Written By Jessica Horwitz and Darrel Pearson
With the recent escalation of military tensions between Russia and Ukraine, the governments of NATO states (including Canada, the United States, UK and the EU) have made statements in recent weeks confirming their intentions to impose sweeping new economic sanctions against Russia in the event that Russia proceeds with a military invasion of Ukraine. The nature of the potential new sanctions has not been publicly confirmed, but could include some combination of:
- expanded restrictions on dealings with Russian banks, and adding more Russian banks to existing sanctions lists;
- sanctions on members of President Putin's "inner circle," and possibly on the president himself;
- expanded restrictions on dealings in Russian bonds and sovereign debt;
- reduction or elimination of access by Russian banks to the SWIFT international wire transfer network;
- sanctions on the Nordstream 2 natural gas pipeline;
- restrictions on purchasing Russian energy sector products, steel and iron products or chemicals; or
- export restrictions on the provision of goods and services to Russia or Russian entities, including information and communications technology, cyber technology and semiconductors (including possible invocation of the U.S. "Foreign Direct Product Rule" in connection with exports of third country technology produced or tested using U.S. software, production equipment or test equipment to Russia or certain entities in Russia), luxury products and consumer goods, or other military, industrial, oil and gas or aerospace goods or services.
Canadian companies that do business in Russia should actively develop contingency plans for the prospect that their business relationships, financial transactions, or ability to provide goods or services to Russian counterparties could be cut off, constrained, or restricted by expanded sanctions in the coming weeks. New sanctions come into force on the day they are announced, with no advance warning to the business community. The amendments may provide for short term wind-down or contain grandfather clauses that give companies time to withdraw from existing business relationships with newly sanctioned counterparties or sectors; this is not always the case and therefore availability of such mechanisms should not be assumed.
Canadian businesses should be particularly vigilant of the possible effect of sanctions imposed by countries other than Canada, which can have extra-territorial application to Canadian businesses by operation of foreign-origin technology or components, dual citizenships of owners, officers or employees, investor agreements or banking arrangements, even if the business does not have physical operations outside of Canada.
Some steps that companies should take immediately include:
- examine your contracts with Russian counterparties to review termination provisions, and include sanctions-related "exit clauses" in new agreements;
- review and update your counterparty screening processes and sanctions due diligence procedures; and
- identify the banks you and your Russian counterparties currently use and consider alternative financial service provider options.
The Bennett Jones International Trade group has been monitoring the situation closely and is available to assist companies to evaluate risk exposure and develop response plans.