Siemens will withdraw from a Russian joint venture after discovering that four of its gas turbines were illegally shipped to Crimea.
The German industrial giant will also halt deliveries of power generation equipment to Russian state-controlled customers for the "time being".
Siemens said it had received "credible information" that its turbines had been diverted from the original destination.
It said this breaches EU sanctions against Russia.
The four gas turbines in question had been delivered for a project in Taman, southern Russia in 2016.
However, Siemens said the equipment had since been locally modified and shifted to Crimea. The company said this breached EU sanctions that had been introduced in 2014 following Russia's annexation of Crimea from Ukraine.
Siemens will exit the Interautimatika joint venture, in which it holds a 46% stake, with the rest owned by Russian state-owned businesses TPE and Rostec.
The German company said it would continue to pursue criminal charges "against the responsible individuals" at TPE.
The Reuters news agency reported on Friday that the Kremlin had declined to comment, saying it was a matter for Siemens and its Russian partners.
However, the affair threatens to strain relations between Germany and Russia. Last week, a spokesman for German Chancellor Angela Merkel said the the delivery to Crimea was "remarkable and completely unacceptable".
Germany's ambassador to Russia, Rudiger von Fritsch, said: "There are all grounds to believe that if what has happened is true, Siemens was seriously deceived, and it was a violation of a contract, a serious blow to trust and a very serious blow to investments in Russia."
On Friday, Siemens announced that it had also terminated a licence granted to a Russian company to manufacture equipment for power plants. It said it was "reviewing all potential collaboration between its subsidiaries and other entities around the world with regard to deliveries to Russia".
Siemens added that new gas power projects in Russia would only be carried out through companies it controls, ensuring "Siemens-controlled delivery and installation" overseen by its own personnel.