Ukraine: business law consequences and actions

People 

International businesses operating in Ukraine will be prioritising the safety of their people. Many have already taken action to assist employees and other workers to relocate to places of comparative safety or to leave the country. Several European countries are now opening their borders to unrestricted travel for Ukrainian passport holders, and the European Commission is reportedly to ask Member States this week to grant temporary asylum for up to three years to all Ukrainians coming to the European Union. The United Kingdom announced on Sunday 27 February some relaxation of its visa rules.

(For the legal sector, The Lawyer magazine has an excellent blog summarising the actions of law firms operating in Ukraine with regard to their offices and people.)

Sanctions and related measures

The EU, US and the UK, among others, have set out various rounds of sanctions and related measures aimed at Russian individuals and entities. Osborne Clarke has summarised (current to Friday 25 February) the initial and second round of measures.

Following Germany's decision to suspend the approval process for the Nord Stream 2 gas pipeline, there has been a quick ratcheting up of sanctions. The EU, France, Germany, Italy, the UK, Canada, and the US have agreed two measures in particular over the weekend which are a step change in the international response to Russian actions. 

Firstly, selected Russian banks are to be removed from the global interbank payments network Swift messaging system. In the words of these countries' Joint Statement of 26 February, "this will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally". 

Secondly, "restrictive measures" will be introduced to "prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions".

Information on the detail and timing of these two measures is awaited. These are actions with very few precedents and, at the time of writing, their precise effect is unclear. Indeed, there may be some 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 trading counterparties will be severely hampered if not entirely removed. There will be both obvious first-order effects – business may not be paid and so are unlikely to continue to trade with some Russian businesses – and also second-order effects, such as within supply chains (see below).

The Joint Statement also promised 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 within our jurisdictions".

President von der Leyen has announced (Sunday 27 February) further measures, including an unprecedented EU decision "to finance the purchase and delivery of weapons and other equipment to a country that 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 regime in Belarus.

The UK yesterday (Sunday 27 February) also set out more sanctions and restrictive measures. These cover a prohibition on UK persons undertaking 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 set of measures to strengthen significantly our trade restrictions against Russia. (Some of these have been announced already; there is some repetition, given the fluidity of the situation.) The UK has also directly sanctioned President Putin.

Wider legal and commercial issues

Cyber risk. Businesses will be alert to the risk of cyber attack and likely taking action to ensure their systems and defences are up-to-date with software and hardware fixes, checking crisis management protocols and reporting obligations, checking core teams are in a state of advanced readiness, and ensuring that data and email systems are backed up and readily available. This will include confirming that key suppliers and other material counterparties are taking the same actions.

Sanctions, and entities through the transaction or structural chain. Where transactions are in course or being planned – for example, but by no means exclusively, in corporate M&A, financing, and real estate – care is needed on the identities of people and entities involved through all "layers" of the transaction in case they are affected by sanctions; this may necessitate a closer understanding the corporate structure and ultimate beneficial ownership of counterparties  By analogy, it may now be necessary to check the sanctions status of entities and people with whom the business currently has any type of financial, contractual or trading relationship.

Export controls. Various countries have announced the tightening or planned tightening of export control regimes for goods and services across a range of sectors, and it will be necessary to monitor those new rules as they are published or elaborated.

Transaction 'call in' regimes. Similarly, matters involving Russian actors or financing, directly or indirectly, may be more likely to be 'called in' under rules designed to monitor non-local involvement in strategic sectors. For example, the US CFIUS (The Committee on Foreign Investment in the United States) rules, the UK's National Security and Investment Act 2021, and the similar German and French regimes.

Contractual matters. Sanctions, or other legal, commercial or ethical concerns, may mean contract termination provisions become relevant, including force majeure. They may also affect other terms around payment, delivery, and non-performance, for example, and require the unwinding of transactions or commercial arrangements currently under way or in force.

Due diligence and warranties. Sanctions compliance and impact should be picked up within due diligence exercises and addressed in transaction and financial warranties.

Market announcements. Listed companies directly affected by sanctions will need to announce this to the market. Consider also 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 lead to a material change in circumstances or trading that is announceable.

Security and collateral. A wide array of assets or property used or posted as security or collateral may lose value as a result of sanctions or market turbulence, triggering the need for additional security, margin calls and similar.

Financial regulation. Regulated businesses have an obligation to, putting it broadly, have systems and controls in place to monitor and ensure sanctions compliance; these may be the subject of heightened regulatory attention.

Supply chains. The widening ambit of sanctions and the removal of some Russian banks from Swift, and their knock-on effects, will start to affect supply chains across a number of sectors, including:

• Energy and mining, including rarer metals used in tech products.
• Semiconductors, creating a possible worsening of an already difficult worldwide position.
• Banks, for obvious sanctions-related reasons.
• Automotive, including electric batteries and other parts.
• Food producers, as Ukraine is a major producer of grain and other raw commodities and an important manufacturing base for some industries.

The results may include supply shortages and commodity or goods inflation, and the failure of counterparties to perform or make deliveries. The pandemic-driven reorientation of some supply chains from "just in time" to the greater holding of stocks and the diversification of supply chains beyond single suppliers and narrow geographies is likely to continue.

Osborne Clarke comment 

Rapid political, sectoral and legal change is now taking place across Europe. The dramatic events in Ukraine are causing long-established political norms in some European countries to alter at speed. Most striking is the Zeitenwende ("turning point" or "new era") speech (English translation) of Germany's Chancellor Scholz as he announced (Sunday 27 February) a break with post-war German policy on defence spending, efforts to decrease his country's dependence on Russian gas, and the building up of coal and gas reserves - amid a continued stress on the importance of moving to an economy based on renewable energy.

Less historically striking – but still indicative of how events may drive a greater focus on business (and indeed political) transparency around the role and capital of non-domestic actors – is the UK government's announcement that it will bring forward today (Monday 28 February), as part of an Economic Crime Bill the legislation on long-awaited measures on a beneficial-ownership register for non-UK entities holding UK real estate, and (later) possibly changes to the rules on corporate transparency (the persons with significant control regime) and improvements to the corporate registry. The Economic Crime Bill is also expected to contain provisions strengthening the system of "unexplained wealth orders".