In the past few months, we have seen an escalation in the tension between Russia and Ukraine, with an increasing Russian military presence on Ukraine's border. In this newsletter, we provide some key points to consider for risk mitigation in case sanctions are imposed against Russia in efforts to prevent invasion or as a response to an invasion.
Diplomatic efforts between Russia, the US, the UK, and the EU are ongoing, however, whether a Russian invasion of Ukraine will happen or not remains to be seen. Depending on the severity of the sanctions, this may cause disruption and financial loss to your business and should therefore be considered by anyone who is engaged in any form of dealings with some ties to Russia or Ukraine.
What is the current legal framework in Norway?
Since the 2014 annexation of Crimea there have been sanctions in place against Russia, which Norway has adopted mainly through EU legislation.
The sanctions list of the EU is implemented in Norwegian law through the regulation on restrictive measures concerning actions that undermine or threaten Ukraine's territorial integrity, sovereignty, independency, and stability (Forskrift om restriktive tiltak vedrørende handlinger som undergraver eller truer Ukrainas territorielle integritet, suverenitet, uavhengighet og stabilitet), which has been in force since 2014. The list of persons, groups and entities subject to EU's financial sanctions are constantly updated to reflect the latest developments in, for instance, Russia and Ukraine.
Pursuant to the chapter 2 of the regulation, there is a mandatory freezing order for assets belonging to or controlled by physical and legal persons listed in Annex I. In addition, chapter 3 provides restrictions on imports and exports of certain goods and technology, as listed in Annex II to the regulation, and the provision of certain services such as construction and engineering services, as well as tourism to the Crimea and Sevastopol area.
Chapter 4 of the regulation also includes prohibitions on import, export and transport of defence materials and certain dual-use-goods listed in List II – Dual-Use Goods. Dual-use goods are goods which may be used both for civilian and military application. There are also prohibitions against export of certain goods and services to the Russian oil industry.
If additional sanctions are implemented by the EU, more goods and services may be added to the scope of this or new regulations in the coming weeks and months.
Furthermore, an export control regime applies in Norway pursuant to the Export Control Act (LOV-1987-12-18-93) and the "Regulation relating to the export of defence-related products, dual-use items, technology and services" (FOR-2013-06-19-718). Similar legal instruments apply across the EU and EEA.
Pursuant to Section 7 b) of the Regulation, export of goods, technology, or services for military use in areas subject to an arms embargo by the Security Council of the UN, or other sanction regimes Norway has adopted, shall be subject to an export licence. This includes Russia, as there is currently an arms embargo in effect. Based on our most recent experience with the Ministry of Foreign Affairs (Utenriksdepartementet), their definition of "military use" in Section 7 b) seems to be wider than expected and can also include civil products that have an unacceptably high risk to be used for military purposes, which is determined in the Ministry of Foreign Affairs' sole discretion.
In addition, Section 7 d) of the Regulation includes a provision which has wider scope and may be characterised as a "catch-all" provision capable of subjecting the export of many different types of goods to an export licence. Pursuant to this sub-section, the export of any goods, technology or services that may directly serve to develop a state's military ability in a manner which is incompatible with Norwegian security and defence interests shall be subject to an export licence.
In our experience, the Ministry of Foreign Affairs is generally restrictive in granting licences for exports to Russia. With the introduction of new sanctions, there is a possibility that exporters who currently do not require a licence may need to apply for one, as other goods, technology or services may be included in the export control regime.
What additional sanctions may be imposed in the next few months?
There are currently several sanctions being debated amongst decision-makers in the US, the UK, and the EU, which would to varying degrees disrupt business to a more severe extent than the current legal framework. The news reports concerning which sanctions may be imposed are constantly developing, and we are monitoring the situation closely.
Sanctions that are being discussed by the US, UK and EU Member States include:
- Direct sanctions against Putin's acquaintances and connections, commercial organisations, and businesses.
- An embargo on US-made or US-designed technology needed for defence-related and/or other industries, such as semiconductors, components for the aviation industry and other microelectronics.
- Targeting secondary market transactions in Russian sovereign debt, or possibly expanding the restrictions to new entities, such as certain state-owned entities.
- Halting the Nord Stream 2 project, which is the construction of a pipeline between Russia and Germany that aims to enhance the supply of natural gas in Europe. The pipeline is not yet in use.
- Further prohibitions on investment and provision of services to conventional Russian oil and gas projects.
- Cutting off Russia's largest financial institutions, possibly including Sberbank, VTB and Gazprombank, from global transactions.
- Banning Russian banks from the SWIFT cross-border payment services. Although SWIFT is technically independent, more than 40 per cent of its payment flows are in US dollars and therefore the US is considered to have effective control over it. Recent reports from US officials suggest that this option is not currently being considered
- Obstructing Russian access to US dollars.
Which sanctions will be imposed depends on how severe the Russian incursion to Ukraine would be. For instance, if Russia launches cyber attacks against Ukraine, there may only be milder sanctions imposed. On the other hand, for more severe invasions of Ukraine, such as a full military invasion, the most severe sanctions may be imposed, such as cutting off Russia's financial institutions from global transactions, and obstructing Russian banks' and companies' access to US dollars. These sanctions would severely disrupt international business with Russian interests.
In response to sanctions, Russia may restrict the EU's access to, for instance, natural gas, which would exacerbate the existing energy situation in Europe and increase LNG-prices. Russia is the EU's main supplier of natural gas, crude oil, and solid fossil fuels. Retaliation against the US, EU, or the UK in the form of disruptive cyber-attacks could also be possible.
What should you do to mitigate the risk of disruption?
- Your third-party management/KYC ("know your customer/counterparty") procedures and routines are important to identify possible risks, including knowing who the beneficial owners of your counterparties are. If the sanctions against individuals are extended to Putin's acquaintances, Russians with business interests in Europe may be affected.
- In furtherance to these routines, ensure to identify all activities relating to Russia and/or Russian counterparties and/or goods originating from Russia.
- Consider whether the performance under any new contractual relations may be impacted by the imposition of sanctions. If there is a risk the performance under the contract may be affected, ensure to include clauses to allocate the risk.
- Review any existing contractual relations and consider whether you may experience disruption, and how this risk is regulated under the existing contracts.
- Consider the risk of being unable to process payments if the most severe sanctions are implemented, meaning that the ability to send or receive funds could be restricted.
- Consider the risk of banks, buyers, insurers etc. taking more risk-averse and restrictive stances moving forward, even before any sanctions are imposed.
- Explore alternative methods for ensuring performance under contracts in the event contractual performance is not possible due to sanctions, such as investigating whether there may be alternative suppliers or destinations available.
- Plan ahead for increased costs, in particular for trades tied to energy prices, commodities such as coal or wheat, shipping in the Black Sea or to/from Russia.
- For Russian interests, consider the consequences of increasing restrictions on access to debt and capital markets.
Although companies may be able to alter procedures before the sanctions are implemented, doing so after to enable an otherwise prohibited transaction could constitute prohibited facilitation or circumvention, which could constitute an offence under the applicable law.
How may we assist you?
We are closely monitoring the situation and are making necessary preparations to enable us to assist our clients swiftly with any difficulties they may encounter due to the conflict. We have established connections with English and US law counsel with expertise in regulatory compliance, who may provide cost-efficient and up-to-date advice on issues relating to English and US law. We are pleased to offer our views on the situation and provide you with cross-border legal advice to manage your business effectively.
