The Coming Trade Sanctions Against Russia

The Volkov Law Group
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The Volkov Law Group

President Putin is making sure that Russia dominates the early 2022 headlines.  As Russia aligns its resources to invade Ukraine, the U.S. and European countries prepare to respond aggressively.  It appears that nothing will deter President Putin from continuing forward.  Russia has calculated that the risks and response from the West may be worth the upside to Russia. 

Global companies should prepare for an aggressive response to any Russian aggression. The U.S. and European countries are promising to impose tough new sanctions against Russia.  It is difficult to predict exactly the contours of the West’s response from a global sanctions perspective. 

Russia’s invasion of Crimea in 2014 resulted in the comprehensive sanctions program against Russia.  Some have argued that the 2014 sanctions program was not as tough as it needed to be.  Congress eventually stepped in to tighten the sanctions program.

From a compliance standpoint, the Ukraine-Russia Sanctions Program starting in 2014 has presented difficult compliance issues.  Aside from designating a number of Specially Designated Nationals (“SDNs”), OFAC created a comprehensive Sectoral Sanctions regime, which raised a number of difficult issues.  Instead of prohibiting business with various designated entities and individuals, the Sectoral Sanctions imposed specific restrictions on a number of entities an individuals, including limits on new credit or debt, as well as specific prohibitions on Russia’s oil and gas industry.

The challenge in predicting just how far the United States and Europe will go in adopting new sanctions is that there are a number of alternatives, each of which presents some serious collateral consequences to the United States and Europe. In this regard, Europe, and in particular Germany, has moved forward with Russia to establish the Nord Stream 2 pipeline for the transmission of natural gas.

The United States would face stiff opposition if it decided to sanction or stop the Nord Stream 2 pipeline, but recently Germany has indicated it may halt the pipeline if Russia invades the Ukraine.  Putin will have to take this into account. 

Aside from the Nord Stream pipeline, the United States and Europe may impose tough new restrictions governing Russia’s access to international banks, and in particular, may cut off Russia’s access to the Society for Worldwide Interbank Financial Telecommunications (SWIFT) global system for financial transactions.  SWIFT is an international cooperative that is essential for financial transactions in the global economy. Such an action would have a significant impact on Russia, although Russia has been exploring with China the possibility of setting up their own international financial network as an alternative. 

If the United States and Europe decide to impose tough new sanctions on Russia’s oil and gas sector global companies could face a complex maze of compliance issues. For example, if Gazprom becomes a prohibited entity, United States and European companies will need a significant wind-down period to adjust.  Given the impact this could have on oil and gas global energy markets, I expect that United States and European leaders will avoid such a harsh measure.

Another possible avenue for sanctions is the restriction on export of technology and communications products to Russia.  The Russian economy is transforming by embracing new technologies and producing consumer goods in response to demand.  By restricting technology products, Russia’s economy may be derailed slightly but a significant impact is not likely.

Apart from these possible measures, the United States and Europe could expand the current Sectoral Sanctions program and the list of SDNs.  Russia, however, is adept at circumventing these restrictions and has been able to avoid the direct hits that the United States and Europe sought to impose in response to the invasion of Crimea. 

Companies have to monitor this situation and prepare for a possible new regime of sanctions.  Compliance will be at the forefront on this issue.  Whatever happens, Russia is likely to decide on its next step in the coming weeks.

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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