Whilst Moscow and Kiev are more than 16,000 kilometres away, recent developments there will be hard for many New Zealand businesses to ignore.

For decades, New Zealand has been exporting several hundred million dollars worth of butter, cheese, apples, fish, meat and wool to Russia and Ukraine, and importing large volumes of fuel, fishing equipment and machinery in return (see figures below). More recently, New Zealand food and beverage, agri-tech, clothing and health care companies have been capitalising on lucrative opportunities created by rising incomes in the region. New Zealand banks, insurers and freight companies have all played a role in facilitating these trade flows.

But these flows could all be jeopardised if the Crimea conflict continues to escalate and the international community imposes further sanctions on Russia and certain Ukrainians as a result. This article considers how sanctions could affect New Zealand businesses and some of the steps that can be taken to mitigate the regulatory risks generated by sanctions.

What are sanctions?

Sanctions are restrictive or coercive measures taken by countries against other countries, political groups or individuals for political reasons. Sanctions affect businesses by placing restrictions and controls on the movement of goods, services and funds.

There are several types of sanctions, but the most significant ones from a business perspective are:

  • Trade sanctions - Trade sanctions are typically bans or restrictions on imports and exports that may be limited to certain sectors (such as arms) or with certain exceptions (such as food and medicines); and
  • Financial sanctions - These can be comprehensive (i.e. prohibiting the transfer of funds to a sanctioned country and freezing the assets of a government, corporate entities and residents of the target country) or targeted (i.e. prohibiting anyone from dealing with the funds or economic resources belonging to or owned, held or controlled by a designated person; or prohibiting anyone from making funds or economic resources available, directly or indirectly, to, or for the benefit of, a designated person). Certain financial sanctions may also prohibit providing or performing other financial services (such as banking or insurance) to designated individuals or governments.

Sanctions can be authorised multilaterally, by the United NationsSecurity Council, or unilaterally, by national governments. At present, New Zealand can only impose sanctions that have been mandated by the UN. However, draft legislation that would enable the Government to impose unilateral sanctions is currently being considered by the Minister of Foreign Affairs, Murray McCully. Numerous jurisdictions are currently entitled to impose unilateral sanctions, including Australia, Canada, the European Union, India, Israel, Japan, South Korea, Switzerland and the United States. 

Sanctions regimes may be subject to frequent and sometimes sudden change. New measures can be imposed with almost immediate effect.

Current NZ sanctions

UN trade sanctions are implemented in New Zealand law by regulations made under the United Nations Act 1946. New Zealand currently imposes sanctions targeting Al Qaida and the Taliban, Cote d’Ivoire (diamonds), North Korea (luxury goods), Democratic Republic of Congo, Eritrea, Iran (most comprehensive), Iraq, Lebanon, Liberia, Libya, Sierra Leone, Somalia and Sudan. UN assets freezes on individuals and entities are implemented in New Zealand via the Terrorism Suppression Act 2002.

How foreign sanctions affect NZ businesses

Foreign sanctions regimes can apply to and penalise New Zealand-based individuals and companies because they have extra-territorial effect. For example, a foreign regime generally applies to its country's citizens, permanent resident aliens, vessels, aircraft and corporations (and their foreign branches), wherever they are located in the world. In certain circumstances, the US sanctions regime also applies to US corporations' foreign subsidiaries and to transactions involving US dollars and concerning US-origin goods.

The sanctions laws of various jurisdictions may apply to a single transaction facilitated by a business. For example, a payment initiated by an Australian-owned bank in New Zealand in US dollars on behalf of the British customer for the benefit of a payee in Iran may need to comply with Australia, New Zealand, United Kingdom, EU and US sanctions laws.

Even if foreign sanctions regimes do not bind a specific business, they may impact upon an individual transaction involving that business, as they may bind the other parties involved, including agents, foreign raw material suppliers, manufacturers, exporters, banks, freight forwarders, carriers and insurance companies.  

NZ businesses' compliance obligations

New Zealand businesses have a duty to ensure that their operations comply with all applicable sanctions regimes, including the extraterritorial aspects of foreign regimes. Parties that fail to comply could be subject to significant regulatory enforcement action, fines, serious reputation damage and criminal charges in New Zealand or elsewhere.

Parties that breach New Zealand's restrictions may be liable on summary conviction: in the case of an individual, to imprisonment for a maximum term of 12 months or to a maximum fine of NZ$10,000; or in the case of a company, to a maximum fine of NZ$100,000. A party may have a defence if it is able to show that it took reasonable precautions and exercised due diligence to avoid contravening the sanctions. If the Minister's autonomous sanctions legislation is passed, it is likely that the penalties for breaching New Zealand sanctions would increase significantly and perhaps by as much as a factor of 10.

The penalties for non-compliance with many of the foreign sanctions regimes are significantly higher than those provided for by New Zealand law and some of the regimes are much more strictly enforced. For example, parties that breach US sanctions relating to Iran may be liable for: criminal penalties, which are not to exceed a fine up to US$1,000,000 and / or imprisonment for up to 20 years; or civil penalties, which are not to exceed the greater of $250,000 or an amount that is twice the amount of the transaction that is the basis of the violation.In 2012, the US Treasury fined 16 companies (including non-US companies) a combined total of US$1.1 billion for breaches of US sanctions.

UN will not impose sanctions targeting Russia

The UN cannot impose sanctions without the unanimous support of the Security Council's five permanent members - China, France, the UK, the US and... Russia. Russia's power of veto, which is derived from Article 27 of the UN Charter, means that the Security Council is powerless to compel Russia to remove its troops. And the power of veto is unlikely to be abolished anytime soon. This is not least because Articles 108 and 109 of the UN Charter establish that any attempt to do away with the veto would require not just a two-thirds vote in the General Assembly, but constitutional ratification by all those states, and the agreement of all five current permanent members, including Russia.

NZ unlikely to impose sanctions, but NZ FTA with Russia put on hold

With the UN unable to act, New Zealand would not be able to impose sanctions unless its autonomous sanctions legislation and regulations targeting Russia were passed urgently. Despite this, earlier this week Prime Minister John Key told Trade Minister Tim Groser to leave Moscow where he was in the final stages of negotiating a Free Trade Agreement with Russia, Kazakhstan and Belarus, which has been in the pipeline for three years. Earlier this week, the Russia Ambassador was called into the Ministry of Foreign Affairs and Trade and told of New Zealand's concerns.

US, EU and other countries imposing sanctions targeting Russia and Ukrainians

Both the US and the EU have started imposing sanctions on Russia and a selection of former Ukrainian officials. Further sanctions are envisaged within the coming days unless Moscow deescalates the crisis and recalls its troops on the Crimean peninsula. That now looks unlikely as yesterday the Crimean parliament abruptly – and unanimously – voted to secede from Ukraine and reposition the peninsula as part of Russia.

In response, the US has halted military and economic talks and imposed visa restrictions on pro-Russian opponents of the new Ukrainian government in Kiev. President Obama has announced that his Administration is clearing the way for visa bans, asset freezes on individual Russian officials and restrictions on business ties within days rather than weeks. Ed Royce, chairman of the US House Foreign Affairs Committee, has called for "debilitating" economic sanctions. He said the US and Europe should act collectively to threaten the Russian stock market, economy and Ruble if Russia doesn't withdraw from Crimea.

For its part, the European Union has thus far suspended export licences on equipment which might be used for internal repression and frozen the assets of 18 former Ukrainian high-ranking officials. At an emergency summit yesterday, it suspended talks with Russia on a wide-ranging trade and economic pact and on a visa deal. EU President Herman Van Rompuy said further measures under consideration include travel bans, asset freezes and the cancellation of an EU-Russia summit if Moscow does not quickly end aggression and join talks to halt the crisis. A number of European nations have imposed their own unilateral sanctions, including Austria, Latvia and Switzerland.

The high chamber of the Russian parliament is reportedly preparing a draft law in case of US and / or EU sanctions targeting the country. According to the Russian news agency Itar-Tass, the draft law proposes to freeze US and EU assets.

Other states that have taken action this week include New Zealand's close allies, Canada and Australia. Canada has frozen the assets of some members of the former Ukrainian prime minister’s regime and suspended its participation in the Canada-Russia Intergovernmental Economic Commission. Australia has cancelled Trade Minister Andrew Robb's planned visit to Moscow this month and threatened to impose ­comprehensive sanctions. Russia's ambassador to Australia, Vladimir Morozov, said in response that "(a)ny restrictive measures of the Australian government will inevitably have a boomerang effect on Australian exporters".

Sanctions and retaliatory action of the kind discussed above could have a material effect on the international economy, and that of New Zealand.

Recommendations

Numerous steps can be taken to mitigate the regulatory risks generated by sanctions. New Zealand businesses that engage with Russia and Ukraine are advised to monitor developments closely. They should conduct internal reviews aimed at deciphering the extent to which their operations are subject to foreign sanctions regime requirements. Reviews should consider issues such as company ownership and management, the nationality of employees, overseas presence, the origin and destination of traded goods, customer identification, the nationality of agents and counterparties, trade routes, finance routes, payment mechanisms and the currencies used for payments. Once an internal review is conducted, steps should be taken to ensure regulatory compliance. This may include amending business practices in order to ensure that they no longer fall under foreign jurisdiction.

Figure 1. Top NZ exports to Russia and Ukraine in 2013 (NZ$ millions)

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Figure 2. Top NZ imports from Russia and Ukraine in 2013 (NZ$ millions)

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