russia, employing local technical personnel. This enterprise operates globally, and salary payments to employees are typically conducted through international bank transfers. However, with the financial sanctions imposed by countries like the United States on Russia, the company finds it exceptionally challenging to pay salaries to its Russian employees.
Firstly, due to the sanction measures, some major Russian banks are excluded from the international payment system, rendering these banks’ accounts unable to receive international transfers. This means that even if the company intends to pay salaries, it cannot transfer funds to the accounts of Russian employees through traditional banking channels.
Secondly, due to the uncertainty caused by sanctions, some international banks may, out of risk considerations, refuse to process transactions involving Russia or impose strict restrictions and scrutiny on such transactions. This poses a significant challenge for companies in finding suitable payment channels.
To address payment issues, the technology company had to seek alternative solutions. For instance, GONEX, a global payroll outsourcing service, can assist in devising payroll outsourcing solutions, managing individual tax obligations for expatriate employees, implementing global payroll projects, and providing advice on payroll compliance policies, among other services.
Additionally, due to restricted payment channels, companies may be unable to pay employee salaries on time, potentially leading to employee dissatisfaction and attrition, adversely affecting the company’s operations and research and development efforts.
Due to the influence of international sanctions and geopolitical factors, the Russian ruble experiences significant exchange rate fluctuations, posing currency risks for companies when paying salaries to Russian employees. Fluctuations in exchange rates may lead to increased or decreased payment costs for companies, thereby affecting their financial stability. Moreover, non-dollar transactions may also be affected by sanctions, necessitating extra caution for companies in choosing payment currencies.
III. Tax Compliance and Legal Risks
When paying salaries to Russian employees, companies need to consider tax compliance and legal risks. The Russian tax system is relatively complex, and companies need to comply with local tax regulations when paying salaries to avoid legal disputes arising from tax issues. Additionally, companies need to understand the relevant provisions of international tax laws regarding cross-border payments to ensure that payment activities comply with international legal requirements.
Given the restrictions on foreign exchange receipts in Russia, especially when Chinese companies are expanding into industries within the sanction scope in Russia, tax compliance and legal risks become particularly prominent. The following example illustrates these risks:
Suppose a Chinese energy company decides to operate in Russia, facing numerous challenges in tax compliance and legal risks due to the energy sector being a focal point of sanctions.
Firstly, when paying salaries to Russian employees, companies need to ensure compliance with Russian tax regulations. The Russian tax system involves various taxes and tax rates, such as personal income tax and social security contributions. Companies need to understand and accurately calculate the taxes due, file timely returns, and make payments. Failure to comply with tax regulations may lead to penalties from tax authorities and even legal disputes.
For example, the energy company may face penalties from tax authorities for failing to correctly calculate and withhold employees’ personal income taxes. Additionally, due to the impact of sanctions measures, the company’s payment channels may be restricted, resulting in the inability to pay taxes promptly, further increasing tax compliance risks.
Apart from tax compliance risks, companies may also face legal risks. Due to the existence of sanctions measures, companies’ operations in Russia may be subject to strict supervision and restrictions. Companies need to understand and comply with relevant sanctions regulations to ensure that business activities are legal and compliant. Violations of sanctions regulations may result in severe legal consequences, including asset freezes, fines, or even criminal liability.
Taking the energy company as an example, if its business activities involve transactions with sanctioned entities or individuals or fail to comply with relevant export control regulations, it may face legal risks and penalties.
Employee Trust and Corporate Culture Risks：
In addition to the aforementioned financial and legal risks, paying salaries to Russian employees may also entail risks related to employee trust and corporate culture. Delayed or uncertain salary payments due to sanctions and payment challenges may affect employees’ trust and loyalty towards the company. Moreover, different cultural backgrounds regarding salary payment methods may also trigger cultural conflicts, affecting internal stability and team cohesion within the company.
Recommendations for Addressing Risks
In the face of potential risks when paying salaries to Russian employees, companies should take the following measures to address them:
1、Understand and comply with international sanctions regulations, select compliant payment channels and methods, and avoid crossing legal boundaries.
2、Monitor exchange rate fluctuations, plan payment timing and currency selection rationally, and mitigate currency risks.
3、Strengthen communication and cooperation with local tax authorities to ensure tax compliance and avoid legal risks arising from tax issues.
4、Establish a sound corporate culture and trust mechanism to ensure employees’ trust and satisfaction with salary payments.
5、Consult Gonex, a professional consultant in global human resources services, to mitigate risks and minimize losses.
In conclusion, under the backdrop of international sanctions, the payment risks companies face when employing Russian employees are complex and severe. Companies need to fully understand the specific content and impact of sanction measures, actively seek suitable payment solutions, ensure compliance with regulations, and reduce payment risks to maintain normal business operations.
