Russian sanctions: responding to a complex situation | Practical Law

Russian sanctions: responding to a complex situation | Practical Law

The ongoing conflict in Ukraine has resulted in a large number of jurisdictions imposing sanctions on Russia and Belarus, as well as embargoes on the separatist-held region of Donbas in Ukraine. Businesses need to assess the extent to which they may be subject to one or more of the international sanctions regimes in respect of the sanctioned territories.

Russian sanctions: responding to a complex situation

Practical Law UK Articles w-035-3181 (Approx. 6 pages)

Russian sanctions: responding to a complex situation

by Elizabeth Coleman and Jack Wray, Eversheds Sutherland (International) LLP
Published on 28 Apr 2022 • ExpandEuropean Union, International, United Kingdom...USA (National/Federal)
The ongoing conflict in Ukraine has resulted in a large number of jurisdictions imposing sanctions on Russia and Belarus, as well as embargoes on the separatist-held region of Donbas in Ukraine. Businesses need to assess the extent to which they may be subject to one or more of the international sanctions regimes in respect of the sanctioned territories.
The ongoing conflict in Ukraine has resulted in a large number of jurisdictions imposing sanctions on Russia and Belarus, as well as embargoes on the separatist-held region of Donbas in Ukraine (the sanctioned territories). While there is commonality between some of the sanctions programmes, the position does vary between jurisdictions. This is particularly the case in a context where so many countries have decided to introduce restrictions, including those that do not usually follow the position of the US, the EU or the UK in respect of sanctions programmes, such as Switzerland. These factors contribute to a situation where the scale and level of sanctions imposed is unprecedented.
This context can make risk assessment and mitigation highly complex. Businesses need to assess the extent to which they may be subject to one or more of the international sanctions regimes in respect of the sanctioned territories. This article focuses on the application of sanctions to Russia, but Belarus and the Donbas region are noted where relevant.

Forms of sanctions

Sanctions can take many different forms, although the sanctions regimes applicable to Russia and Belarus can be broadly distilled to the following:
  • Trade sanctions, which impose restrictions on controlled items, including those that are considered military or dual-use, as well as sector-specific restrictions in, for example, the aerospace and oil and gas sectors.
  • Economic sanctions, which freeze the funds or economic resources of individuals or companies, or ban or restrict financial transactions with certain entities and countries.
  • Diplomatic sanctions, which suspend co-operation with the sanctioned territories, including prohibiting certain commercial activities with sanctioned entities in that country and banning travel.
In order to determine which sanctions regimes may apply, businesses will need to consider which jurisdictions they are subject to (see box “Considering jurisdiction”).

Risk assessment

If a relevant nexus to a sanctioned territory can be established, it is up to the business to determine whether it is acting in compliance with the relevant sanctions regime. It may wish to consider the following issues.
Business presence. The business should consider whether it has a presence in the sanctioned territories, by virtue of:
  • A company.
  • Employees.
  • Real-estate or other assets, for example, money held with a Russian bank.
  • Intangible assets, such as registered intellectual property.
Goods and services. The business should consider whether it provides goods or services (including technology and software) directly or indirectly, for example through a reseller or agent, to the sanctioned territories. Goods and services may be caught under sanctions if they are:
  • Controlled, which covers goods and services that are:
    • dual-use (deemed to have both commercial and military applications);
    • military; and
    • neither dual-use nor military controlled but require export authorisation if the exporter suspects, is aware or has been informed that the items may be intended in part or whole for end uses such as weapons of mass destruction or military.
  • Sector-specific items, including items in the aviation and space, marine, and oil and gas sectors.
If the goods or services are controlled for export to the sanctioned territories, businesses should consider:
  • The specific nature of the restrictions.
  • Whether there are going to be issues with financing their purchase, transport or delivery.
  • Whether there are goods or services that have already been supplied but not paid for, or that are held in stock in, or are in transit to or through, the sanctioned territories.
Supplier relationships. It may be relevant for the business to consider whether:
  • It fully understands its supply chain, for example, which entities are involved, including logistics providers and agents, where they operate from and their status under international sanctions regimes.
  • Its suppliers, or other companies in the suppliers’ groups that may contribute to the supply, operate in or from the sanctioned territories.
  • It is supplied with products or services originating from the sanctioned territories.
  • If there is an issue from a sanctions perspective with the supplier or with the goods or services supplied, there may be relevant legacy provisions allowing supply in respect of contracts entered into before relevant dates.
  • It fully understands the financial chain, that is, the timeframe for making payments, the currency it uses to pay for goods, and which banks are engaged or involved.
Customer relationships. It may be relevant for businesses to:
  • Consider whether any customers are, or are controlled by, sanctioned entities.
  • Consider whether any customers have a presence in the sanctioned territories.
  • Assess whether there is potential for products that are supplied to customers outside of the sanctioned territories to be used in the sanctioned territories; that is, what the end use of the items is, particularly if controlled.
  • Ensure that it understands its financial chain (see above).
Logistical considerations. Businesses may need to consider whether their goods can be transported. In particular, the following may be relevant:
  • Restrictions on Russian-registered aircraft entering certain Western airspaces.
  • Restrictions on Russian-registered vessels entering certain Western ports.
  • Some port workers are apparently refusing to unload Russian origin items or items transported on a Russian-registered vessel.

Russian countersanctions

The Russian government has imposed countermeasures in retaliation for the sanctions imposed by the foreign states that are taking an adverse position to Russia in respect of the Russian invasion of Ukraine. The countermeasures take a number of different forms and are designed to protect the Russian economy from the effects of the third-country sanctions. Businesses will need to consider whether Russian countermeasures may apply to any business decisions being taken in respect of Russia.
Countersanctions include:
  • Restrictions on the extent to which foreign owners from so-called “unfriendly” states can take steps to close down, sell or restrict the activities of Russian businesses.
  • The power for Russia to place foreign-owned companies from “unfriendly” states under Russian management, with the power to force the sale of those companies.
  • Export bans on certain goods to certain countries.
  • Mandated sales of foreign currency for Russian residents.
  • Equity market-related restrictions.
  • Debt-related restrictions.
  • Transactions in respect of securities and real estate between Russians and those from “unfriendly” states being subject to Russian permits.
  • Prohibitions on foreign aircrafts in Russian airspace.

Business response

The sanctions imposed against the sanctioned territories are complex, with many governments broadly united in their baseline approach, meaning that there are commonalities between national sanction regimes. However, these similarities are not universal, and each regime has its own intricacies and complexities. The issues identified in this article for businesses to consider are based on general principles and do not relate to a specific international sanctions regime (for example, the UK or the EU). Therefore, once businesses have identified any potential issues, they will need to consider which regimes will specifically apply to their business.
The situation with regard to both international sanctions regimes and Russian countermeasures is constantly changing, with new restrictions being imposed (or, in Russia’s case, announced as future policy decisions or in draft) on a regular basis. It is therefore important to be alert to these changes and for businesses to be ready to comply with current as well as any future sanctions and countermeasures.
Elizabeth Coleman is a partner, and Jack Wray is an associate, at Eversheds Sutherland (International) LLP.

Considering jurisdiction

There are a number of different countries with sanctions in place against Russia, Belarus and the separatist regions of the Ukraine, and businesses may find that they are subject to a number of different regimes. While with some legal risk areas, jurisdiction arises only in relatively narrow circumstances, for example if the business is operating from or in the relevant country, sanctions regimes often apply in much broader circumstances where a nexus to the relevant country can be established, for example by virtue of using a country’s banking system, even if no other party to a transaction relates to that country. Businesses wishing to understand whether they are subject to EU, UK or US sanctions regimes may wish to consider the following:
  • EU sanctions apply within the territory of the EU, to EU persons both natural and legal (in any location), in respect of any business done in whole or in part within the EU, and on board aircraft or vessels under EU member states´ jurisdiction.
  • UK sanctions apply as above but replacing “EU” with “UK” (see Focus “UK sanctions regime: six months of autonomy” and News brief “Economic Crime Act: cracking down on illicit wealth”).
  • US sanctions apply within the US, to US persons both natural and legal (wherever located), to the involvement of a US origin item and to the use of the US financial system (including transactions in US dollars).