Roschier Insights Seminars: Sanctions in the wake of the war in Ukraine – Lessons learned 12 months later
On 16 February 2023, the Dispute Resolution teams in Helsinki and Stockholm held live and hybrid events on the continuously developing landscape of sanctions against Russia and the countermeasures taken by Russia.
In Helsinki, the speakers at the event were Roschier’s Paula Airas, Laila Sivonen, Kiira Tuohimaa-Leisio, Lauri Säilä, and Aapo Saarikivi. In Stockholm, the speakers were Roschier’s Johan Sidklev, Shirin Saif, Annika Pynnä and Daniel Bjurbom, and guest speaker Konstantin Bureiko from Debevoise & Plimpton LLP, who participated to discuss legal and practical issues relating to the UK and US sanctions regimes.
Navigating through the ever-evolving sanctions landscape is the new reality
We are approaching the anniversary of Russia’s invasion of Ukraine on 24 February 2022. With no end in sight, navigating through the complex and continuously changing landscape of various international sanctions appears to have become a permanent exercise. There is now a presumption that, if a transaction involves Russia, it must in some way be affected by sanctions.
More than 1,000 new names have been added to the so-called Targeted Sanctions Regulation (Council Regulation (EU) No 269/2014), while many new business sectors and products subject to export and import restrictions have been added to the so-called Sectoral Sanctions Regulation (Council Regulation (EU) No 833/2014). So far, the EU has enacted nine sanctions packages in response to Russia’s invasion. The tenth package is expected to enter into force by the end of February. Each regulatory reform introduces new restrictions, but also possibilities for derogations. As a result of the rapid evolution of the sanctions regime and limited interpretative materials, it is a challenging task for affected companies to get to grips with it. Continuous monitoring is a must. This has meant numerous pivots in planning exits and other strategies for affected companies and advisors.
The authorities face the same challenge. Throughout the year, we have dealt with authorities on behalf of or with our clients on a number of occasions, discussing even some fairly practical matters as the regulations are open to interpretation. Sometimes, matters have required a great deal of lawyer involvement, with everything from meetings, correspondence, and legal opinions.
Compliance and a properly documented risk-based approach are key
The sanctions regulations impose restrictions and obligations, but do not offer the practical means for businesses to comply with them. This means that businesses must decide what measures are sufficient to comply with the regulations. But what are regarded as “sufficient” measures?
Both the Targeted and Sectoral Sanctions Regulations provide that any actions taken by companies that may ultimately be deemed contrary to sanctions will not give rise to liability if the companies “did not know, and had no reasonable cause to suspect” that their actions would infringe the regulations. Further, companies will only be liable for participating in activities that circumvent the sanctions if they have acted “knowingly and intentionally.” A similar approach is also applied under the US financial sanctions and by the UK authorities, where sanctions infringements are typically pursued against companies acting purposefully in a dishonest manner.
Based on our experience, a robust compliance program is a key factor for operators to avoid enforcement actions. We continuously advise our clients to create a well-documented sanctions compliance program, which is calibrated according to the specificities of their business and the related risk exposure. The method for such calibration is commonly referred to as a “risk-based approach”, for which there is guidance provided by, e.g., the EU and US authorities. To be effective, the sanctions compliance program and the risk-based approach taken under the program should extend to the day-to-day activities of the organization. The program and underlying approach should also be routinely reviewed and updated to meet the requirements of the ever-evolving sanctions landscape.
As regards more bespoke sanctions checks, throughout the past year we have been involved in many cases where what would ordinarily comprise simple KYC and AML checks on counterparties have turned into fully-fledged due diligence exercises – particularly in cases involving exits from Russia, where a client is considering transactions and wants to make sure that the counterparty is not owned or controlled by a person subject to targeted sanctions. The standard process of sending self-disclosure requests, cross-checking the information received, and conducting regular public searches is usually the best way to achieve this, but it is almost never possible to give a 100% green light: the product is always a risk assessment, where the risk is low, medium, or high. In all these cases, a well-documented process is the key to navigating through the red tape.
US and UK sanctions, and Russian countermeasures may play a role
In addition to keeping up with the constant changes in the EU sanctions regime, EU-based companies (especially those operating internationally) may also need to monitor US and UK sanctions regulations. The US authorities in particular have sometimes assumed jurisdiction in sanctions-related matters, for example by virtue of the involvement of individual US citizens, US dollars, dollar accounts, and the use of US servers. Therefore, companies need to be aware of any nexus that exists between their business activities and the US and UK.
In addition, for all Russia-related operations, a further challenge is posed by Russia’s own countersanctions, which have made it very challenging for Western companies to operate in the country and, more importantly, to leave.
In the seminars held in March last year, we discussed a legislative proposal in Russia that would have established a mechanism by which Russian authorities would be able to nationalize Western assets located in Russia. While the proposal garnered much attention in the early days of the war, there have been no developments in the legislative process for over seven months. Nonetheless, expropriations and related measures are still taking place. The purpose of the vast majority of Russian countermeasures is to prevent capital flight. Taken together, the Russian countermeasures have been fairly effective in at least halting the process of Western companies leaving Russia.
The transfer of ownership of shares or participatory interests in Russian companies is subject to prior approval by a government commission. According to recent criteria for the approval of such applications, we have understood that sellers (i.e. Western companies) looking to divest their Russian assets are compelled to choose between agreeing to defer a significant part of the purchase price or voluntarily making a contribution to the Russian state budget. The general sentiment is that, perhaps, the window to exit the Russian market is closing if not already closed for the majority of Western companies that have not yet completed their exits.
Protection from investment arbitrators and other sanctions-related disputes
Given the new reality, we can reasonably expect an increase in the currently very limited sanctions-related case law in the form of criminal and administrative proceedings, as well as contractual disputes.
It is safe to say that almost all Western companies previously operating in Russia have suffered some form of financial loss as a result of the war. Naturally, every effort has been made to minimize these losses, in some cases even at the expense of other Western partners. In addition to the sanctions, social pressure may have driven companies to exit Russia quickly in a manner which is not always in line with their existing contractual obligations. Such situations create a schism between companies not directly impacted by the sanctions.
In addition, investment protection disputes are also expected to increase, in particular due to the significant economic losses caused by Russian retaliatory sanctions and potentially also by the Western sanctions on Russian individuals.
Navigating the New Geopolitical Landscape in Arbitration: Insights on Commercial Disputes and Investor Protection will be the topic of the 2023 Roschier Arbitration Forum to be held in Stockholm on 26 May 2023. Stay tuned for more information!
Our experts are happy to discuss any sanctions-related issues you may have.