The U.S. government has enacted a myriad of new sanctions through presidential executive orders that prohibit U.S. and non-U.S. companies from engaging in a wide range of activities with numerous government-related and private entities and individuals in Russia, Belarus and parts of Ukraine. These activities include, but are not limited to:
- Restrictions on trade and investment within certain regions in Ukraine;
- Designations of individuals (oligarchs) and entities (banks) to the Treasury’s List of Specially Designated Nationals and Blocked Persons (SDN list or “black list”) and restrictions to transactions involving sovereign debt;
- Restricted activity with Nord Stream 2 AG, a company in charge of the design, construction and operation of Nord Stream 2, an energy project connecting Russia and the European Union;
- Sanctions on President Vladimir Putin and other high-ranking officials within the Russian government; and
- The removal of certain Russian banks from the SWIFT messaging system.
Mexico’s trade with Russia is not substantial; however, it is not insignificant. Mexico’s main exports to Russia include tequila, beer, beef and automobiles. On the other hand, Mexico’s biggest imports from Russia include chemical products, metals, aircraft and ammunition.
At the time of publication of this Alert, the government of Mexico has ruled out implementing direct measures to sanction Russia for its invasion of Ukraine. Mexico’s position contrasts with broad sanctions imposed by the international community, including its biggest trading partner, the United States. The argument has been made that Mexico historically has always remained on the sidelines, adhering to its "non-intervention" policy. Regardless of its merits, it behooves all Mexican entities and individuals with transactions in or with U.S. entities and persons to be familiar with the restrictions applicable to Russia and Russian entities. More importantly, it is a legal necessity to understand the restrictions and sanctions to avoid violating them.
Furthermore, previous administrations have not shied away from using U.S. soft power and statecraft to pressure Mexico into adopting specific actions, (e.g., the Trump administration’s use of tariff threats to force Mexico’s cooperation with curbing illegal immigration). More recently, the prospect of sanctioning Mexico was floated when Mexico considered purchasing Russian-made helicopters. The deal ultimately fell through. However, these examples serve as a cautionary tale for those willing to overlook U.S. and international sanctions on Russia. These are especially worthy to note if the situation in Ukraine continues to deteriorate as the international community further escalates their commitment and support of Ukraine.
How Can Mexican Entities and Individuals Be Affected?
The U.S. is the biggest export market for Mexican companies. It is the cornerstone of Mexican exports. According to U.S. census data, in 2021 the United States imported $385 billion in goods from Mexico, by far the largest destination for Mexican products. Several entities in Mexico have subsidiaries in the United States and/or transact business from the United States. These contacts may be sufficient for the prohibitions to apply to such Mexican persons and entities, such as the recent cessation announcements by companies such as Bimbo and subsidiaries of Grupo ALFA in Russia.
Executive Order 14065 of February 21, 2022, defines the scope of applicability of the sanctions to include not only United States persons but also any person in the United States. See the complete definition below (emphasis added):
For purposes of the order, the term ‘‘United States person’’ means any United States citizen, lawful permanent resident, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.
These last words broaden substantially the potential scope of applicability. As you may appreciate, the application analysis is fact-specific and more nuanced than determining the nationality of an entity or individual. In any event, best practices suggest that Mexican companies with substantial U.S. dealings should tread very carefully―even avoid to the fullest extent possible―engaging in business dealings with Russia, Russian companies or any entity that has been included in the SDN list.
Despite the limited trade relationship between Mexico and Russia, the economic effects have already been felt in the form of increased fuel prices and disruptions to global supply chains. Consequently, and in order to minimize unintended consequences, the U.S. government has issued eight general licenses that authorize the continuation of certain types of transactions with Russian entities. Such licenses include, but are not limited to, certain exceptions for international organizations, food and agricultural products, air ambulances, certain transactions and negotiations related to energy, debts and shares, derivative contracts and a grace period to liquidate certain operations, among others.
As a practical matter, conditions in Russia are deteriorating so fast that it may prove to be unfeasible and unprofitable to transact or continue transacting business with Russia. Russian banks have been cut off from the SWIFT system, making payments of goods and services very complicated to complete. The Russian ruble has depreciated substantially, and access to U.S. dollars is scarce for most Russians. Even existing lenders, particularly aircraft lessors, are facing a threat of Russian seizure of their assets, negating the ability to foreclose on any collateral or security located in Russia. The adoption of additional retaliatory measures by the Russian government cannot be overlooked.
What Can You Do?
Perform a comprehensive due diligence check. Companies should begin by performing a comprehensive due diligence check through their transactions, counter-parties and arrangements to determine if they have any sanctions-related risks, including identifying the beneficiaries in certain transaction, source of funds and the location of the source. Make sure to avoid transactions with any of the entities mentioned on the black list. Additionally, other countries such as Singapore, the United Kingdom and the member countries of the European bloc have adopted their own sets of restrictions that may indirectly prevent commercial transactions between Mexico and Russia.
In conclusion, it is prudent to be aware of the impact and unintended consequences that economic sanctions can have. Many of the effects of sanctions are not easy to discern, and due diligence could mitigate many risks by reducing costs in the long run.