As the crisis on the Ukrainian border persists, companies with exposure to Russian markets and counterparties are being forced to reckon with the possibility that a Russian invasion of Ukraine could result in imposition of the most serious economic and trade sanctions ever imposed on Russia. Such sanctions are being openly discussed and debated politically, and are the clearly preferred first response to any aggressive military moves Russia might make to cross the Ukrainian border in locations where Russian military assets have been staged over the last several weeks. While obviously preferable to a global military conflict, efforts to sanction Russia to a level sufficient to reverse an incursion into Ukraine will have significant ripple effects throughout numerous industries and with numerous significant multinational organizations.
The situation at the border and at the negotiating table remains fluid, so the possibility, timing and form of sanctions remains speculative. However, the situation is sufficiently serious that any company with Russian exposure would be well advised to review its Russia-related business activities and begin contingency planning.
What We Know
- If Russia invades Ukraine, severe sanctions imposed by the United States government and other governments in Europe and beyond are almost certain to follow. Recently, Secretary of State Anthony Blinken described the response as “including economic measures that we haven’t used before — massive consequences.”
- Such sanctions are likely to follow very quickly after any Russian military incursion into Ukraine, at least from the United States. U.S. officials have indicated that they have already developed a sanctions package that will be ready for immediate implementation in the wake of any invasion of Ukraine.
- The sanctions to be imposed will be comprehensive and most likely include a mix of actions, such as:
- Designation of specific persons and entities as direct sanctions targets.
- Increased targeting of and restrictions on involvement with key Russian industrial sectors.
- Efforts to cut Russia off from the global financial system, up to its exclusion from the SWIFT global financial network and denying key industries access to global debt markets (e.g., Russian energy producers).
- Restriction on exports to Russia of key technologies (e.g., software, high-tech componentry) and consumer goods (e.g., smartphones and computers) that Russia needs and does not produce domestically.
- Restrictions on imports of Russian goods and technologies
- The Russian energy sector will almost surely be central to any sanctions strategy.
What We Don’t Know
- What individuals and entities are most likely to be sanctioned. We can, however, make some educated guesses. For example, any sanctions are likely to target those closest to Vladimir Putin, and military and intelligence organizations and suppliers involved in aggressive acts toward Ukraine.
- Whether there will be reasonable wind down periods. If we look to the recent example of the sanctions imposed on Venezuela, reasonable wind down periods were provided, and with good reason. Markets throughout the world had significant exposure to and entanglements with PdVSA, and disengagement from Venezuelan crude oil supplies was disruptive even within the time provided. The comparable entanglements with Russia energy companies, and in particular with Russia oil and gas supplies into Europe, are as much if not more complex. On the other hand, these sanctions would be in response to an invasion and intended to shock Russia into withdrawing. There may be little interest in wind down periods that soften the blow, even if innocent third parties suffer commercially. While it might be reasonable to expect there will be wind down periods provided, there are no guarantees.
- Whether the Nord Stream 2 pipeline will feature prominently. Ukrainian officials have described completion of the Nord Stream 2 pipeline as being as big a threat as the troops massed at their border. A sanctions bill specifically targeting Nord Stream 2 and related entities was narrowly defeated in the U.S. Senate last week, with Republican and Democratic support, but with strong opposition from the White House. If sanctions are necessary, Nord Stream 2 is likely to be impacted.
- Whether there might be secondary sanctions targeting non-Russian persons or entities that support Russian actors or sectors. The threat of secondary sanctions – imposed against parties outside Russia that support targeted persons — is an increasingly common feature of U.S. sanctions strategies, and there is every reason to expect they will at least be included as an available feature in a comprehensive Russian sanctions strategy.
- How coordinated the sanctions will be. There are sanctions actions the United States can take unilaterally, but some of the more impactful sanctions being discussed will require multilateral support across numerous countries in order to be effective (e.g., cutting Russia off from SWIFT). The United States and rest of NATO have been discussing this issue intensively, so one would expect close coordination.
- Timing. There is no current deadline by which the crisis must be resolved or escalated. But for a variety of reasons, it appears that matters will come to a head within the next thirty to sixty days, if not sooner.
- How Russia will respond. Russia is not without leverage in this situation, given the significant amounts of oil and natural gas it supplies into Europe. Russia weaponizing its energy supply by cutting Europe off could be critically impactful, and would require efforts to swiftly transition European markets to alternative energy supplies, possibly in the middle of winter.
What Companies Can Do to Prepare
Companies with significant commercial ties to Russian markets and counterparties, including in particular those companies with Russian subsidiaries, should use this moment to closely examine what those ties are, and whether and how they can be severed or adjusted in the event they are impacted by sanctions. This can include:
- Identifying any direct or indirect commercial exposure to Russia, and to Russian entities and individuals.
- Understanding the direct and indirect transactional and contractual ties to Russian markets and counterparties.
- Determining whether they already have reasonable means of modifying or disengaging with Russia-related commercial activities within reasonable time periods.
- Planning for commercial alternatives if they lose the ability to deal with Russian markets or counterparties.
- Engaging with commercial counterparties in Russia to front the issue and prepare for the possibility of sanctions imposition.