The compliance challenges to come
Henrietta Worthington is a Solicitor at Vedder Price
The imposition of concerted sanctions against Russia has changed the global sanctions landscape and the interconnection of the global economy. The sheer scale and breadth of the sanctions imposed is striking, and has been described as a ‘modern form of economic and technological warfare’, with the measures taken by the sanctioning nations coordinated, novel and unprecedented.
The complexities of unpicking Russia’s integration in the global economy cannot be overstated. Companies have spent considerable resources over the past three years updating their internal processes and amending their business practices to ensure compliance. The real question now is what a peace deal may mean for companies caught between the swathes of sanctions restrictions.
The EU, UK, US and other allies have acted to impose coordinated sanctions on Russia in a way that has never been seen before, with the intention of allowing the sanctions to have a powerful ‘bite’, reducing the ability to ‘jurisdiction shop’ and creating a noteworthy impact on the Russian economy.
The approach was complex and considered. Europe’s reliance on Russian energy; the opposing geopolitical considerations of the sanctioning nations; and Russia’s position as a significant global economy with substantial oil, gas and critical metal reserves meant that the task of imposing the layers of sanctions was challenging. Lawmakers had to strike the balance between a sanctions package that had sufficient bite, whilst not triggering economic chaos.
Coordinated approach
The response against Russia’s actions was the largest ever coordinated use of sanctions as a coercive economic weapon. Achieving consensus on these measures was no mean feat. Each sanctioning nation had its own foreign policy objectives and legal framework to contend with. They also had to consider the stability of the global economy and whether some of the more significant measures might unsettle the markets.
Indeed, the measures have taken much of the blame for spikes in global oil and gas prices, and the imposition of a total embargo was not possible due to the integration of Russia in the global economy, and therefore some exceptions were required whilst still delivering a substantial blow.
Each jurisdiction had its own agenda. The UK had become home to a sizable amount of illicit Russian wealth. Germany had announced that it was phasing out nuclear power and was increasing its reliance on Russian gas. At the time of the Ukraine invasion, Germany relied on Russia for almost half of its gas imports. Canada had the world’s second largest Ukrainian diaspora after Russia.
However, the G7 nations were largely able to agree upon waves and waves of coordinated sanctions against Russia. Naturally, whilst there was largely alignment on the measures imposed, the nature of the distinct legal frameworks led to a level of fragmentation in implementation and effect. Companies active across the various jurisdictions have to pore through the minutiae of the restrictions to ensure strict compliance.
New measures
The sanctioning nations also acted to introduce novel restrictions, which often left companies grappling to understand the measures and how to adhere to their compliance requirements. Tools such as the designation of sanctioned individuals and entities are well-established as a coercive economic measure.
Whilst this has never been used to sanction so many targets in a particular jurisdiction – currently almost 2,400 individuals and entities are sanctioned under the EU’s Russian sanctions regime – its effect and how to comply is understood. It undoubtedly has its own complexities in terms of compliance, with issues such as determining ownership and control in often murky ownership structures, coupled with the nuanced tests between jurisdictions, but ultimately compliance teams are aware of the steps that need to be taken.
As the war raged on, the EU in particular began considering new tactics to bolster its existing sanctions packages, with a focus on anti-circumvention. In recognition that there was still significant leakage of high priority items into Russia, the EU introduced a requirement for EU exporters of specified items such as aircraft and jet fuel to include a ‘no re-export to Russia’ clause in their contracts: the so called ‘No Russia clause’.
This new legal requirement also applies retrospectively, meaning that EU operators were required to amend existing in-scope export contracts. This created a sizeable administrative burden on companies that had to re-open existing contracts to ensure legal compliance.
The EU’s efforts also included the development of two new sanctions regimes relating to Russia. In May 2024, it introduced a standalone sanctions regime aimed at targeting those responsible for human rights violations in Russia. Whilst this measure is not specifically related to Russia’s actions in Ukraine, it provides broad powers for the EU to make designations and restrict the transfer of equipment and associated technology that may be used for internal repression activities.
It is intended to complement the EU’s existing human rights regime, and is significant in the fact that it is the first country-specific framework of this kind. Further bolstering its arsenal against Russia, in October 2024, the EU imposed another new sanctions regime relating to Russian hybrid threats. The new regime allows the bloc to target companies and individuals engaged in destabilising activities, including undermining democratic political processes, and malicious cyber activities.
Old measures, new muscle
Measures such as the disconnection of the largest Russian banks from the SWIFT international financial messaging system had been used before. SWIFT is used to facilitate international payments, so the banning of strategic banks makes it harder to move money in and out of Russia. This measure had also been deployed against Iranian banks in 2012, but its impact is undoubtedly greater in the context of Russia due to its integration in the global financial system. SWIFT is a Belgian entity, and therefore it was the EU who had to impose this measure.
However, given European reliance on Russian gas, certain smaller Russian banks were allowed to continue to operate on SWIFT to facilitate payments for gas supplies. The EU also later banned the use of the ‘System for Transfer of Financial Messages’ (SPFS) of the Central Bank of Russia.
The coordinated immobilisation of Russia’s Central Bank reserve holdings is significant. It is estimated that €210 billion worth of assets is currently frozen in the EU. Again, this measure had been used before, for example by the US against Afghanistan in 2021.
Russia’s position in the global economy and the aligned approach taken by the G7 nations has given this tool considerable bite. No major central bank has ever been blocked in this way. The ramifications are hard to predict in terms of their effect on the global economy, but the impact of this coordinated measure is substantial. However, as was the case for many of the measures taken, this action is not without its drawbacks.
Critics of the action claim that it may undermine the significance of the dollar, euro, pound and yen in the global economy, creating uncertainty about the safety of these currencies and provoking nations to reconsider the risks of economic interdependence.
The sanctions imposed against Russia in response to its invasion of Ukraine represent a coordinated allied economic force that has not been seen before
What could a peace deal mean for sanctions?
Current signs indicate that there is appetite in the US to roll back on at least some of its sanctions against Russia. It has been reported that the US is already reviewing its current sanctions package with a view to what relief it can provide to Russia.
It is more likely that Europe will maintain its firm position. Where companies have been impacted by the nuances between the different sanctions regimes in response to Russia’s invasion of Ukraine, a US withdrawal from the sanctions block would have far more severe compliance challenges. Companies caught between regimes would have to carefully balance the value of doing business in Russia against the legal [and reputational] challenges.
The only real comparable scenario is the conception of the Joint Comprehensive Plan of Action (JCPOA) which provided for the coordinated easing of sanctions against Iran, followed by the subsequent US withdrawal from the plan during President Trump’s first presidency. Whilst the US reinstated many of its previous sanctions restrictions against Iran, which ‘snapped-back’ in 2018, the EU and other nations tried to uphold the integrity of the agreement.
The continuing nations maintained their negotiations with Iran and attempted to assist companies navigating the diverging positions. The EU (including the UK at the time) attempted to facilitate adherence to the terms of the JCPOA through use of its Blocking Statute, and the creation of a special purpose financing channel known as INSTEX.
In general, companies caught between the diverging sanctions requirements chose to adhere to the more stringent and better enforced US sanctions, despite the facilitation tools provided by the EU. This acted to undermine the JCPOA and reflects the strength of the US position in the global economy. INSTEX was used to process one payment and was liquidated in 2023.
Still, the possible sanctions outcome based on current indications would create the inverse effect: a position where the US permits a level of engagement with Russia which is prohibited in the other sanctioning jurisdictions. The US sanctions system is arguably more established, better enforced and more feared than its European counterparts. However, the European nations have stepped up their enforcement measures in the past years. In May 2024, the EU introduced a new directive ensuring enforcement harmonisation across member states by setting out minimum penalties for sanctions breaches and criminalising certain sanctions violations.
It remains to be seen what would happen in the case of a divergence between Russian sanctions regimes. There has been considerable coverage regarding the imposition of the oil price cap and the coordinated measures taken against Russia’s ‘shadow fleet’. Any roll back on the US position would likely undermine the position of the rest of the sanctioning group.
Nevertheless, many have lauded the EU’s actions against Russia as having the most significant effect on the Russian economy. Of the sanctioning nations, the EU is Russia’s largest trading partner, holding the greatest amount of (now frozen) Russian central bank reserves, and is home to SWIFT.
In theory, a strong Europe could still present an effective economic threat to the Russian regime. However, it’s not clear how this would work in practice and what it would mean for businesses operating on both sides of the Atlantic.
The EU’s recent focus on anticircumvention measures means that a US withdrawal from the coordinated approach may have considerable compliance implications. Taking the example of the ‘No Russia’ clause in aviation contracts, the US is currently a ‘partner country’ in the regulation, meaning that aviation contracts between US and EU counterparties are exempt from the requirement to include a No Russia clause.
The list of ‘partner countries’ in the EU regulation is made up of jurisdictions with substantively similar sanctions restrictions in place against Russia, meaning that the EU is less concerned that there may be leakage of high priority items. Yet, in a situation where the US rolls back on its restrictions, there is a theoretical risk that the US could become a channel for Russian exports, thus undermining the EU’s measures.
The sanctions imposed against Russia in response to its invasion of Ukraine represent a coordinated allied economic force that has not been seen before. As former President Joe Biden noted in an address, ‘taken together, these economic sanctions are a new kind of economic statecraft with the power to inflict damage that rivals military might’. The power of the bite of the sanctions against Russia is in their coordination: shutting Russia off from a significant chunk of the world’s economy. At the time of writing, it appears that any unwinding of sanctions will not be coordinated. It is currently unclear exactly what President Trump’s intentions are, but companies will need to watch closely to ensure compliance.
