Analysis

Contract risk is high and rising for Russia as sanctions are implemented, expansion considered

  • Europe
  • Russia
  • Trade and Sanctions Compliance
Henry Smith

Henry Smith

Contract risk is high and rising for Russia as sanctions are implemented, expansion considered



Since the end of February, various governments have implemented their Russia sanctions regimes, including additional designations of Russian government-associated media, and oligarchs based inside and outside Russia. The EU on 2 March disconnected seven Russian banks from the SWIFT interbank network.

  • The prohibitions and restrictions on relationships with a growing number of Russian individuals and entities, and the broader restrictions on banking with Russia, demonstrate our high contract risk for Russia, though the overall extent of restrictions has not significantly changed since 28 February.
  • Organisations should be clear on their direct and indirect relationships with Russia and Russian-owned organisations, and regularly evaluate their exposure to sanctioned entities and individuals as the range of prohibited or restricted entities and individuals continues to grow.
  • Beyond this, sanctions’ limiting effect on banking activity, and international organisations’ suspension of activities in Russia, are causing growing operational challenges to companies operating in Russia, particularly access to working capital and international transactions.
  • As we previously noted, organisations considering market exit should assess the impact of such a decision on employees in Russia, and ensure that any steps to end business activity are compliant with the evolving sanctions regimes.
  • A more comprehensive economic embargo, which would need to include more consequential energy sector sanctions, appears increasingly likely, and – depending on its scope and level of international support – would increase contract risk to extreme.

Implementation

The sanctions regimes implemented in the first week of March have built on the legal frameworks and announcements made by governments in the past few months. The implementation of these measures has seen significant growth in the number of Russian entities and individuals that have been subject to outright prohibitions or more partial restrictions on the nature of the business activity that organisations can conduct with them.

The focus of these designations and restrictions over the past week has been primarily but not exclusively organisations and individuals in Russia’s defence and aerospace and media sectors, and Russian politicians, oligarchs and – in some cases – their families. Governments have also issued additional guidance documents to respond to questions from organisations affected by the sanctions regimes, which help with general questions about how to comply with and implement the measures.

Escalation?

There are two ways in which the sanctions regime against Russia could become more significant, and thus lead to a rise in our contract risk rating from high to extreme:

Additional countries formally adopt comparable sanctions against Russia, or practically implement them without formally adopting them. The existing sanctions regimes are imposed by the US, the EU, the UK, Japan, Australia, Canada, Singapore and South Korea. The addition of other major economies would mark a significant expansion of the sanctions regime. These countries will continue to face diplomatic pressure to adopt or comply with sanctions as Russia’s military action in Ukraine continues, though their willingness to adopt these measures will vary given their own political and economic considerations. Some organisations headquartered in these countries will seek to comply with other governments’ sanctions anyway, given their concerns about legal and reputational risks affecting their activities.

Governments that are currently imposing sanctions expand the sanctions regime to broader sector-level restrictions – most notably on Russia’s energy sector – and, additionally, seek to impose these measures on other countries in the form of so called “secondary sanctions”. These are measures that apply to third country companies and individuals in a bid to maximise the economic and political effect of the sanctions. There is growing political will among the countries imposing sanctions to consider targeted measures against Russia’s oil and gas exports, and its domestic development and production capabilities. The greatest economic and political obstacle to sanctions on Russia’s energy sector is within the EU given Russia’s role in the bloc’s energy security. Given the need to maintain consensus among the governments imposing sanctions, which has been one of the most notable aspects of the expanding sanctions regimes, we do not expect the US or other governments to unilaterally impose sanctions that complicate the EU’s ability to import oil and gas from Russia without the EU’s consent. Canada is an outlier given its restrictions on imports of oil and gas from Russia, though they do not affect the EU’s ability to continue its imports in the manner that US restrictions would.

Impact on organisations

Irrespective of whether the sanctions regime against Russia expands or tightens in the coming weeks, organisations will face a range of legal, reputational and practical challenges. From a legal perspective, organisations should be clear on their direct and indirect connections to Russia and Russian-owned organisations, and regularly evaluate their exposure to sanctioned entities and individuals as the range of prohibited or restricted entities and individuals continues to grow.

If organisations decide to continue engaging in sanctions-compliant activity in Russia or with Russian-linked entities, they should be prepared for various stakeholders, including employees, investors, business partners, governments and NGOs, to raise questions and criticisms of their activity in Russia. More practically, organisations that continue to maintain business with Russia, or that are trying to conduct transactions necessary to end their operations with Russia, will find that the availability of banking channels for companies and their employees is significantly reduced as sanctions take effect and organisations wind down their operations.

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