Posted on: 13 June 2022
In early February, Stephenson Harwood published an article on the legal implications of the escalating Russia-Ukraine crisis. At the time, there was still hope that diplomacy might prevent violence. Nevertheless, commodities markets were already reacting to the uncertainty with price rises and we recommended that those with live trades in the Black Sea region and with Russian and/or Ukrainian counterparties carry out risk assessments.
On 24 February 2022, Russia launched its invasion of Ukraine. Since then, commodity prices have surged further and traders have been impacted by the disruption to supply chains, sanctions against Russia/Russian entities and the “self-sanctioning” of banks and other institutions.
Now some months into the conflict, we reflect on some of the important legal issues for traders that we have seen arise, and those that might still be to come. We continue to follow closely the unfolding of events in Ukraine and the international responses to them.
Sanctions
The sanctions that have been imposed against Russia, by the UK, the EU, Switzerland, the US, and other nations, are unprecedented in their size and scope as well as the rate at which new measures are being imposed. Never before has a country that is so deeply embedded in global supply chains being targeted so heavily. Current forecasts are that Russia’s economy will contract by more than 10% in 2022, which is its biggest fall since 1994. The sanctions may still go further. Infrastructure issues and heavy reliance on Russian fossil fuels have so far prevented an EU import ban on Russian oil, which has maintained this revenue stream3–even as Russia has retaliated by sanctioning gas shipments to the bloc.
In very brief and broad overview, the sanctions include financial and investment restrictions on entities owned/controlled by the Russian government, asset freezes on individuals and corporations associated with Vladimir Putin’s regime and/or supporting the war, bans on Russian aircraft, prohibitions against Russian vessels, embargoes on the trade of goods (e.g. iron, steel and luxury goods) and technologies (e.g. oil refining technology, quantum computing) and activities associated with their export.
While the various governmental bodies have been working together such that many of the sanctions imposed are very similar and/or overlap, they are not identical. For example, the EU has banned Russian flagged (and recently reflagged) vessels from EU ports, whereas the UK prohibition goes further by also banning vessels which are “owned, controlled, chartered or operated” by “designated persons” or “persons connected with Russia”. A trade may be caught by sanctions for various reasons beyond the trade of the goods, such as extending credit via payment terms or demurrage provisions. Given the volume and the rapid development of the sanctions against Russia, we recommend seeking legal advice before proceeding with existing contractual commitments and/or entering into new contracts.
Secondary to the sanctions themselves is the impact of “self-sanctioning” as parties take more stringent steps to avoid Russia-related trade. Some buyers are looking to amend contractual terms or washout contracts to avoid the risk of being stuck with Russian-origin product that can only be on-sold at a discount. In such instances it would be prudent to obtain legal advice as to the precise nature of each party’s rights and obligations under the sale contract because, where it is not possible to reach a resolution with a seller, the buyer risks finding itself in breach of contract for failing to perform by not taking delivery of the goods in question. Likewise, shipowners are unwilling to send their own tonnage into Russian ports or to pay a premium to charter in tonnage, and “self-sanctioning” by (particularly US) banks can delay payments or even go so far as to prevent performance of the contract itself where the contract price is in US dollars.
The third impact of international sanctions is the shifting of global trade flows as traders reflect on where they should establish networks and locate assets in the future. For example, India has traditionally not been a huge wheat exporter but recently emerged as a key supplier to countries that are largely dependent on Ukrainian wheat. The Indian government was encouraging an accelerated campaign of exports before u-turning and imposing an export ban on 14 May 2022 in the face of domestic inflation. New trading patterns often require fresh analysis of the particular legal requirements (e.g. for effective transfer of title) in new jurisdictions.
More generally, parties should continue to conduct thorough customer due diligence as new sanctions continue to be imposed. Parties should also review the sanctions clauses in their contracts to ensure they remain fit-for-purpose, or to ensure that sanctions clauses are included in their contracts going forward. However, while sanctions clauses may make it easier to terminate a contract, they are not a substitute for conducting appropriate due diligence and risk assessments.
Read the briefing in full here.
