Current Impacts of Russia Sanctions

The Clark-Esposito Law Firm, P.C. recently published a convenient guide to current Russia sanctions which can be found here.

While it is clear that both the United States as well as a large number of other countries have imposed far-reaching sanctions against Russia and Russian entities, what may be less clear is how such sanctions are likely to affect everyday life and business in the West.

To be clear, the current sanctions are unprecedented, and systemic impacts of the new sanctions are coming to light with each new business day. Beyond the daily surprises, however, we have sought to highlight some of the most substantial and immediate impacts businesses and consumers are likely to encounter.

In the short-term, the aim of the new and comprehensive sanctions against Russia is to disable Russia’s capacity for making war (prevention) as well as to disrupt Russia’s domestic economy and to damage support for the war (punishment). The new sanctions are, however, so far-reaching that they will affect the wider global economy – and not just businesses with direct ties to Russia or Russian entities.

First and foremost – Western securities markets are reeling from both the destabilizing effects of a war of significant scale and the ripple effects of removing Russian banks from access to Western markets. In addition, many major Western companies and investment funds are divesting themselves of Russian assets and operations. Further, both the New York Stock Exchange and Nasdaq halted trading of Russian stocks on February 28 (including Russian exchange-traded funds). In response, more than one credit ratings agency has already downgraded Russian sovereign debt to “junk” status. Certainly Western financial markets anticipated much of this, but the full effects may take some time to materialize – modern markets are a tangle of connectivity and the wholesale removal of an entire national economy from the system is a rare step without precedent.

Next – energy costs. As Russia is a major producer and supplier in world energy markets (particularly Europe), the current chaos was sure to result in higher energy costs. Given EU dependence on Russian energy, the sector has been spared from immediate direct sanction in Europe (so far), however, the United States announced that it would halt imports of Russian crude oil and refined petroleum products. While the Biden administration is taking steps to reduce the fallout in U.S. markets, as we have all seen, energy costs are rising fast and anticipated to stay high for the foreseeable future. Suspension of Russian crude oil and refined petroleum products will also entail knock-on effects economy-wide, as these underlying commodities are components of thousands of consumer products, product packaging, and fertilizers needed for the food sector – to name just a few arenas reliant on petrochemicals.

The same differential effects are expected to be seen in other commodities markets as well. Whereas the United States expects increasing food costs and further systemic impacts from general disruption; Europe, where more Russian food is directly imported, will see a more notably diminishing supply coupled with much higher prices. Remember that Ukraine has long since been referred to as the “breadbasket of Europe”, and both Russia and Ukraine are major suppliers of global wheat. Russian wheat will be sanctioned, while Ukraine has restricted its exports to protect its own food supply amid the ongoing war. Both Russia and Ukraine are also major producers of a number of vital materials, including palladium, iron ore, uranium, steel, and a number of industrial chemicals – shortages of which will be felt across global markets and businesses dependent on these materials. Ukraine is also a major U.S. supplier of semiconductor-grade neon (in fact, 90% of the neon supply originates in Ukraine). As has been noted, while on-hand supplies may hold out for some time, they will certainly not last forever, and even where the U.S manages to locate alternative supplies of some materials, disruptions will be inevitable.

For companies with overseas suppliers, supply chains, and arrangements dependent on foreign financial transactions, sanctions may be trickier. Many Russian banks have been blocked from foreign transactions as well as a wholesale bar from the SWIFT system. This includes engaging in foreign currency transactions. This certainly presents potential payment issues for outstanding transactions and settlement, and will preclude ongoing business connected to affected banks or where through-payments rely on Russian institutions. Already, realtors have reported some transaction types becoming much slower than normal – likely as a result of all parties to the transaction ensuring that the assets themselves, and any financial institutions through which the transaction may pass, are not subject to sanctions. Such delays may be expected to increase in other sectors as well, as banks catch up to the sanctions and attempt to verify the source and destination of transactions. In addition, Visa and MasterCard have suspended cross-border services, meaning Russian-issued cards will no longer work outside of Russia for payments, and cards issued outside of Russia will no longer work in Russia. Likewise, Apple also suspended its Apple Pay systems in Russia.

Elsewhere, at least one supply chain expert has raised the alarm that general global supply chains, already disrupted from the COVID-19 pandemic, are likely to become even more unpredictable. Remember that 36 countries (so far) have banned Russian owned and operated aircraft from their airspace – resulting in untold rerouting of air cargos. Additionally, numerous ships are backlogged at global ports as a result of sanctions on ships with Russia connections. The results to international trade are already being termed a supply chain “Iron Curtain”.

Finally, many private businesses are electing to suspend services in Russia and with Russian entities of their own accord. As the list of businesses voluntarily suspending ties with Russia continues to grow, this lends an added level of unpredictability to markets, services, and supply chains. Massive businesses as diverse as Apple consumer products, McDonalds, Starbucks, Coca Cola, and FedEx have suspended operations in Russia. One can imagine the wider economic ramifications of businesses such as these abruptly suspending services to the world’s 11th largest economy, as measured by GDP.

For businesses who are concerned about determining their exposure to specific sanctions or their risk of inadvertent violations, we recommend a full review of lines of business, including suppliers, supply chains, financial institutions, and customers. For businesses engaged in exporting an additional review should be conducted of export operations and export compliance procedures to determine the level of risk and any red flags in existing operations, areas for deeper investigation, and areas requiring immediate action. Companies with direct foreign links and export operations should bear in mind that the U.S. Department of Justice is taking a strict approach to new sanctions against Russia, even creating a task force who will be working in conjunction with its European counterparts, to enforce sanctions.

Where your company is new to such compliance obligations, or where you now have risk exposure owing to new sanctions that you had not previously been subject to, the Clark-Esposito Law Firm, P.C. can assist in both a review of current risks, as well as the development of an internal compliance program based on your operations, line of business, and customers.

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