RELATED UPDATE: New Revelations in Ukraine Lead to Tightening Global Sanctions (April 8, 2022)
As we approach the thirty day mark since the United States, and other Western countries began imposing a series of rigorous sanctions on the Russian economy and key components thereof, we are starting to see real evidence of their broad impact. Unfortunately, that includes significant impacts that Western companies are being forced to bear. In some cases, large multinationals that could arguably continue to operate in Russia or with Russian partners are voluntarily electing to walk away from the country, whether due to the complication involved in navigating a dynamic sanctions environment, ambiguity around beneficial ownership of high risk partners, reputational concerns, a calculation that it was the right thing to do, or all of the above. However, other Western companies less well-situated to simply walk away from Russian business entanglements are finding themselves left with little choice but to absorb millions of dollars in losses.
For Western companies with Russian exposure, their ability to salvage their Russia-related operations and relationships is becoming increasingly challenging. The sanctions impact is manifesting itself in various ways, including:
- Lenders becoming increasingly hesitant to approve new loans or allow existing loans, credit facilities and other financing to proceed if there is exposure to Russia, even if the exposure does not run afoul of current sanctions. Borrowers are finding themselves forced to jettison or significantly constrain Russian subsidiaries and Russian business relationships in order to remain in good standing with their lenders.
- Investors suffering steep losses in value on pre-sanctions holdings and, in some cases, being unable to exit positions with potential sanctions exposure.
- Businesses that were ruble-exposed prior to imposition of sanctions (g., through forward currency contracts that are often used by western businesses to offset the risk of currency volatility when they have Russia-related operations) being exposed to massive devaluation of their positions.
- Businesses that were reliant on outsourced Russian and Belarussian resources (g., in the software and other high-tech industries) facing skepticism from customers regarding the continued use of such offshoring, uncertainty under increasingly tight export control restrictions, cybersecurity concerns, and challenges making lawful payments.
- Companies with Russian subsidiaries working in energy-related fields being subject to highly restrictive U.S. and EU sanctions against new energy sector investments that took immediate effect in the last two weeks and have functionally frozen many in their ability to support or maintain those businesses going forward and forced some to exit ventures immediately.
The extraordinary human suffering that is occurring in Ukraine certainly demonstrates that the U.S. and its Western partners were justified in imposing these sanctions as part of their efforts to deter Russia’s aggression. While it was always understood that non-Russian commercial parties would feel some of the sting of sanctions in order for them to be effective, it is not clear how much governments factored that impact into their decisions regarding the sanctions that have been rolled out. It is also not clear how much further the impacts of the sanctions will extend into Western economies.
What is clear is that the expansive sanctions against Russia are not going away soon. OFAC announced today the designation of dozens of Russian defense companies, 328 members of the Russian parliament’s lower chamber, and the CEO of Sberbank as “key enablers of the invasion” in coordination with similar designations by regulatory counterparts in the EU, UK and Canada. The U.S. and other Western countries will continue to identify additional targets for sanctions so long as the fighting continues. Even if anticipated peace talks are successful, it is hard to imagine that NATO allies will be inclined to ratchet down the sanctions given the extraordinary damage to Ukraine and its citizens and the perceived threat to other countries,. The sanctions are decidedly a long-term problem for Western companies involved in Russia and those businesses must plan accordingly. Businesses with significant interests at risk should carefully assess the future impact of any responsive actions, particularly those that are made on grounds other than the direct application of mandatory legal requirements.
If you have further questions about the impact of these sanctions, or the breadth and capabilities of our practice, please contact the authors of this article