Russian sanctions: how businesses should prepare

Russian sanctions developments

On Monday 31 January 2022, the UK’s foreign secretary, Liz Truss, announced that the UK would broaden its sanctions regime against Russia. The UK’s sanctions laws will be amended to give the UK the power to introduce new financial sanctions by expanding the criteria by which individuals and legal entities can designated as subject to sanctions. The existing criteria will be extended beyond those linked to the destabilisation of Ukraine to enable sanctions to be imposed against “individuals and businesses of economic strategic significance to the Kremlin”.

The specific criteria are expected to be published by 10 February 2022 and it will likely allow sanctions to be imposed against Russia’s largest and most strategically important businesses, which means it is likely to target the oil and gas and financial sectors.

Truss noted in her statement that the changes would allow the UK to act swiftly, in lockstep with the US, and to freeze the assets of those targeted so UK businesses and individuals are unable to transact with them. The statement is significant because it indicates that the UK sanctions regime may align more with those imposed by the US than the EU, which appears to be less keen on imposing stringent sanctions because many EU countries have a greater reliance on imported Russian gas. 

The US is understood to be drawing up a list of additional sanctions targets, with one senior US administration official indicating that the individuals “play a role in government decision-making or are at a minimum complicit in the Kremlin’s destabilising behaviour”, according to media reports.

Wider packages that may be imposed

There is considerable speculation about the wider package of sanctions that could be imposed. The following measures have been canvassed as sanctions that could potentially be imposed, particularly on the US side and potentially also by the UK:

• targeting Russian financial institutions by toughening the existing, narrow sanctions against state banks or by widening the list of financial institutions subject to sanctions;
• expanding the restrictions under existing sectoral sanctions, including those targeting the energy sector, and expanding the sectors targeted by those restrictions;
• targeting the state-backed Russian Direct Investment Fund and sovereign debt;
• imposing restrictions on the export of certain items to Russia, with semiconductors and microchips in particular being targeted;
• cutting off Russia from the Swift global messaging system, which supports international financial transactions;
• a wider category of individuals and entities being designated as sanctions targets than had been targeted to-date, including government and military officials and oligarchs.

Sanctions usually allow impacted existing arrangements to be wound down or include an exception, subject to a licensing regime, for pre-existing contractual obligations but this is not guaranteed.

What steps should businesses now being taking?

For businesses that have an exposure to the Russian market, there are preparatory steps that can be take in advance of any escalation in sanctions. 

Review the business’ contractual arrangements in place with Russian counterparties

Termination, choice of law and jurisdiction clauses in any contracts linked to Russia should be reviewed to identify the contractual remedies available to you should those relationships be impacted by any new sanctions imposed. For new contracts, consideration should be given to adding a sanctions clause which enables the contract to be suspended should sanctions be escalated, and the contract should ideally have a choice of law and jurisdiction clause that is outside of Russia.

Governance, structuring and ringfencing arrangements

Although the UK, EU and US will seek to co-ordinate the sanctions to be imposed, any sanctions imposed will not be identical. Corporate groups with entities registered and active in different countries may be subject to different restrictions.

For example, we anticipate EU sanctions will be less severe that US and UK sanctions. If that is the case, companies may be able to put governance and structuring arrangements in place in advance of sanctions being imposed which enable business to continue so long as the business is properly ring fenced in a country where the business in question remains lawful. Structuring arrangements put in place after sanctions are imposed is considerably more difficult because sanctions include anti-circumvention provisions.

Up to date CDD, screening and end-use declarations

The prospect of new financial sanctions should spur businesses to check for any potential dealings with sanctions targets. Financial sanctions are wide enough to apply to non-sanctioned entities that are owned or controlled by sanctions targets. Businesses should consider updating their customer due diligence (CDD) records, take steps to carry out sanctions-related screening, and consider seeking updated end-use declarations from Russian based customers.

There may be a need to engage quickly with licensing authorities, banks and insurers and being able to show that the business holds up to date CDD, sanctions screening records and end-use declarations will be helpful.

Prepare to apply for a licence

There will be exceptions from any new sanctions regime for goods and services exported under a licence. Businesses should identify the goods, technology and/or software and services being exported into Russia or for use in Russia for which they may need a licence in future.

Licence applications can take time to process and, if wide ranging sanctions are imposed, the licensing authorities may be overwhelmed by licensing applications. There will be a need to get in early.

UK and EU sanctions often restrict categories of items by reference to their commodity code. Businesses should check whether they have records of the commodity codes for relevant products or materials. If not, they should engage experts to carry out a classification exercise so that they can quickly identify whether or not their products or materials are caught by any further sanctions imposed. 

There are likely to be prohibitions on brokering, technical assistance and financial services or assistance related to restricted goods. For example, commonly we see UK companies supplying Russian customers through an EU-based subsidiary but the financial and technical support is provided from the UK. There may be a need for one or more EU and UK licences in those circumstances.

US-origin items and foreign-made products incorporating US-origin items should also be identified as these may be caught by US trade sanctions and wider export controls, even if the export takes place outside of the US.

Co-written by Rebecca Devaney of Pinsent Masons.