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Sanctions: An Industry-by-Industry Look

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Matt Kelly

Navigating the world of trade sanctions was never easy even under the best of circumstances. Now Russia’s invasion of Ukraine, and the blizzard of sanctions that Western nations have imposed in response, have made compliance all the more challenging. 

To be clear, the moral and political arguments in favor of sanctions are compelling; sanctions are a crucial tool to starve Russia of supplies for its war machine and to pressure the regime in Moscow to change its course. Nevertheless, sanctions compliance is an arduous process. Businesses need to prepare for the challenges at hand — which means taking a close look at sanctions rules, understanding their impact on your industry, and assuring you have a compliance program suited to the task

What sanctions are in force? 

The sanctions imposed on Russia come from multiple directions and take several forms. People often talk about sanctions imposed by “the West,” but it’s more accurate to say that all countries in the West (including some that geographically are not anywhere near the West, such as Japan, Australia, and South Korea) are imposing their own versions of sanctions that are broadly similar, but not always identical. 

Many Russian nationals or businesses are on the sanctions list of every Western country, but each nation does maintain its own list of sanctioned entities. Keeping track of all those sanctions lists is indeed one of the big challenges for a sanctions compliance program. 

The sanctions themselves can take several forms:

  • A ban on making any new investments in Russia;
  • A ban on selling certain goods to Russian customers;
  • A ban on doing business with enterprises owned by the Russian government;
  • A ban on purchasing certain Russian goods, such as coal or oil;
  • A ban on conducting financial transactions with certain Russian banks.

Some of those prohibitions extend to Russian persons, such as Vladimir Putin, his top lieutenants, their families, and various oligarchs; that means a Western business cannot do business with those people individually, or with any companies affiliated with them. Other prohibitions extend to Russian corporations and government agencies — for example, no selling advanced technology to organizations tied to the Russian military.

Each Western government maintains its own list of sanctioned entities. Those lists change often, and right now, more Russian entities are added to the lists every day.

Which industries will feel the greatest risk? 

Every company will face unique challenges in sanctions compliance, depending on its own operations and pre-existing compliance programs. That said, it’s also clear that some industries will face more serious implications for Russia sanctions than others. 

Technology

Technology companies will need to beware of selling dual-use goods — that is, components that could be used for either civilian or military purposes — to Russian buyers that are on Western sanctions lists. For example, selling advanced microchips and quantum computing technologies would be forbidden, unless the Western company could confirm that its customer was not affiliated with any sanctioned Russian entity.

In theory, a Western company could undertake screening, due diligence, and documentation procedures to confirm that its technology products are going to legitimate Russian customers. As a practical matter, however, it might be simpler to cut ties with the Russian market (a step many Western technology companies have already taken). 

Energy

Russia’s energy sector has depended on technology, equipment, and expertise from Western oil and gas companies for years; that came to an abrupt end after the invasion. Exxon Mobil, BP, Shell, Equinor, and other Western energy giants all announced their departures from Russia in March, altogether writing off more than $22 billion in assets. New investments in Russia’s energy sector are now forbidden. 

Moreover, Western businesses also face import bans on Russian oil, gas, and coal. The United States has implemented a ban on Russian energy imports already; the United Kingdom plans to implement a ban on oil products by the end of this year. The EU hasn’t implemented its own ban on Russian energy imports yet, although the clamor for a ban is rising and one may come into effect soon.

That means Western companies buying oil and gas (energy companies foremost; but also commodity traders and other buyers) need to perform due diligence and sanctions screening to assure that they aren’t buying prohibited Russian supplies.

Defense

Western defense companies have already had to comply with severe sanctions rules against selling defense goods into Russia since 2014 when the country annexed Crimea. Those sanctions remain in place today, so the compliance burdens for exporting goods to Russian customers are nothing new to this sector. Similar bans are in place for selling dual-use goods to the maritime and aerospace sectors, where those components might find their way to the Russian military.

Instead, Western defense contractors now face new restrictions on importing raw materials and supplies from Russia. In particular, aerospace and defense contractors can no longer rely on Russia for supplies of titanium. So businesses in this sector will need to screen their suppliers against sanctions watch lists to assure that no Russian titanium ends up in their supply chain.

Consumer goods

The sale of many consumer goods in Russia, and particularly the sale of luxury goods, is now severely restricted. Those luxury goods include items such as leather handbags and suitcases, furs (including artificial furs), yacht parts, perfumes, and other cosmetics, carpets, clothes, footwear, motorcycles, and many other items. (The U.S. Department of Commerce maintains a complete list of banned items.)

For Western retailers, this means you need to assure that your distribution chains don’t sell those prohibited items to Russian buyers. For example, you might need to work with distributors or resellers to assure that they won’t sell your goods to the Russian market; that might include revisiting contract terms with those third parties and performing audits to assure compliance. If you have a direct sales operation, you would need to screen buyers against sanctions lists. 

Why is sanctions compliance important? 

Sanctions compliance is important for several reasons.

First, the enforcement risk for violating sanctions rules is high. Under U.S. law, for example, the monetary penalties for a sanctions violation are potentially enormous; even relatively small transactions worth several hundred thousand dollars could lead to penalties well over $10 million. 

In practice, most sanctions settlements are much smaller if the offending company discloses its violations and makes a good-faith effort to improve compliance — but that very fact proves the point that sanctions compliance is important. Even a fledgling program that makes mistakes is far better than no program at all.

Second, there are also reputational and third-party risks about Russia that companies cannot ignore. Any Western company “caught” doing business with sanctioned Russian partners is likely to face unwanted headlines in the press and pointed questions from your other business partners, who might decide to sever their relationships with your company. 

For reasons both legal and practical, then, global businesses have a strong incentive to take sanctions on Russia seriously. Compliance officers, and the compliance programs you oversee, will need to plan accordingly.