Economic and trade sanctions are a response to war, terrorism, weapons proliferation, and other political events, and have always been subject to change. Recent political developments in the US, the UK and the rest of Europe are highly likely to affect how – and against whom – this foreign policy tool is used. For example, in the US, President-elect Donald J. Trump has made statements against the recent loosening of the Iran and Cuba sanctions, and in favour of loosening current sanctions targeting Crimea and Russia.
When sanctions are resurrected
Companies looking to do business in countries targeted under recently-loosened sanctions must carefully consider the risks inherent in doing so. If previously loosened or dropped sanctions are re-imposed, companies doing business in Iran or with Iranian persons (and certain companies doing business in Cuba) will need to cease or substantively restructure their business activities, as there will likely be no ‘grandfathering’ of pre-existing contracts.
Emergency exits: preparing for departure
Although some companies have put plans on hold, other companies have continued active engagement in sanctioned countries, proceeding with caution and with an eye to exiting. The Iran nuclear deal has a failsafe: sanctions will ‘snap back’ into place if Iran does not comply with the terms of the agreement, and any of the parties, including Iran or the US, could unilaterally withdraw from the agreement. This means that even before the recent political developments, being able to plan a ‘way out’ has been a key consideration when entering into transactions with potential sanctions risk.
Company checklist: three ‘must-haves’ in transactions with sanctions risk
Companies considering business in countries with recently-loosened sanctions in place should make sure to:
Structure transactions to be able to exit quickly if necessary.This could mean taking a ‘wait and see’ approach if considering a major infrastructure project or building a physical presence in-country.
Conduct ongoing due diligence to ensure business partners, contractual counterparties, and others connected to the project are not targeted by new or changing sanctions.
Build into agreements the ability to exit for sanctions-related reasons: include sanctions force majeure language, termination rights, liquidation rights, escrow accounts, put/call options, or other ‘divorce’ mechanisms.
It is certainly possible to continue engagement in countries where sanctions were recently loosened, provided that companies understand their risk and prepare for the potential for rapid change.