The Economy

Russia Sanctions Put U.S. Firms in a Tough Spot

Firms that do business in Russia should examine their contracts, try to amend them and, as a last resort, apply for an emergency license.
Marielle SegarraApril 2, 2014

In response to Russia’s invasion of Crimea, the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) has imposed economic sanctions on Russia. The sanctions, which went into place in March, prohibit U.S. companies from doing business with 20 individuals and banks in Russia. That move may be just the beginning.

President Barack Obama chats with Russian President Vladimir Putin during more peaceful times. Photo credit: White House/Pete Souza

President Barack Obama chats with Russian President Vladimir Putin during more peaceful times.

On April 1, the U.S. House of Representatives passed a bill imposing additional sanctions on Russia. The bill, which has already passed the Senate, now heads to the President’s office.

On the surface, the sanctions seem pretty straightforward: U.S. companies just need to stop doing business with the individuals and banks on the sanction list. But the restrictions can get complicated, says Gregory Husisian, partner at international law firm Foley & Lardner.

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OFAC, which administers economic sanctions, requires companies to halt trade or financial transactions with any firm that’s more than 50 percent-owned by a specially designated national (SDN), someone who has been sanctioned. Since many Russian officials and business leaders operate via proxy companies, however, it’s hard for U.S.-based companies to know when a firm it’s dealing with is partly owned by someone on the SDN list, Husisian says.

If a U.S. company does business with such a firm, OFAC could punish it with anything from a warning to a criminal charge. To defend itself against such charges, a company would have to argue that there’s no way it could have identified the Russian firm’s owners. “It can be difficult to show that you couldn’t have discovered this with reasonable diligence,” Husisian says. “The government might say, ‘Well, you didn’t know but you could have been more careful.’”

On the other hand, if a U.S. company breaches its contract with a Russian firm, a Russian court could seize the company’s assets and order the firm to pay damages. “U.S. courts have ruled that economic sanctions trump any contracts. But in Russian court, you’re going to be in trouble,” Husisian says. “If you have assets in the country, they can be taken by the state to help pay any judgment.”

If a company has neither of these clauses in its contracts, it can file an emergency license with OFAC. If the transaction with a sanctioned firm or within a sanctioned country wouldn’t harm national security and policy aims (let’s say your company provides medical supplies to Iran) and might do some good (alleviate human suffering but not serve anti-U.S. military purposes), OFAC might grant the firm a license to operate. Two warnings about this approach: OFAC license applications currently take six months or more to secure, and once you apply you are admitting that you know your operations are illegal, so you’ll have to stop operating until you receive the license, Husisian says.

With more sanctions looming, companies should catalog their direct and indirect business in Russia and figure out where they can withdraw from contracts if necessary. If companies are entering new contracts, they should include a clause that allows them to withdraw under U.S., EU and U.N. sanctions. They should try to amend existing contracts to include such a protection, even if that means offering additional products or lower prices.

Companies might also consider appointing one person to monitor the OFAC website, track any new sanctions, and research Russian business partners to ensure that none are owned by an SDN. Research firms like Lloyds and Dun & Bradstreet may be able to create reports on individuals and companies that show such affiliations, Husisian says. There are also software platforms that allow firms to run company and individual names through a database that affirms whether they’re associated with an SDN.

Photo: White House/Pete Souza