Eldwick Law

Tag: sanctions

  • How Russian Sanctions May Affect Your Business

    How Russian Sanctions May Affect Your Business

    Note: The points in this article reflect sanctions in place at the time of writing, 12th April 2022. This article does not constitute legal advice. For further information, please contact our London office.

    We recently discussed the effectiveness of targeted sanctions when it comes to dealing with rogue states such as Russia and North Korea and argued that although sanctions provide the impression to voters that their government is taking affirmative action, there is little evidence they influence the inner circle of a country’s leadership. Regardless of their effectiveness, however, targeted sanctions have been used by the UK, EU, and US against Russian individuals and businesses in response to Russia’s invasion of Ukraine. Many companies have been caught up in the sanctions regime and/or want to launch new ventures in Russia. This article explains the type of sanctions in place and the risk assessments and due diligence organisations must apply before, during, and after doing business in Russia in order to protect their best interests. And although this article focuses on Russian sanctions, the information contained below applies to doing business in any sanctioned jurisdiction.

    To begin, let us look at what Russian sanctions may apply to your organisation.

    What is the scope of UK, EU, and Russian sanctions?

    UK sanctions

    UK sanctions apply to all British citizens, British overseas citizens, and any entity incorporated in the UK. They also cover any actions taken by someone in the UK (either wholly or partly) or in UK territorial waters.

    EU sanctions

    EU citizens, incorporated entities, anyone on board an aircraft or ship travelling within the jurisdiction of an EU Member State, and anyone conducting business wholly or partly within the EU is subject to EU sanctions.

    US sanctions

    Like US taxes, US sanctions can ensnare the unwary. Not only do US sanctions apply to US citizens and incorporated businesses, as well as anyone conducting business wholly or partly within US territory, under the Countering America’s Adversaries Through Sanctions Act (CAATSA) non-US citizens can also be caught by US sanctions.

    Given the wide catchment of UK, EU, and US sanctions, people and organisations doing or planning to do business in Russia and/or any other country where sanctions have been imposed need to undertake comprehensive due diligence and risk management to ensure they are fully compliant with any sanctions imposed. Non-compliance can lead to significant legal, financial, practical, and reputational implications for UK organisations. Below is a brief guide to ensuring you do not inadvertently breach not only the legal aspect of international sanctions but the spirit in which they have been applied, the latter being something that the public will neither forgive nor forget if your business is subjected to a ‘trial by social media’.

    Be mindful that the situation can change rapidly and without warning, therefore, it is vital to take experienced legal advice regarding the below guidelines.

    Check your commercial contracts

    If you have commercial contracts with people or organisations in a sanctioned country you must review the terms of the agreement to ensure the goods and services they cover do not fall within current sanctions. Never take the wording of sanctions at face value – the EU has sanctioned ‘luxury goods’ such as alcoholic spirits, sporting equipment, perfumes, handbags, and clothes. These items are defined as ‘luxury’ if their value exceeds €300, hardly an outrageous sum.

    You may wish to simply cancel any contracts that have connections with a sanctioned state, however, unless the terms of the contract allow for such a step, for example, there is a force majeure clause that permits termination in the case of sanctions, you will be in breach of contract.

    If one or more of your contracts have become uneconomical, untenable, or both, you may be able to rely on the doctrine of frustration. Frustration was defined by Lord Radcliffe in Davis Contractors Ltd v Fareham UDC [1956] AC 696 (at 729) (emphasis added)

    “frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.”

    Generally speaking, the courts in England and Wales will ask the following questions to determine whether or not a contract has been frustrated:

    • Did the event occur after the contract was formed?
    • If so, does it strike at the heart of the contract and is it entirely beyond what was contemplated by the parties when the agreement was entered into?
    • Is either party at fault?
    • Does the frustrating event render further performance impossible, illegal, or transform performance into something radically different from that contemplated by the parties at the time of signing?

    Although the above questions provide a reliable guide to how the courts will evaluate whether or not the doctrine of frustration will apply, all cases will turn on their own facts.

    Undertake comprehensive due diligence and risk management exercises

    In circumstances where you or your organisation plan to launch a new venture into a territory subject to UK, EU, or US sanctions, a meticulous due diligence and risk management exercise must be completed. Factors to consider include:

    • The legal jurisdiction governing any agreements and disputes.
    • Payment terms such as late payments and letters of credit which may be considered loans and therefore prohibited by certain sanctions.
    • The ability to secure adequate insurance and onboard suppliers/distributors.
    • Including contractual terms to allow for a rapid exit, for example, a detailed force majeure clause and sanction-specific termination clauses.
    • Undertaking Know Your Customer/Business Partner checks to establish whether or not an entity is owned or controlled by a sanctioned person, or a designated person is effectively also sanctioned but does not appear on a sanctions’ list.

    Wrapping up

    Sanctions involve a complex web of domestic and international law, much of which is beyond the scope of this article. Therefore, it is imperative to check each transaction related to Russia or any other country subject to sanctions individually and seek legal advice as to you and/or your organisation’s legal position.

    Below are some websites you may find helpful:

    You can also contact the Export Support Service on 0300 303 8955.

    To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

    Written by Waleed Tahirkheli

  • Are Targeted Sanctions Effective In Dealing With Rogue States?

    Are Targeted Sanctions Effective In Dealing With Rogue States?

    As the war in Ukraine continues, sanctions imposed by Western governments and the impact of hundreds of companies pulling out of the country are starting to negatively affect the daily life of the Russian people. Prices are increasing, shortages are being reported, and the rouble has plummeted.

    Never before has such a large, modern economy been cut off from most of the world so swiftly. Unfortunately, there is ample proof that state and even UN sanctions are not effective in coercing a government deemed to be breaking international law to change its behaviour. What sanctions are extremely good at achieving is punishing innocent civilians. The horror placed upon ordinary Iraqi people following crippling sanctions in response to Saddam Hussain’s invasion of Kuwait in 2003 led to sanctions being focused more on individuals and companies rather than the misbehaving state itself. These are known as smart or targeted sanctions and they are also being used by Western governments, including the UK, to punish Russia. Evidence shows, however, that targeted sanctions also achieve little in relation to dealing with rogue states. Worse still, innocent people can become caught up in freezing orders and other sanction tactics whilst the individuals targeted often use their wealth and power to avoid most of the negative consequences.

    Before looking at the details of the sanctions imposed by the British Government on Russia, it is useful to define what sanctions actually are.

    What are sanctions?

    Sanctions are a range of measures put in place by individual governments, regional groups (for example the European Union or the African Union) or the United Nations to achieve one or more of the following:

    • Prevent escalation of or settle conflicts.
    • Curtail nuclear proliferation.
    • Deal with terrorism and human rights violations.

    Types of sanctions include:

    • Economic – impose commercial and financial penalties, for example levying import duties and/or blocking exports of certain goods.
    • Diplomatic – reducing or recalling diplomats or cancelling high-profile international meetings.
    • Sport – preventing the sanctioned country’s athletes from competing in international events.
    • Targeted/smart sanctions – imposes travel bans and asset freezing orders on individuals, companies, or other entities such as terrorist organisations.
    • Military sanctions – these are used as a last resort and can involve targeted military strikes and arms embargoes.

    Russians affected by UK sanctions following the invasion of Ukraine

    The UK has long been criticised for turning a blind eye to international money laundering within its territories. Many Russian oligarchs have invested heavily in UK luxury homes, businesses, and even football clubs. Following the invasion of Ukraine, the UK, alongside the EU and US, imposed sanctions on hundreds of members of the Russian regime, including wealthy Russian oligarchs such as Chelsea FC owner Roman Abramovich and ex-Arsenal shareholder, Alisher Usmanov as well as others who are considered to be close to the Kremlin, for example, former Russian president Dmitry Medvedev and Defence Minister Sergei Shoigu, plus a further 386 members of the Russian parliament.

    The problem with imposing targeted sanctions on Russian oligarchs

    Countries such as the US have had sanctions in place against many Russian billionaires since the annexation of Crimea in 2014. These appeared to do nothing to deter President Vladimir Putin from a full-scale invasion of Ukraine eight years later. This may be because despite being once close to the Kremlin, most of the recognised oligarchs now seem to have little influence, or even contact with President Putin and his inner circle.

    In 2000, at a meeting with 21 business tycoons, President Putin made himself abundantly clear regarding his attitude to the oligarchs – they could remain in business but they were to stay out of politics. And he backed this up with action – Mikhail Khodorkovsky, once Russia’s richest man as head of oil giant Yukos and a fierce critic of the President, spent 10 years in prison for tax evasion and theft after funding opposition parties.

    With Mr Khodorkovsky’s fate still fresh in their minds, almost all oligarchs now stay well clear of politics. Although some have condemned the war, none have directly criticised President Putin. Mikhail Fridman told Bloomberg that “to say anything to Putin against the war, for anybody, would be kind of suicide.”

    It seems, therefore, that although imposing sanctions on the business and personal interests of oligarchs may appease the public by giving the impression that those who made billions out of the collapse of the USSR are finally being penalised, in reality, they no longer have any ability to influence the Kremlin’s actions. And even if they did, a 2019 paper concerning the effectiveness of targeted business sanctions concluded:

    “Through empirical analysis, significant evidence was found in support of the hypothesis that targeting military interests will result in more successful outcomes than targeting other interest groups or comprehensive sanctions. Evidence regarding the targeting of business interests presented a far less compelling case of this line of sanctioning’s efficacy relative to comprehensive sanctions.”

    Final words

    Although more research is required to judge the effectiveness of smart sanctions, the initial evidence does not appear promising. Furthermore, smart sanctions are even less likely to achieve the aim of the government or group that imposes them if they are not targeting people and/or business interests that can actually influence the rogue state’s leadership. I will leave the final word to Mohamed ElBaradei, an Egyptian law scholar and diplomat, former Director-General of the International Atomic Energy Agency, and Nobel Peace Prize recipient:

    “People talk about smart sanctions and crippling sanctions. I’ve never seen smart sanctions, and crippling sanctions cripple everyone, including innocent civilians, and make the government more popular.”

    Written by Waleed Tahirkheli

    To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.