International Sanctions on Russia An Update

Background to sanctions

In response to what Russia has called a "special military operation" in Ukraine, and following a series of unsuccessful negotiations, the US, EU, UK, Canada, Australia and others have imposed a series of sanctions (many joint and coordinated) against Russia.

Western states already had in place a complicated and far reaching set of sanctions targeting Russia for, amongst other things: (i) its annexation of Crimea; (ii) issues in Eastern Ukraine; (iii) tampering with democratic election processes; and (iv) cyber-attacks.

However, further sanctions have now been imposed in the last few days in light of Russia's military invasion of Ukraine, the key focus of which are:

• sanctions on individuals (politicians, selected oligarchs, senior military personnel and certain members of the Russian elite) in Russia and in Ukraine;
• sectoral sanctions restricting, or increasing restrictions on, access to Western capital markets by the Russian Government and Russian state-owned entities ("SOEs"), including certain Russian banks; and
• increased Western export controls in relation to Russian military, aerospace and defence sectors.

Sanctions imposed since 2 February 2022

As set out in our previous briefing note from earlier this month, there are a number of sanctions options available to Western countries. The approach thus far has been an incremental one, with a build-up of sanctions increasing in severity in response to the actions being taken by Russia. As matters stand, the following sanctions have been imposed by the West:

• Designating a large number of individuals, including senior Kremlin officials, members of the Russian elite, senior military personnel and/or major Russian contributors to the Russian economy, particularly in the energy, industrial and infrastructure sectors.
• Extending prohibitions on access to the Western debt and capital markets for certain Russian entities, including a number of Russian banks and other SOEs.
• Targeted sanctions and export controls restrictions on corporations directly or indirectly involved with the Russian military.
• Restrictions on the export of high tech and oil refinery products, likely a list of products "to or for use in Russia".
• Sanctioning the Nord Stream 2 gas pipeline between Russia and Germany.
• Prohibitions on Russian airlines, including restricting their ability to fly through Western airspace and/or land at Western airports.
• Placing limitations on trade in all dual use items to Russia.

What could happen next?

As explained, the sanctions imposed are incremental and there remain a number of options still available to Western governments, including:

• Removing Russian access to the SWIFT clearing system. This action is not unprecedented as Iranian access to SWIFT was removed in 2012, reconnected in 2015, and then some banks were removed again in 2018. However, it is seen as a "nuclear" option. Whilst the US and the UK have been keen to remove access, the EU has been more reluctant.
• Import restrictions into the West for Russian items, in particular oil and gas. Nothing comes close to oil and gas as revenue generating exports for Russia. Russia cannot sell its oil and gas to third countries, as most current pipelines face West, and much of eastern Russia is not connected to any gas grid. There are no obvious alternative markets for Russian gas, potentially making restrictions a powerful tool. However, the economic impact on the West could be severe.
• Taking other financial measures, e.g. restricting Western access to Russian companies' equity or bonds, or placing limitations on access by Russian entities to the Western insurance and re-insurance markets.

It should not be forgotten that Russia has shown some limited appetite to put in place sanctions on the West (e.g. food imports), and has considered some form of blocking measures. In response to the UK's sanctions on Aeroflot restricting its access to UK airports and aerospace, Russia has banned UK flights to Russia.

What should you be doing?

In order to assess whether your business is impacted by the recent escalation in Western sanctions on Russia, consider the steps outlined below:

1. Identify whether your business has any dealings with Russia or Russian SOEs.
2. If so, are any of the parties involved subject to any of the recently imposed sanctions? If not, are they likely to become so in the coming days / weeks? Consider not only the direct parties to the contract, but the parent / ultimate parent companies and/or any controlling individuals. Most sanctions regimes bite on persons/entities who are owned or controlled by sanctioned persons/entities.
3. Know what sanctions regimes your business is subject to: where does it have a presence, where are group companies located and where does it do business? Consider the terms of any relevant financing agreements – you may have agreed (contractually) to comply with a sanctions regime which you would not otherwise be subject to. Consider the wide-reaching effects of US secondary sanctions too – no nexus to the US does not necessarily mean you can ignore US sanctions.
4. Review the terms of any contracts relevant to those transactions and/or counterparties. Do those contracts have specific "sanctions" clauses, and are they triggered now, or do you have to wait until sanctions are in fact imposed? If you cannot perform a contract due to Russian sanctions, are there provisions in the contract which will excuse non-performance? Can you – if required – terminate the contract?
5. If you find yourself in a dispute with a contractual counterparty, where would a dispute be heard? Russian courts will not give effect to any Western sanctions and so that stance will impact the settlement of any disputes raised by any Russian counterparty affected by Western sanctions. Russian legislation specifically provides for the jurisdiction of Russian courts in disputes involving targets of Western sanctions, even if the parties have previously agreed on international arbitration outside Russia.
6. Looking further ahead, if the confrontation lasts (which looks to be the case), Russia may even try to nationalize companies or otherwise take away ownership by companies from jurisdictions which imposed sanctions. Do you have any business interests which might be affected by such actions? Based on the recent Russian laws (and judicial interpretation), domestic Russian litigation can trump arbitration clauses if sanctioned entities are involved.

If you have any doubt, please seek legal advice.

Authors: Tom Cummins, Ross Denton, Sophie Law and Aaron Marchant

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Our global sanctions team, which has experience of dealing with all major sanctions regimes, can help clients who are affected by sanctions imposed, or who are concerned about the impact of future sanctions.

This note was last updated on 25 February 2022. This note does not constitute legal advice and we make no representations as to its accuracy or completeness.