At the end of July, the US and the EU escalated their respective sanctions regimes against Russia following the Kremlin’s intervention in the Crimea/Ukraine crisis, as well as recent issues pertaining to access to the MH17 crash site. By announcing broadly co-ordinated sanctions, European and American leaders have made an overt statement to Russia that such action will not be tolerated by the West.
The sanctions themselves focus mainly on Russia’s military, energy and financial sectors, with five of Russia’s largest banks, Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB) and Rosselkhozbank now the subject of sanctions.
While companies that trade goods or have a presence in Russia are not immediately impacted by the latest wave of Western sanctions, the Kremlin has now decreed that the import of fruit, vegetables, meat, fish, milk and dairy imports from the United States, the European Union, Australia, Canada and Norway, be prohibited. As a result, those involved in the consumer sector, who trade fast moving consumer goods with Russian companies or have a retail presence there may soon find themselves at risk and, in particular those who deal in the prohibited products will now need to carefully assess their position. The following are some potential consequences of the new sanctions:
- companies who rely on emerging markets for their business may experience lower sales in Russia as the economy slows;
- many Western industries rely on exports from Russia and, should the Russian economy falter, companies may experience supply issues;
- companies dealing with counterparties in Russia or its vicinity will need to scrutinize carefully who they do business with, and be prepared to answer questions regarding their business partners from both governmental bodies and those who provide finance to them; and
- those who import the designated products into Russia will, from 7 August 2014, find themselves unable to do so for one year. There is also the potential for additional products to be prohibited by Russia in the coming months.
In addition to the above commercial concerns, there are also legal considerations. For example, are companies able to continue financing their business with Russia? Are counterparties now sanctioned? Is the transaction itself now sanctioned? If so, how do companies extricate themselves from contractual obligations? All these concerns and more are not to be taken lightly.