Sanctions related to the military conflict in Ukraine: The impact on foreign entrepreneurs and ongoing transactions

The economic sanctions imposed on Russia and Belarus by numerous countries are intended to stop the military conflict in Ukraine and avoid the use of military force by NATO and the USA. Russia has responded with a few sanctions on foreign companies and restrictions on transactions or payment in foreign currency. Until this conflict is resolved, the sanctions are likely to expand even further. While the sanctions are yet to result in cease-fire, the immediate collateral effect on entrepreneurs outside Russia and Belarus and their ongoing transactions in these countries is already tangible:

  • Payments from Russian clients to their foreign counterparties in EUR/USD are difficult to arrange because of the exclusion of several Russian banks from the SWIFT and the restrictions on dealings with foreign currency imposed by the Russian government ;
  • Payments on loan and security transactions to foreign creditors from the ‘hostile countries’ exceeding 10 million Russian Rubles (approx. EUR 80,000 ) in a calendar month (or on the 1st day of the month) are to be made in Russian Ruble only ;
  • Import and export of certain goods from Russia shall be either banned or subject to special license;
  • Delivery of goods to Russia is likely to suffer from the ban of Russian airlines and the restrictions on air transport imposed by Russia and the neighboring countries;
  • Sourcing of input ingredients and materials from Russia and Ukraine is suspended for the time being, which results in a halt in manufacturing of numerous goods dependent on these sources.

For enterprises and entrepreneurs outside Russia, mitigating this negative impact in a timely and efficient manner is crucial. Hence, there are several interim measures that could be put in place:

Objective 1: Avoid default and the ensuing penalties under agreements with clients

For a start, a prudent entrepreneur should notify its counterparty about any foreseeable delay in delivery of orders or goods agreed under contracts with ongoing performance and attempt to extend the timeline for delivery or suspend the performance. In the absence of agreement to reschedule the timeline, the affected company should consider invoking the force majeure clause applicable to the respective contract. In certain cases, this clause would require a written notice sent by the affected party within a limited period of time so it is material to review the relevant contract and comply with the envisaged formalities.

Objective 2: Limit the exposure

A supplier should carefully consider accepting any new orders if they are related to one of the following categories:

  • The manufacturing of the goods might be negatively impacted by the penury in sourcing the necessary in-put ingredients or materials;
  • The goods are to be delivered to Russia or Belarus, or are intended for clients in these countries (including companies that are registered abroad but operate through Russian subsidiaries).

If the contract does not afford the supplier with the discretion to accept the order, consider re-negotiating the contract and/or invoke the force majeure clause.

Objective 3: Ensure compliance

While the sanctions are in effect, all entrepreneurs and companies dealing with counterparties in Russia and Belarus should exercise stricter diligence in planning and conducting their operations to avoid default on their ongoing transactions and ensure that they are in compliance with all restrictions – which might prove to be a challenge with the ever-expanding list of sanctions. The penalties for violation of the sanctions are severe as the governments are seeking to enforce them to the maximum intended effect and close loopholes. Therefore, entrepreneurs should follow closely the developments and engage legal counsel without delay in any transaction or contract that might seems to be within the scope of the restrictions.

If the sanctions remain in effect for a longer period, they would entail reconsidering of the business operation of the entrepreneurs worldwide.

Published in cooperation with D`ORNANO PARTNERS