The impact of the tragic situation in Ukraine on business law will be low on many people’s list of concerns. However, the business implications will require thought and action from internal legal teams.
International companies operating in Ukraine will prioritize the safety of their personnel. Many have already taken steps to help employees and other workers relocate to relatively safe locations or leave the country. Several European countries are now opening their borders to unrestricted travel for Ukrainian passport holders, and the European Commission is would have to ask the Member States this week to grant temporary asylum for up to three years to all Ukrainians coming to the European Union. The United Kingdom announcement on Sunday, February 27, some relaxation of its visa rules.
(For the legal sector, the lawyer the magazine has an excellent Blog summarizing the actions of law firms operating in Ukraine with respect to their offices and staff.)
Sanctions and Related Measures
The EU, US and UK, among others, have implemented various sets of sanctions and related measures targeting Russian individuals and entities. Osborne Clarke has summarized (updated Friday February 25) the initial and second turn of measures.
Following Germany’s decision to suspend the approval process for the Nord Stream 2 gas pipeline, the sanctions quickly increased. The EU, France, Germany, Italy, the UK, Canada and the US agreed on two measures in particular over the weekend that constitute a sea change in the international response to Russian stocks.
First, some Russian banks are to be removed from the Global Interbank Payments Network’s Swift messaging system. In the words of these countries Joint Statement of February 26, “this will ensure that these banks are disconnected from the international financial system and will harm their ability to operate globally”.
Secondly, “restrictive measures” will be presented to “prevent the Russian Central Bank from deploying its international reserves in a way that undermines the impact of our sanctions”.
Information on the details and timing of these two measures is awaited. These are actions with very little precedent and, at the time of writing, their precise effect is unclear. Indeed, there may be unintended consequences. But it seems clear that the ability of some Russian parties – extending well beyond the financial sector – to make payments to contractual or commercial counterparties will be severely hampered, if not eliminated altogether. There will be both obvious first-order effects – companies may not get paid and are therefore unlikely to continue to trade with some Russian companies – and also second-order effects, such as within chains supply (see below).
The joint statement also promised to take action against the sale of so-called “golden passports” and “to launch a transatlantic task force that will ensure the effective implementation of our financial sanctions by identifying and freezing the assets of sanctioned individuals and companies that exist in our jurisdictions”.
President von der Leyen has announcement (Sunday 27 February) new measures, including an unprecedented decision by the EU “to finance the purchase and delivery of arms and other equipment to a country which is under attack”. EU airspace has been closed to all Russian-owned, Russian-registered or Russian-controlled aircraft, and sanctions have been extended to the Belarusian regime.
The UK yesterday (Sunday 27 February) also go plan more sanctions and restrictive measures. These cover a ban on British persons carrying out financial transactions involving the Central Bank of the Russian Federation, the Russian National Wealth Fund and the Ministry of Finance of the Russian Federation; measures to prevent Russian companies from issuing transferable securities and money market instruments in the UK; a power to prevent designated banks from accessing sterling and clearing payments through the UK; and a package of measures to significantly tighten our trade restrictions against Russia. (Some of these have already been announced; there are repeats, given the fluidity of the situation.) The UK also directly sanctioned President Putin.
Wider legal and business issues
Cyber risk. Businesses will be alert to the risk of a cyberattack and will likely take steps to ensure their systems and defenses are up to date with software and hardware patches, checking crisis management protocols and reporting requirements, verifying that core teams are in an advanced state of readiness. , and ensure that data and messaging systems are backed up and readily available. This will include confirming that major suppliers and other significant counterparties are taking the same steps.
Sanctions and entities across the transaction or structural chain. Where transactions are underway or planned – for example, but by no means exclusively, in corporate mergers and acquisitions, financing and real estate – care should be taken to identify the individuals and entities involved across all “layers” of the transaction in case they are affected by sanctions; this may require a better understanding of the corporate structure and ultimate beneficial owners of counterparties. By analogy, it may now be necessary to verify the sanctions status of entities and individuals with whom the firm currently has any type of relationship financial, contractual or commercial.
Export controls. Several countries have announced the strengthening or planned strengthening of export control regimes for goods and services in a range of sectors, and it will be necessary to monitor these new rules as they are published or developed.
In-transaction calling regimes. Likewise, matters involving Russian actors or funding, directly or indirectly, may be more likely to be “called” under rules designed to control non-local involvement in strategic sectors. For example, the US rules of CFIUS (The Committee on Foreign Investment in the United States), the UK National Security and Investment Act 2021 and similar German and French regimes.
Contractual issues. Sanctions or other legal, business, or ethical concerns may mean that contract termination provisions become ineffective, including in cases of force majeure. They may also affect other terms regarding payment, delivery and non-performance, for example, and require the unwinding of pending or existing trade transactions or agreements.
Due Diligence and Warranties. Compliance and the impact of sanctions should be noted in due diligence exercises and addressed in transaction and financial safeguards.
Market announcements. Listed companies directly affected by the sanctions will have to announce it to the market. Also consider whether second or third order effects may require an announcement; for example, the inability to deal with a sanctioned party or supply chain issues may result in a material change in circumstances or transactions that is reportable.
Security and warranty. A wide range of assets or property used or deposited as collateral or security may lose value as a result of sanctions or market turbulence, triggering the need for additional security, margin calls and the like.
Financial regulation. Regulated companies have an obligation, in general terms, to put in place systems and controls to monitor and ensure compliance with sanctions; these may be subject to increased regulatory attention.
supply chains. The widening scope of sanctions and the withdrawal of some Russian banks from Swift, and their repercussions, will begin to affect supply chains in a number of sectors, including:
- Energy and mining, including rarer metals used in technology products.
- semiconductors, creating a possible worsening of an already difficult global position.
- Banks, for obvious sanction-related reasons.
- Automotive, including electric batteries and other parts.
- Food producers, as Ukraine is a major producer of grain and other raw materials and an important manufacturing base for certain industries.
Results may include supply shortages and inflation of raw materials or goods, as well as the inability of counterparties to make or complete deliveries. The pandemic-induced shift of some just-in-time supply chains towards greater inventory holding and diversification of supply chains beyond single-source suppliers and narrow geographies is likely to continue.
Commentary by Osborne Clarke
Rapid political, sectoral and legal changes are currently taking place across Europe. The dramatic events in Ukraine are rapidly changing long-established political norms in some European countries. Most striking is the Zeitenwende (“turning point” or “new era”) speech (English translation) by German Chancellor Scholz as he announced (Sunday 27 February) a break with Germany’s post-war defense spending policy, efforts to reduce his country’s dependence on Russia’s gas screws and the building up of coal and gas reserves – amid a continued emphasis on the importance of moving to a renewable energy-based economy.
The UK government’s announcement today (Monday 28 February) is less historically striking – but nonetheless indicative of how events may prompt a greater emphasis on transparency in business (and even politics) regarding the role and capital of non-national actors. , as part of a bill on economic crime, the legislation on long-awaited measures on a register of beneficial owners for non-UK entities holding property in the UK, and (later) possibly changes to the rules on corporate transparency (persons with a significant control regime) and improvements to the company register. The Economic Crimes Bill is also expected to contain provisions strengthening the system of “unexplained wealth orders”.