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The Economic Risks of Russia Sanctions

The Intricacies and Implications of the US’s New Russian Sanctions on Business

Russia Sanctions Situation Snapshot

  • New sanctions have been approved by the US House of Representatives to address Russia’s aggressive international behaviour.
  • The new measures target the mining, metals, shipping, railway energy, the Russian military, and intelligence sectors.
  • If imposed, the new sanctions would impact Russia’s economy and business climate as a whole.

Background on the Russia Sanctions Bill

On July 25th, the US House of Representatives approved a new package of sanctions against Russia as punishment for its alleged interference in the 2016 US Presidential Election, continued aggression in Ukraine and support for the Syrian government. The proposed legislation would codify into law and expand the scale and scope of existing sanctions imposed under former US President Obama. The proposed legislation would compel the White House to seek congressional approval for easing, suspending, or terminating US sanctions on Russia. However, before the proposed legislation becomes law, it must be approved by the US Senate and the President. Should the bill be approved, it would have significant impact on US regulatory restrictions on doing business with Russia.

Restrictions Imposed by the New Bill

Although vague in nature, the proposed bill brings a plethora of restrictions. Within the proposed legislation, sanctions will be applied to Russians found guilty of human rights abuses, supplying weapons to the Assad regime or having conducted cyber-attacks on behalf of the Russian government. The bill also vaguely targets new sectors of the Russian economy, including mining, metals, shipping, and railways.

In addition to current sanctions, which ban Western companies from providing goods, services, and technology for next-generation oil and gas projects (Artic offshore, deep-water and shale projects conducted within Russia), the new bill extends this to include any projects outside Russia in which a Russian energy firm is involved (specifically, projects that have 33% or more Russian ownership). Additional sanctions would also be placed against Russia’s military and intelligence industrial complex, including entities that purchase Russian defence equipment. In effect, the vagueness of the bill may be a deliberate feature intended to enhance the effectiveness and reach of its sanctions.

The Impacts of the Proposed Sanctions

Implications of the new sanctions are extensive. The expanded sanctions threaten the Russian economy by impinging upon critical investment projects in Russia’s energy sector. Sanctions in the energy sector span beyond Russian borders. In fact, sanctions could impact any non-Russian energy company that makes significant investments in Russian energy infrastructure, such as oil and gas pipelines. Thus, European companies, such as those involved in the Nord Stream 2 project, could be targeted. In addition, financial markets could also be affected by the new bill. Under current sanctions, US financial institutions cannot provide credit with a maturity of 30 days or more to some of Russia’s largest banks. The new bill tightens the debt maturity threshold to 14 days. It also adds a new layer of restrictions for the privatization of state-owned assets; this restriction could heavily limit the ability of US investors to participate in the privatisation of Russian companies.

The new measures would act as a further deterrent to foreign investors and would also likely dampen business confidence within Russia, thus disrupting the country’s economic prospects.
 

Although some of the new measures would have a minimal direct economic impact, they would nevertheless increase the overall regulatory risk for doing business with Russian entities. The new measures would act as a further deterrent to foreign investors and would also likely dampen business confidence within Russia, thus disrupting the country’s economic prospects.

The ambiguity of the bill is likely a method to disincentivise US companies from engaging with specific sectors of the Russian economy. However, Russia is not expected to remain silent in response to the proposed sanctions. Moscow is likely to retaliate, at the very least, by intensifying its operational harassment of US firms in Russia, for example, via tax and/or health and safety inspections. As such, US companies based in Russia should seek to ensure that they are in (and maintain) compliance with Russian regulations. For companies that have, or are planning, significant investments in Russia, legal advice should be sought to ensure compliance with the sanctions and if necessary, alternative investment opportunities should be explored. 

 

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