The Ukraine Conflict International sanctions and what they mean for your business transcript

RH: Good morning everybody and a very warm welcome to this dispute resolution webinar by the Ashurst sanctions specialists. This morning we are going to be talking about the conflict in Ukraine and in particular the international sanctions which are developing there, fast developing, and what they mean for your business, how you can navigate them and how you get to understand what it is that will impact you.

I am joined by a fantastic team of specialists. I have got Ross Denton to one side of me, Ross heads our international trade practice. I have Matthew Saunders on the other side of me who heads our global arbitration practice, and on the screen you will see Alexander Dmitrenko who is our corporate crime sanctions specialist based in Tokyo dealing with APAC and Olivier Dorgans who is our corporate crime sanctions specialist in Paris covering the continental European piece.

I am Ruby Hamid, I'm the global co-head of our corporate crime practice here at Ashurst and really delighted to be in such fantastic company and talking about something which I know is on many of your minds.

Clearly a human tragedy is developing in Ukraine of proportions which we are watching unfold in front of us. Today we are going to be focusing on the commercial consequences of that and the actions that governments are taking around the world to impose sanctions, how those overlap, how they began and we are going to help you try and keep track of the legislation and issues that are going to arise for you.

We have got a Q&A box on the screen, please do use that to drop questions in as we go. We will do our best to get to them at the end of the session. If they are technical or we don't have time for them we will get back to you and contact you after the session so don't worry, your questions won't be lost.

We are going to kick off with some context Ross aren't we, you are going to talk to us a little bit about how the situation has developed in terms of sanctions, what we've been looking at since 2014 and just give a bit of background.

RD: Yes, thank you very much Ruby and good morning and potentially good afternoon to some people, thank you for attending. I have been telling people my life is currently like drinking from a fire hose so this is an extremely fast moving and rapidly developing situation. We are going to do our best to give you some high level comments that allow you to frame the situation that you might find yourself in and give you some pointers towards how we may remove it.

As Ruby said, this is not new territory for the European Union, with the US etc., we have had in place sanctions against Russian entities since 2014 and they are sort of informative about where we are now, they show the sorts of things that we have done and they really were the first example, those 2014 sanctions really were the first example of what we would think of as smart sanctions which is definitely what we are seeing today. Some people used to say smart sanctions were just things that the US wasn't doing and the rest of the world was but anyway we've got to the situation now where we are looking at a whole panoply of new sanctions, but what we had in 2014 was effectively three things.

First of all, we had obviously, as with most sanctions regimes, you have a whole list of people whose assets have been frozen and that goes without saying and they were a mixture of oligarchs and people that had been involved in the original invasion of Crimea and to a lesser extent some of the stuff that was going in the Donbas, but particularly we had in 2014 limitations on certain state owned banks, energy, space and nuclear companies from getting access to the Western medium or long term capital markets in excess of 30 days in most places except for the US for new transferable securities and that's feeding through into the new system. We now see that the brackets that I had around state owned banks, energy and space, nuclear companies being expanded to other companies, we will come back to that.

There are also prohibitions on exports of certain technologies to or for use in Russia in relation to oil and gas equipment and specifically there for the ENGs to deep water Arctic or shale, an attempt by the West to try to take or degrade Russia's ability to extract those minerals, those oil and gas from unusual and/or challenging environments. And then finally we had a tiered approach to export controls on certain items, certain technologies and items, meaning that for certain end uses and certain products you had to go through particular hoops. So let's spin forward to where we are now, or where we are coming from now.

So in the new context, what's the movement from 2014 to where we are today? Well we've seen, and know now this is all unfolding, Russia over a number of months have built a significant number of troops on the Eastern Ukraine border and indeed elsewhere but most of the focus was placed on the Eastern Ukraine border. The West sought to discourage Russia from invading Ukraine by arguing that Russia would face unprecedented and uncoordinated sanctions. I think this is really something that's really very important to note, this isn't the same situation that we have seen in the past, for example Libya, where something bubbled up very quickly and were just faced with sanctions, this has been trailered, this is an attempt by the West to discourage President Putin from doing anything in Ukraine and, to the extent that he decided to do that, there was a pretty clear road map laid out.

Then we had, I think it was last week, Russia recognised the Donbas regions as independents and the West and States imposed a number of sanctions but they didn't go to that full extreme sanction options that we are looking at now, so it's a clear and layered approach.

Then last week unfortunately Russia invaded Ukraine and the West and States started to unveil a number of significant and draconian measures.

What we've done is we've actually grouped these sanctions thematically and then we're going to look at them individually, my colleagues and I will go through them. As I've said, the key, and the cornerstone of most sanctions regimes, is the freezing of assets of a number of key Russian persons and Russian banks. So, in that situation, we've got a very very long and detailed list now of Russian persons who are now subject to asset freezes and obviously the corollary of that is that you're not able to make funds of economic resources available to or for use directly or indirectly for those persons.

We then see restricting European, US and UK nationals from dealing with the Central Bank of the Russian Federation, the Russian National Wealth Fund and the Ministry of Finance of the Russian Federation. These are not sanctioned entities, it's just that we have now seen specific restrictions on Western persons dealing with them and that's cut off a lot of the access that they have. There are restrictions on the assets but that is in principle through the restrictions of the nationals dealing with them.

We've seen the placing of restrictions on Russian banks currency and clearing activities, again, for example, Sberbank have had that both in the US and the EU. As I've already mentioned, we have had the extending of the so-called Article 5 restrictions to a wider group companies so there are lots of Russian companies now that can't get access to the Western capital markets. Interestingly that has not yet been extended to energy companies or beyond energy companies.

We've seen removal of certain Russian banks from SWIFT or at least it's in the post, we don't have the names of those yet, SWIFT said overnight it's still waiting for those to come. We've seen prohibition of certain imports from Russia, which we can talk about, across the globe. Obviously one of the things that there, the elephant in the room that thereby its failure to be there is oil and gas.

And then we have seen prohibitions on dual use items and restrictions on other items going to Russia. So, for example, EU Annex 10 is a list of products that would be helpful or useful in developing oil and gas refinements.

And then finally we have seen a whole series of measures on the state airline Aeroflot but also yesterday the UK has put in place a series of restrictions in relation to Russian vessels entering UK ports, so again pressure on that. 

And then we've just got a couple of points here as to what else might be in the pipeline. I mean, obviously we don't know what's going to happen in terms of how President Putin's going to react but there is some headroom to be able to do other things. So, we also have seen, for example, Western governments are encouraging major companies to pull out of Russian business and actually in reverse as well we have just seen this morning Sberbank has pulled out of the European Union. But we have seen, for example, activities by Shell and BP in relation to their Russian business and again I think overnight Olivier, Total confirmed that it would stay in Russia, he posted that.

We also have the possibility, as I said, that Russia might expropriate by way of retaliation, so we may see some assets that Western companies have actually taken by the Russian government but again that's not happened yet.

We've also seen, as with most of these sanctions regimes, that private, there are private sanctions in the Western banks and financial institutions, and actually many trading companies have in place policies that go above and beyond the law and seem to de-risk their business and we have seen lots of companies take measures that are not required by the law, so for example Apple pulling out of the Russian market overnight was not required by law, it just seemed to be as if that's what Apple decided it was going to do so, again, that has consequences unrelated to the law.

So, at the moment, as I've said, Russia … the West has not specifically mentioned limiting Russian oil and gas exports and Matthew's going to deal with that later on, but the longer the invasion goes on and potentially as winter recedes we may see, as Europe is a key generator of wealth for Russian gas and provides a lot of revenue to Russia, it may be that the West decides it's actually going to start to play round with the energy market which would obviously be a very very important step. And, of course, there is the question of what is it that President Putin is going to do that would actually allow these sanctions to come about because at the moment he has already invaded Ukraine, he is already involved in a conflict there, so it’s not clear exactly what would be the trigger to release further sanctions but that may be the case.

RH: Thank you Ross, that's a brilliant outline.

Olivier, we are going to talk about some of those topics that Ross had on his slide in a little bit more detail. You are going to tell us a bit more about the restrictions on particular people and also the Central Bank of Russia and what those restrictions look like.

OD: Yes, thank you very much Ruby and thanks for this very detailed introduction Ross.

Going back to what Ross was mentioning, the first series of sanctions, one of the first series of sanctions imposed against Russian interests over the last week target certain so-called oligarchs or persons which are deemed to be close to the inner circles of powers within the Kremlin. The measures from this first message we wanted to convey which in a sense is in itself quite big news because there's a lot of Q&A and there's a lot of guidance already from both the FCA in the UK, the OFAC in the US and the Commission and the relaxed EU level sanctions of similar nature have already been in place for quite some time, both in the US, the UK and the EU. They were initiated in March 2014 against a series of actors which were deemed to have supported military, the annexion of Crimea and the unrest in the Donbas area of the Ukraine. These measures have increased over the course of the years throughout actions which have been deemed by the West to be imperialistic against the sovereignty of the territory of Ukraine and these measures target not only hundreds of individuals or legal entities directly but they also target the company the owner controls. And that's I think one of the first difficulties in the implementation of these measures which have practical consequences on the future or existing links with Russian entity. The ways in which the Russian economy is structured, a handful of individuals can have majority interests or controls. When we look at the EU slides in hundreds if not thousands of Russians company and that calls for higher scrutiny in the identification of the beneficial owners especially now that the list has been significantly extended by the EU, the UK and the US over the last six or seven days.

These measures, another point I wanted to touch upon also and that's more something for our continental Europe attendees, they are not perfectly aligned and we have seen some disagreement, or at least some differences between the European approach, the UK approach and the US approach with respect to some banks notably VTB to name it, is subject to asset freeze measures both on the UK and the US level, it is not as of this morning subject to EU sanctions and this is not a … this has some non-trivial consequences in the sense that most financial institutions in continental Europe abide by not only EU but also UK and US sanctions as a result it will take actions and they started taking actions to wind down their businesses involving VTB and that may cause consequences in terms of disputes against financial institutions in continental Europe which may be deemed to be of a compliance and maybe abiding by rules which are not directly European.

Another area of interest with respect to the restrictions in person is the highly political communication that has been jointly done by both the US, the UK and the European Commission as to the nature of these asset freeze measures. Traditionally, asset freeze measures have been perceived to be primarily targeting financial institutions and various investments funds in their ability to freeze the assets which they have in their control but there's been calls, especially in France and in continental Europe, to go further and to start also tracing physical goods, real estate as well, as well as all sorts of cars and yachts and all sorts of luxury items which may be held by this restricted or sanctioned person. This has a lot of consequences in terms of the nature of the asset freeze measures and the ability for governments to seize property and to prohibit these oligarchs from accessing their property during the life of the sanctions. So we will see some interesting developments here as well and I think it's an area of attention to you.

Most notably, and that's due to the dependence of the European Union on Russian energy product and Russian gas most notably, the list of restricted persons does not include any Russian energy companies to date and interestingly as well, and that's not yet fully confirmed but there's strong elements pointing to that, the de-SWIFTING of certain financial institutions that Ross will go back to in a few minutes, do not seem to also target financial institutions which are involved in the trading and in the financings of energy products. So we are seeing some concerted efforts at EU level but also at UK and US level to not target this sector which is perceived to be of great importance to the economic interests of the European Union and notably some member states which are highly dependent on Russian energy resources.

The last point on that slide we wanted to touch base on with you is the issuance of wind down licences which most notably target financial institution which are subject or have been subject to asset freeze measures for the last couple of days. There are wind down period which are introduced through general licences both in the US and in the UK which allow for the coordinated exit of the businesses and business interests you may have with these restricted entities, most notably financial institution.

If we move on more specifically, and I'll try to be as succinct as I can since we have a lot of material to cover with you this morning, there's a new type of sanctions which have been imposed against the Central Bank of Russia. To give you some context, the reason that the EU and the US and the UK have been very keen to target the activities of the Central Bank of Russia, is the perceptions at the EU, US and UK level that the Central Bank of Russia had prepared for the strengthening of sanctions over the course of the year. What is interesting contextually speaking is the fact that Russian sanctions are not new and that may sound very trivial said like that but it has a lot of consequences on the restructuration of the Russian economy and the activity that has been conducted by the Central Bank of Russia which has, and the immense currency reserves and gold reserves of the last four to five years, they've increased by more than 50 per cent and there was a concerns amongst the Western States that these reserves would be limiting the impact of sanctions that had been imposed on the financial sectors which Ross will deal with in a minute, but also against certain companies that are owned by entities or individual which are subject to asset freeze measures.

So, very interestingly from purely your standpoint, the Commission and the UK and the US quite quickly turned around that limitation on the effectiveness of sanctions by targeting the Central Bank of Russia. You may have heard, and we were trying to correct perception, that the assets of the Central Bank of Russia are frozen and it's slightly, it is in essence quite comparable to that, but we are not at that stage yet. We are at the stage which is just one step behind. The assets of the Central Bank of Russia are now prohibited to be used in operations and financings with Western financial institutions and Western companies. If we want to try to simplify it and make it the most accessible, in essence what the restrictions that have been drafted over the weekend and earlier this week by the European Commission must now agree, is to prohibit the use of these resources that have been accrued by the Central Bank of Russia against in transactions, financing and operations which involved Western entities. Interestingly as well, and that shows the balance that the European Union has tried to strike with respect to the interests of the European Union, there are, and that is one of the reasons we want to highlight that example in this line, there are some restrictions or some derogation which are already in place which by derogation allow a competent authority i.e. member states licensing authority to authorise transactions involving the Central Bank of Russia so involving the resources that have been queried by the Central Bank of Russia to the extent these measures are necessary to ensure the financial stability of the Union. But, except for these derogations, we are in essence in a position where entities in the European Union, the UK and the US are not in a position where they can participate or * transactions involving assets under control by the Central Bank of Russia or involving Central Bank of Russia more generally.

I'll leave the floor back to Ross who will walk you through the Article 5 restrictions and then back to Alex who will walk you through the Russian counter measures and the trade restrictions as well.

RD: OK. Thanks. So I've already mentioned this. This is a technique which we've called the Article 5 restrictions, it applies in the US and Alexander might want to just jump in and give us the equivalent in the US but effectively, as I've already said, since 2014 we've had this type of tool available to us. But it's only been applied to a small number of Russian state owned banks in Annex 3 so I think it was five banks in total. It has been applied to three military companies and three energy companies and it's been pretty stable. So effectively what was done there from 2014 was that, in relation to any new transferable securities, i.e. securities that were created after 2014, and in 2014, those securities could only be dealt with in the Western market if they were shorter than 30 days or 30 days or shorter. So it was really the only short term capital market that they had access to. Anything longer than that and that was effectively prohibited by the European Union. So, in respect of those sort of small curtailed lists everybody got used to working with those Russian banks and to a certain extent the Russian energy companies structured transactions that either didn’t fall under the requirements or they were happy there was actually a 30 day market did actually come out of that for certain types of Russian companies.

What we see now of course is, as I said, the sort of brackets have been taken away from those restrictions in the sense that at the moment it does it appear as if the West and the European Union, and the UK particularly, are preparing to place a number of Russian companies, not state owned, not important to anything else, just Russian companies into that bucket so that their access to the Western capital market is effectively cut off. We did see a little bit of this trailered in the UK February 10th statutory instrument where they went through the nine sectors, that they were now saying is in target but effectively those nine sectors covered most of the Russian economy so it didn’t give us any real clues as to who they're going to go after. We're starting to see that come through now.

Alexander, I don’t know if you want to say a little about how the US did this but it was broadly comparable, right?

AD: Indeed, and I think the key question that comes up from clients is what happens to the security steps issued before the cut-off date. So, for instance, if you were in the market, under US rules, anything that was issued before the cut off date either 2014 or the new date in this year, that is tradeable, it doesn’t matter whether, you know, it changes hands as long as the security, underlying security, remains to be unchanged, these terms are at the date of its issue. And that is an important point because I guess the key concern that the regulators are trying to address is not to allow these banks or other entities to get new financing from the foreign investors.

RD: So the new structure seems to be as if they are moving the old Article 5 parties off of that list and on to being designated persons or having their assets frozen and the new ones are coming on.

SWIFT has been one of the most important things that has been discussed and I hesitate for a metaphor that doesn’t involve something that is slightly belligerent but it is seen as being the place which would really cause Russian banks the most pain.

So what is SWIFT? SWIFT is not a payment system, it's an international messaging system that facilitates the payment system. It increases the confidence and pace of international payments. So although these Russian banks may be taken off of SWIFT, that doesn’t mean that they are not able to make payments, what it means is, it's - imagine it's like throwing a handful of sand into a machine, it just starts to gum everything up and everything starts to slow down. So, if we are taking entities off of SWIFT, it effectively means that the pace of and the confidence in the payment system just slows down and you go back to, for example, using fax and all these sorts of measures for verifying payments etc.

The EU was reluctant, a number of member states were reluctant to take this step as it actually undermines SWIFT. SWIFT is not a sort of government agency, it is actually a private entity that really works only through the competence of its, I think 11 or 12 thousand members and as soon as you start saying some are in and some are out, not only does it undermine the confidence of SWIFT but also encourages, for example, Russia and to a lesser extent China to develop parallel systems that they can use for their own sort of non-aligned purposes. Which is the case, we have seen Russia do this with.. I think it's called FPSF or SFPS I call it, I always forget what it is, but apparently it has quite degraded functionality compared to SWIFT.

So, the issue at the moment is, we don't really know two major things about this process of taking Russian banks out of SWIFT. First of all, which banks are on the list, I think we can have a pretty good guess that the big ones and the important ones are going to be in there to some degree and maybe the ones that were listed in Article 5 and the directives…

AD: Ross, can I jump in. I think the EU just made you a present by naming the banks, the names of the banks are on there, just now. Back to you.

RD: Very interesting. I don't have access to the internet while I'm here but you guys do. OK.

So the other thing that we don't know, so now we do know a list of sorts. The other thing that we don't know is how the West is going to seek to carve any due related transactions out of prohibition. So it will be the case, we think, that banks will be in certain transactions by those banks will be exempt but we have not yet seen the process by which that is going to be done and frankly I don’t think it's necessarily going to be an easy one to complete and there will be a lot of questions around that but let's move on.

RD: OK. Trade restrictions. Well OK, we've just had a raft of trade restrictions that are out there. As I said we've had since 2014 restrictions, you can see them there. We have seen new structures begin to appear in respect of trade restrictions by adding, for example, suspension of dual use licences. So the UK just went to all licence holders that had destination Russia and said your licences are now suspended. We now see also new controls on high tech, we don't know what that means yet but we expect there's going to be a list, well, sorry, there is a list, whether it's going to be extended, whether it's going to be expanded. So, in the EU, the high tech items that are not dual use, they're one sort of click down below that, is EU Annex 7 and then the EU and the UK have also got controls on items that are going to refineries. So, you can actually see that at the moment as EU Annex 10 to certain parties. As I said, as yet we don’t have any import restrictions but we have seen bans tossed around in relation to precious and semi-precious metals, aluminium, titanium, nickel have all been in there. Gold's been in there, coal lumber and of course, as I say, the elephant in the room is oil and gas, as I said which accounts for about two thirds of Russian foreign revenue which of course if they go after that, that would be huge.

RH: Thank you Ross and thank you Olivier and Alexander for having your finger on the pulse. Alexander, we are going to move to you and we're going to talk a bit about possible Russian counter-measures. We've actually have a question in on this which I think we're going to cover but I'm going to read it out for everybody. It's a question about retaliation. What are the risks for foreign investors in Russia that there will be retaliatory measures and what can they do to protect or mitigate from that risk. I think you're going to pick that up but… off you go.

AD: Thank you. I'll try… I mean, frankly guys we are in the area for increasing conflict of laws between the sanctions described by my team and what Russian counter measures will look like. Some of those laws in Russia have been in place for quite a while, particularly the law around the adversarial, unfriendly entities of Russia, particularly US and longer list of unfriendly entities. But critically, now a key law was passed about a year ago that allowed Russian courts a jurisdiction of any districts with a sanctioned entity, a Russian sanctioned entity, regardless of underlying jurisdiction or underlying dispute resolution clause in the agreement. Which basically means that if you have a current contract with a Russian entity and the entity is on the list of sanctions, it may be difficult, you can still go for the arbitration or whatever dispute resolution you have but the Russian courts, supreme court confirmed, the judicial Russian courts to take over and review that in Russia. Obviously it will be difficult if you have two parallel hearings to enforce anything that happens outside of Russia in Russia. I think Matthew and I can discuss further on that.

But the key points here are really, you know, what is Russia's response, more instantaneously as to what is happening with the sanctions. Well, very quickly Russia said, you know, they're going to be freezing and nationalising foreign assets although they didn’t say they would be nationalising, they'd have said that that's what… they're going to take a step and take a careful review because actually the jurisdictions imposed sanctions on Russia, those entities from those jurisdictions would be on the top list of potential nationalisation, you know, targets.

The freezing of assets, as you probably have seen, there are multiple developments there. One of the key developments I've been discussing with clients over the last few days and it's an issue. So let's say you now have a Russian asset, you know, that's for security that you may want to sell because it's now a sanctioned security and you know the Russian Central Bank said foreigners can sell those securities and put a freeze on those transactions in the first place or any other Russian assets to speak of. But, also, critically you may have difficulty finding a buyer and I'll talk about this on the next slide but allow me to finish here.

There are also, as mentioned earlier, potential defaults. Because of an ability of Russia to access the foreign financing to refinance some of its bonds and loans, they may and I think the economists predict within possibly even this month are that there may be a default on some of the bonds and if that happens, as you can imagine, it will be a triggering fact for all of the other bonds and other finance documents and financing arrangements to be coming into play if there is default by, even in one agreement. The point there, on the bottom slide, is restriction of sale, as I just mentioned to you earlier. They are very important because you may want to exit Russia but how do you do it?

So on the next slide is the answer. Ruby you raised it with the client.

What can you do? Look it's a very fast evolving situation as Matthew said, we may know something from the past but we're really in uncharted territories here and you know we are learning law as we speak and more continuously as we just saw, the banks names just appeared as we speak today on the webinar. But if you think that you know, obviously you may already be thinking about it, we would recommend you to take care of, is assess and address your exposure to Russia and Russian markets. I'm sure you're mostly doing this already. Again, the potential conflict of laws is if you have any of the underlying securities or investments in Russia that do have exposure to sanctioned entities, that may be where you may need to consider what to do. And what to do means can you exit and can you exit means can you exit contractually if you are a minority shareholder in a joint venture it may be difficult unless you have written co-options or some other ways to exit or can you do it even from a regulatory standpoint. As I mentioned to you, the Russian Central Bank and the government have already indicated that they will prevent foreigners to be able to exit from Russia and their investments.

So, you know, to review the key clauses with the sanctions clause if you have one, force majeure clause, suspension clause, termination clauses, I think, Matthew you will touch more on those because they will be key and frankly those are the ones our clients are worried about the most, would they be able to exit Russia if they want to do so. The compliance of sanctions for entities that are, you know, you need to ensure your compliance in Russia still with your Russian operations. Then again, because there is a bit of a difference between the US and the UK and the EU, again, you may need to understand how this all works and even if you don’t have an exposure on the UK you may still have exposure on the US and as a US lawyer can tell you, the US has unique secondary sanctions element that basically applies to any transaction, may apply to any transaction, regardless of any US nexus. So very important to keep in mind. A lot of Russian investments go through Cyprus for instance, that again is part of EU and US sanctions will be very important.

Ex pats and individuals, if you have anyone in Russia, you've seen probably US already indicating to their people to leave Russia if possible. It may be an opportunity to consider again what to do with ex pats in Russia currently.

The other point, if you have a trading relationship with Russia, what are your options? Can you fulfil the contractual obligations by the selling or buying from Russia, can you actually make and receive payments? The discussion on SWIFT as mentioned by Ross just earlier, it is going to be difficult to make those payments very easily. Remember SWIFT is not just EU, UK and US, the entities are in Asia, Korea and Japan and even Taiwan, indicated they will follow SWIFT closures and I know that many banks internally have already indicated that they are going to be closing SWIFT transactions for some of the Russian banks as a general principle.

Deliver goods to and from Russia – as you heard in the opening remarks from Ross, you have already seen the flying of Russian aircraft or even parking of Russian vessels in ports across Europe in the UK may be difficult but again how are going to be transporting goods to and into Russia. Russian railways is one of the sanctioned entities, again something to consider if you are in that area of business.

And last, you know, quick question. OK, you want to exit, you may be able to exit but who can buy your sanctioned assets? So I actually had a quick chat with my OFAC contact to confirm the position because, you know, what if can no one buy your sanctioned assets or what if your Russian government does not allow you to sell it, so you're stuck with it. You know, the position is not unusual, it has happened in the last few years with respect to assets and it will be basically if you have something, you know, a security that is sanctioned, it will have to be in some kind of escrow arrangement or some other market based freezing situation that you are not really dealing and wheeling about.

So that's really I wanted to share with you and am happy to answer more questions if we have time. Thank you.

RH: Thanks Alexander, and there are questions. Keep them coming and we'll do our best to filter them and get them to the right people at the end of the session.

Matthew, we're going to talk about disputes and what disputes are likely to arise from all of this. Alexander's given us a picture of the problems for Russian investment but tell us about the dispute picture.

MS: OK. So I'll just start with picking a point from what Alexander's been covering. For all sorts of historical reasons, Russia has a surprisingly large number of bilateral investment treaties. These are treaties that provide quite effective remedies in circumstances where there has been expropriation. If what Russia does is it expropriates assets where investors have met the requirements of bilateral investment treaties then there will be recourse against the sovereign entity of the Russian Federation. Given the quantity of assets of the Russian Federation that are now frozen globally, enforcing arbitration awards or paying through that process may not be the kind of challenge that it often is. So one of the first steps to think about if you have assets in Russia is do you have the protection of one of those 83 bilateral investment treaties. It's been asked at another seminar if anybody has any questions on that I should suggest you email us and we'll do our best to answer them. It's important to know that for historical reasons there is a particularly wide investment duty umbrella that covers investments in Russia and that may be part of the answer.

So moving on, in terms of the contractual impact of sanctions. Sanctions do not generally provide themselves an excuse for non-performance, this is not a "trading with the enemy" territory of World War II where there were suitably leading legislation that would provide cover for non-performance. Here, we're looking at the tools that are available in contract law to operate as an excuse for non-performance in circumstances where a sanction or some other event that is related to what we are seeing happening in Ukraine impinges on the ability of a party to perform or the ability of a party to receive contractual performance. It's really, really important to understand that there are stark differences here between how common law and civil law systems operate. So do not assume that everything will operate as it might do in an English law or a US law governed contract. That is not the case, very important to appreciate those differences. And very important to understand that there are certain steps that need to be taken, potentially quite quickly, so delay in taking steps can be quite prejudicial.

Lastly, I am going to very briefly outline the kind of issues that we may see developing in certain sectors. I'll fix on the gas sector because it's one that I'm personally most familiar with. Which as an illustration of the sort of stresses and strains that contracts are likely to be under in certain sectors in coming months.

So here's what the common law cupboard offers us. Firstly, and most significantly, force majeure causes in contracts. It's important to realise there is no doctrine force majeure, there's no part of the common law law library that covers force majeure, it's all about what's in the contract, what the words on the page say.

I'll set out here some typical considerations with these people in mind. One of the events that the force majeure clause covers: is it a laundry list of 15 specific instances or is it a generic provision where anything hindering performance will be captured by the clause. What level of performance, or what level or non-performance, triggers the clause. Is it anything that hinders performance or is it impossibility? And there's a very wide spectrum there, particular attention needs to be paid to that.

If you have a laundry list type of approach with very specific instances that will trigger force majeure protection, can you establish a causable link between what has happened and your inability to perform. Does the clause say, or does it refer to trade blockades, does it refer to sanctions. The laundry list approach is fraught with challenges and bringing the event into the causal link can be a real challenge. We saw that with Covid, very few clauses refer to a pandemic and really what was often causing the inability to perform was the regulation passed in response to the pandemic. So pay close attention to what the causal link might be.

In our experience, most of the disputes around FM clauses are around requirement to give notice. It isn't a minor administrative issue. Careful attention needs to be paid there. And continuing obligations, such as reporting, are those obligations met. Don't fall down on that potential significant obligation.

Where does the FM clause actually lead? Force majeure clauses generally suspend performance, they don't provide a permanent excuse and, in our experience, many after a period of time give rise to a right to terminate. Is that really what you want, and what are the consequences in terms of partial contractual performance or termination? So lots of issues there to bear in mind.

Change in law clauses, commonly found in the construction and infrastructure sectors. Often those clauses will require parties to negotiate and if there isn't negotiation then again they can lead to termination. Is that what you want? Do you want to start this process that ultimately may lead in termination.

And finally, frustration. It's the ultimate common law contractual answer to the impossibility of performance, but that's what it requires: performance must be impossible, it's a very significant threshold. The consequences of parties being discharged from their contractual obligations are significant, they are covered by the Law Reform Frustrated Contracts Act passed in 1943. That date gives you a clue to what was giving rise to those particular issues.

Could we pass on to the position in the civil law world, as I say, it's important to understand how different this can be. Force majeure is essentially a legal doctrine in the civil law world, so it's not just what's in the contract, it's what the contract law itself provides, but very often what the doctrine requires is close to impossibility in performance. So don't approach a Swiss law, French law, Italian law, German law governed force majeure clause with a common law hat on, it won't work, it might take you to a very wrong conclusion. So bear in mind that there is a body, a doctrine, in the civil law world around force majeure.

Something that scares the pants off English law lawyers is the existence of hardship doctrines in certain civil law systems, where a court or tribunal can readjust the contractual bargain after it's been entered into. This is an area where very often prompt recourse needs to be sought from arbitral tribunals or from courts. Leave it too long and you won't have that remedy available. But it can be extremely powerful, quite a lot of doubt in many civil jurisdictions as to how far it's available where there are complicated commercial relationships where it could be argued that parties have contractually agreed how risk is going to sit, but we're in unprecedented territory here. Clauses like section 36 of the Scandinavian Contracts Act provide for the hardship doctrine expect new law to be made in this area over the coming months. Important that what hardship doctrines generally do is they allow for the readjustment of the market, not generally termination. Also other doctrines that sit in civil law systems, in Scandinavian systems, adopt to affirm assumptions.

So the key message here is whilst a great deal in the practise of commercial law may be very, very similar between the civil law and the common law systems, where it comes to contractual non-performance, this is an area where very significant differences exist and they can cause upset. So be conscious of those from the very start.

Lastly, a quick look at a particular sector and the sort of issues we might see. European reliance on Russian natural gas is widely understood, something like 50% of Germany's natural gas [*] comes from Russian exports. What we may see as a consequence of that is very, very constrained global LNG supply. Maybe Russia turns off the taps, maybe just turn down the pressure, that's what happened in 2008/2009. All sorts of consequences for those towards the end of the distribution pipeline when that happens. What's the impact in terms of the use of, certainly for the UK and many European jurisdictions, a preference for spot and short-term pricing in contrast to the 25-year contracts that tend to prevail with Japanese and Korean buyers. You can see the sorts of tensions that exist wherein a party might be able to make 20 times the profit on a transaction if they sell on the spot market as opposed to a 20-year long long-term agreement.

What we see is a stratospheric rise in, particularly spot LNG pricing, that puts contracts under enormous stresses and strains. We see use of volume flexibility provisions, price reopener arbitration mechanisms and maybe there could be creation of an incentive not to perform, maybe more money could be made selling on the spot market, even after caps contractual damages are paid under a long-term GSPA. All sorts of issues there about the way that courts and tribunals deal with a deliberate, and arguably cynical, breach of a commitment to deliver. But we may well see that in the coming months and possibly years in the LNG market.

And we heard today about the sanctioning, or the restrictions on Russian backed vessels and Russian owned vessels berthing at UK ports. Russia has a fair share of the LNG carrier charter market. If those vessels cannot berth in European ports, then there's a proportion of that market unavailable at the very time when the market is tight and there's never been greater demand for LNG. So all sorts of tensions there around contractual performance.

RH: Alright, thank you Matthew, plenty to think about. I'm going to wrap up for a couple of minutes thinking about enforcement. So this is taking us back to the sanctions provisions that Olivier, Alexander and Ross were talking about at the top of the session. And we just wanted to wrap up by making it clear that there is a serious and likely to be active enforcement regime around the sanctions provisions, and most sanctions provisions are either strict liability or quite close to it. For example, in the US and Australia, there is a strict liability for breach of sanctions, there's a defence and there's mitigation possible but the starting position is a breach of US sanctions is a strict liability offence.

In other situations, in the UK, in the EU, there has to be a reasonable cause to suspect that you, as a business, are dealing with a sanctioned person, so it's a slightly different test but nevertheless it's a difficult hurdle to overcome. And what we have seen is increasing enforcement in the sanction space over the last few years, in particular targeting the banking sector but not entirely, and those of us who are around the table here virtually have all had experience of dealing with sanction investigations which have involved non-financial institutions. So banks are at risk here, non-financial institutions are also at risk here. And I think our general sense, and I'm sure others will chip in, is that we're expecting to see active enforcement here because there have to be teeth to these regimes and what the US, the UK, the EC, other jurisdictions can't have is a position where people ignore the sanctions measures and therefore undermine the effects for which they're being enacted.

So we're expecting to see enforcement, noting that for regulated financial institutions, not just in the UK but elsewhere, there are likely to be additional reporting obligations because sanctions breaches are one of the core financial crimes and there will be obligations to identify, report and remediate financial crime which includes sanctions breaches. So there's something else to think about there. But enforcement is a key risk and I think everybody on the call needs to be conscious of that.

I'm going to stop there and we're going to turn to some questions.

RD: Are you going to show the tracker you mentioned?

RH: I am, yes. Thank you Ross. We have been putting together something which we hope will be really useful to all of you which is a chronological assembly of all the legislation as it is being enacted which will affect the sanctions position. We're calling it our sanctions tracker, it's available on the Ashurst website and we're going to share a link to it post-event, we're keeping it updated, it's been a very popular source of information amongst our clients.

RD: It's currently being updated now with the Swift.

RH: Everyone's been given instructions for the update as we speak, so it's your go-to place for the up-to-date picture. OK, yeah please.

MS: We are very interested in what you need. We are providing what we think our clients need. We're taking quite a lot of learning from the experience around Covid two years ago, but this is quite clearly both tragic and unprecedented territory. So we would very much like to hear from you in terms of the sort of support that you would find useful in terms of seminars, webinars, podcasts, whatever else might be useful. Next week we'll be doing two webinars focused specifically on the energy sector and specifically on banks and financial services. So those are coming next week. But if there's anything else that you would find useful that you think - particularly from an in-house counsel perspective - would be helpful, please let us know. We hope to be as flexible as possible but very obviously dealing with a fast moving picture, but please let us know if there are areas that you would find helpful.

RH: Yeah, thanks Matthew. We're in an active dialogue with many of our clients at the moment around the world and I echo Matthew's encouragement to ask us how we can help.
I'm going to pick up a few questions, if I may. I know there are more coming through. Ross there's two questions I've got for you. One is a timing question: is there a cut-off date after which receipts of Russian customers, for example, might end up being from sanctioned people? Is there a date that we should be working to?

RD: So this sort of goes to the wind down licence point that we've already mentioned. Up until Monday of Tuesday of this week, maybe it was Friday of last week, I can't remember when the VTB licence came out, the UK has had no experience of these wind down licences, so as soon as somebody moved to be designated, literally the shutters came down. There were certain exemptions that allowed things to be done but in principle it was as if that entity had now been cut off from all humanity in the UK context. That is not the case this time. We have seen in respect of the major Russian banks - the VTB is a good example - banks have moved onto this asset freeze designation process, we have seen the UK government – albeit slowly – have brought out wind down licences and I'll be honest with you, they're not perfect, they're not easy to read, they are developing as we talk. So for example, the VTB one has a 30-day wind down period, I can't remember exactly when it starts but as at the end of that date, the shutters do come down effectively.

One point that we have noticed - I work on the UK finance working group on Russia – one of the things that came up there is that the 30-day period is not sufficient to allow people to close out positions in respect of derivatives which would be 35-40 days. That point has been made to the UK government and hopefully in future licences we'll see a longer wind down period or at least some provision for derivative products that can't close down that quickly. Alexander, you had a comment about how, for example, the US does this, it might be helpful to give some insight there.

AD: Well the US has been doing it for quite a while, I think the reason behind it is to allow the third parties, the innocent bystanders, not to be caught by sanctions without any forewarning or having an ability to exit. Ross, as people can appreciate, 30 days is a very short window. It may be easy to exit if you have spot trading or something very simple, but if you have a long-term project, that may not be sufficient at all and we've seen for all the sanctions regimes there were longer winding down periods for Iran, six months for instance, and for some of the other Russian stuff was also quite long, even for Chinese sanctions, we almost see up to a year. So this is really I think what may be giving the time. One thing I wanted to mention – we do see that this is really being taking seriously, these sanctions are being forced and that will be mentioned, that the governments are taking this very seriously, they're not trying to allow any room for maneuvering, people are asking what if you use different currency, this and the other, I think there's going to be very focused attention by the regulators to ensure there is no loopholes left. And frankly unlike the regime that was under President Trump, this is clearly going to be an enforcement priority for the US, for the UK, likely for the Europeans.

RH: Alexander, there's been a question on that actually, the point about currency. If we have other currency payments made into Russia, Japanese yen for example, Indian Rupees, does that get around things?

AD: Well Japanese yen – I'm in Tokyo now, so konnichiwa Ruby-san – I can tell you that the Japanese government has never issued as strong sanctions as they did this time around. It's a full-on sanctions, unlike 2014 when Japan's government under Prime Minister Abe took a timid step, I would say, during the Russian/Japan relationships. Bottom line is, swift restrictions that have just been announced, they'll likely be replicated by Japan, Korea and others.

Ruby, another key point here – you may have other currency payments that may be able to do, the critical point will be for some of those payments, they may need to go via US dollars. So there might not be direct exchange rate between let's say rupees and roubles, I don't know. So, for some of those transactions, even though you may think OK we're going to go to third country, third currency, but Thai baht may not be convertible to roubles without using the USD and once you get to that stage you may not be able to do it. So people ask about crypto currency if it's an option, I think you'll see some of that again being covered as a loophole from the regulators, they've already been focusing on this, and some of the crypto currency exchanges have already come out saying that they will endorse sanctions to the extent they apply to their individual holders again.

So, Ruby, there will be very small loopholes. I think that Ross' point, given that energy has not been the focus of sanctions and obviously there needs to be a way to pay for Russian gas, oil etc., so I suspect they will be left an ability for those payments to go through but the overall impact, and particularly US dollar use, will be very limited and pressure with Japan, Korea, they'll follow through restrictions, they will not be available, they will basically be the same rules as you see in Europe and the US.

MS: Also, just in terms of energy, it's more a risk with LNG and cargoes of crude, but if, whilst a cargo is being shipped, a vessel becomes subject to sanctions, either because of its flag or its ownership, any stage along the lines, you are in a right mess, particularly if its LNG, because you can't just sit there and wait for the situation to be sorted out. With crude you possibly could for a while, but attempts to get around the situation are fraught with risk if sanctions bite and I said about frustration and issues around where the loss lies, there is a risk the loss will lie in a manner that's really very uncomfortable if some of those situations develop. Quite literally, you have your LNG cargo and it is dissipating in value as it sits there, because it's boiling off, so all sorts of challenges.

AD: Matthew, the way around this obviously if you have that situation is to very quickly apply for an OFEC licence on emergency basis, at least if it's a US based restriction specifically for those tankers.

RH: We're out of time, but there's one last question I wanted to ask Olivier, if I may. Olivier, there's been a question in about systems and controls of due diligence. Should our clients be revisiting those in order to detect new lists of sanctioned entities and people?

OD: Yes, of course. Thanks Ruby for the question. That is what I was implying when I was talking about the addition of new entities to the sanctions list both on the UK, US and EU front. The implication means that there is potentially 100,000 if not more of companies which are owned or controlled by these newly sanctioned individuals and as a result this calls for higher scrutiny and also this is all the more true now that there's a new political impulse at UK and US level to also implement more forcefully assets freeze measures so our advice would clearly be to at least revisit it and ensure that you're in a position to identify the ultimate [*] owners of your Russian interests.

RH: Thank you Olivier. Thank you everybody for joining us, we're at the hour. Thank you to Olivier, to Alexander, to Ross and to Matthew and gratitude from our side for having the time and your attention this morning. Do keep in touch and thank you very much.

MS: Thanks everybody.

RD: Thanks everybody.