Update on Russia-Ukraine Sanctions – Multiple Legal Challenges

by Orrick, Herrington & Sutcliffe LLP
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In response to Russia's actions relating to Crimea, the United States and the European Union have expanded their lists of sanctioned parties and their legal bases for broader sanctions.  These sanctions are beginning to restrict and complicate international business.  Further to our March 6 advisory, multinational companies are well advised to evaluate and address their exposure under current and anticipated sanctions.

Expanded Sanctions

United States Sanctions:  The White House has published three executive orders to authorize Russia-Ukraine sanctions.  Sanctioned parties now include 31 individuals and Russia's Bank Rossiya.  The U.S. government's application of executive order "blocking" measures freezes these persons' assets that are in the United States or otherwise held by U.S. persons.  The executive orders also generally forbid U.S. persons to engage in transactions in which these sanctioned persons have a direct or indirect interest.  United States officials have confirmed that U.S. persons are to treat as being sanctioned companies that are 50%-or-more owned by these designated sanctioned persons.  Finally, the executive orders ban entry into the United States by sanctioned persons, and U.S. authorities reportedly have suspended issuance of export licenses for exports to Russia.

EU Sanctions:  With the recent publication of a new decision and regulation, the EU Council has designated dozens of Ukrainian and Russian persons as being subject to the EU sanctions.  Like the U.S. executive orders, the EU measures freeze designated persons' assets and forbid dealings that involve the designated persons.  EU authorities have also established a ban on designated persons' entry into the EU.  In addition, the UK Export Control Organisation has suspended a number of licenses for exports of dual-use items to the Russian military.  Other European nations may take similar actions.

Business Impact:  As the scope of sanctioned persons has expanded to include Russian business leaders and a large bank, sanctions are restricting and complicating international business and finance.  Uncertainties about sanctions' scope and about sanctioning of additional persons are leading to suspension and termination of planned transactions.

Furthermore, U.S. and EU authorities have made it clear that, absent resolution of disagreements about Russia's actions in Crimea, they will expand sanctions further to impede international transactions involving Russia.  The latest of the three U.S. executive orders, issued March 20, authorizes sanctions against "sectors of the Russian Federation economy" such as "financial services, energy, metals and mining, engineering, and defense and related material."  New U.S. sanctions would be expected to apply immediately on issuance; no grace periods or grandfathering are anticipated.

Potential Additional Sanctions and Implications

New sanctions and their implications may be along the following lines:

  • Expansion of the list of sanctioned government officials, military personnel and businessmen.  Longer "blacklists" will place more weight on due diligence to explore issues such as indirect, beneficial ownership or control of assets and operations by designated persons – difficult given factors such as non-transparent offshore structures that are common among Russian businesses.
  • Designation of additional Russian banks and other sanctions that block access to western banking systems.  Such measures could undermine financings, particularly those for U.S. dollar denominated transactions.  Already, credit card companies have recognized impediments to processing payments involving sanctioned banks, resulting in losses for the banks, cancelled transactions for cardholders and potential legal controversies. 
  • An arms embargo against Russia.  A U.S. arms embargo would forbid not only sales of weapons systems but also most transfers to Russia of goods, services, software and information relating to defense activities.
  • Prohibition on government support for financings and other transactions.  Bans on support from, for example, the U.S. Export-Import Bank and Overseas Private Investment Corporation could forestall planned transactions and result in defaults and disputes in the context of transactions in process.

In addition, the U.S. Congress is expected soon to produce legislation that will broaden and intensify U.S. sanctions relating to Russia.

As a general matter, expanded sanctions will raise questions about the status of ongoing transactions, including implications for default, termination, force majeure, payment and dispute resolution provisions.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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