How sanctions affect international trade

Mainstream

Sanctions are not just lists of people and goods. It is the new architecture of international trade.

The main question is not whether sanctions are imposed against a particular country or counterparty. The main question is how these sanctions are reshaping the rules of the game for each participant in the supply chain, financing and contractual obligations.

Effective management of sanctions risks begins with three checks:

• What sanctions regimes apply to the transaction, the parties, the goods and the route?
• How these restrictions affect the ability to execute a contract, receive payment, and retain assets.
• What kind of compliance and contractual protection structure can prevent a business from being blocked?

If these three issues are not resolved in advance, the company may face a freeze of funds, a contract break by the counterparty, a bank’s refusal to make payment and a real threat of secondary sanctions.

When sanctions become a critical factor in international trade

Sanctions analysis is necessary in any of the following situations:

• export goods, technologies or services that are potentially subject to export controls;
• your buyer, supplier or beneficiary is located in a country that is subject to sectoral or blocking sanctions;
• the goods pass through high-risk areas or can be re-exported to a sanctioned jurisdiction;
• payment is made in the currency, the issuer of which is associated with the sanctions regulator (US dollar, euro, pound);
• banks request enhanced compliance and refuse to conduct foreign trade operations;
• the contractor insists on the inclusion of sanctions clauses or, conversely, refuses to discuss them;
• It is necessary to build a supply chain bypassing sanctions restrictions (legal redesign);
• sanctions are imposed or changed after the conclusion of the contract, which jeopardizes its performance;
• Dispute with a foreign partner concerns the application of force majeure or hardship due to sanctions;
• A license from OFAC, BIS, OFSI or a Russian regulator is required to carry out a trading transaction.

The mistake most companies make

Many companies start with the question:

“Can I continue trading with this partner?”

That's the wrong first question.

The right question is:

“How exactly should the deal, contract and compliance be structured to remain lawful, resilient to sanctions risks and enforceable under the current circumstances?”

Sometimes the best solution is to get a license. Sometimes, a change in currency and banking route. Sometimes, a supply chain overhaul with end-use commitments. Sometimes – timely termination of the contract based on a sanctions clause. Sometimes arbitration with a claim for damages due to sanctions obstacles.

Sanctions compliance does not require a reflex, but a commercially sound strategy.

Step 1. Identify applicable sanctions regimes and jurisdictions

The first thing to do is to understand which regulator is subject to the transaction.

Key questions:

• Is one of the parties an American person or is it acting from the United States? (OFAC)
• Are US dollars, US correspondent banks, or technologies with an American component used? (de minimis rule for re-export)
• Is there a European or British element: Companies, goods, financing? (EU Regulations, UK OTSI/OFSI)
• Are Russian counter-sanctions applicable: ban on imports, restrictions on foreign exchange transactions, special procedure for transactions with unfriendly persons?
• Does the deal cover sectoral sanctions (oil, gas, finance, dual-use technology, defense)?
• Is there a risk of secondary sanctions for significant transactions with sanctioned persons?

Without accurate mapping of jurisdictions, it is impossible to determine the real scope of the restrictions.

Step 2. Classification of goods, services and technologies

Sanctions apply not only to persons, but also to the nomenclature.

It is necessary to determine:

• ECCN (Export Control Classification Number)
• whether the goods are subject to the lists of dual-use goods subject to export control;
• Whether the restrictions on the US Munitions List (ITAR) or similar national lists apply
• whether the supply is prohibited by a specific sectoral package (e.g., equipment for oil exploration in the Arctic, technology for refineries);
• whether the product has a U.S., European or British controlled component;
• Whether exemptions (humanitarian supplies, food, medicines) apply.

A classification error can turn a standard shipment into an export control violation.

Step 3. Checking the Contractors and End Users

Sanctions screening should be multi-level, not just a check of a company name in a common list.

Checked:

• the contractor and its affiliated structures;
• Beneficial owners (the 50% rule – companies in which the sanctioned person owns from 50% are blocked in SDN lists, aggregated);
• Directors and signatories;
• End-user and end-use (end-use and end-user)
• participating banks, carriers, insurance companies;
• the presence in the chain of persons registered in high-risk jurisdictions;
• risk of re-export to Russia or Belarus through third countries.

It is particularly important to identify transactions in which the ultimate beneficiary is hiding behind nominal structures in friendly jurisdictions. These structures are under the scrutiny of regulators.

Step 4. Assessing financial logistics and payment risks

Even a fully legal supply can stall at the bank level.

It is necessary to find out in advance:

• Whether the selected currency and correspondent network are available;
• whether the bank will accept the payment subject to the sanctions clauses in the payment instructions;
• Whether participating banks are subject to sanctions and are willing to confirm compliance;
• Can alternative currencies (yuan, dirham, rupee) and local payment mechanisms be used without the risk of being blocked?
• whether there are currency restrictions on the part of the debtor or creditor (Russian currency regulation, decrees on a special procedure for fulfilling obligations);
• Whether the approval of the National Commission for the Control of Foreign Investment (CFIUS, EU FDI) is required for trade transactions with the investment element.

The financial part of the transaction often carries greater risk than the shipment of the goods itself.

Step 5. Analyze the treaty through the prism of sanctions

The international contract should be considered not only as a commercial agreement, but also as a tool to protect against sanctions risks.

Critical provisions:

• Sanctions Clause – the right to suspend or terminate a contract without liability in violation of the sanctions legislation;
• assurances about the final use and absence of links with sanctioned persons;
• obligation to immediately notify of the change in the sanctions status;
• the right to suspend execution if payment is impossible;
• Force majeure and hardship – whether they cover sanctions obstacles and to what extent;
• applicable law and arbitration clause capable of taking into account public policy and sanctions rules;
• provision on the currency of payment and the mechanism of currency substitution;
• the right to compensation for losses arising from the blocking of payment by the counterparty.

If the contract is drawn up without taking into account the sanctions reality, the parties risk being in a situation where the execution becomes illegal, and the withdrawal from the contract is not legally protected.

Step 6. Establish a system of compliance and regular due diligence

One-time inspections do not work in the context of constantly updated sanctions lists.

It is necessary to introduce:

• automated sanction screening of counterparties, beneficiaries, banks and logistics operators;
• the procedure for checking end users and end-use declarations;
• Regulations for the escalation of red flags: non-standard routes, requests to split the payment, change the customer at the last minute;
• regular training of employees of commercial, financial and legal departments;
• internal audit of foreign trade contracts for compliance with sanctions regimes;
• Documenting decisions is critical when dealing with regulators.

The compliance system is not a legal formality, but insurance against enforcement measures and personal responsibility of management.

Step 7. Developing contractual protection mechanisms for the future

The best time to protect against sanctions risks is the stage of contracting.

An international trade treaty should include:

• a clear sanctions clause tailored to specific jurisdictions;
• the right of each party to suspend execution without breach of contract if execution becomes a violation of the sanctions legislation;
• mechanism for changing the delivery route, payment currency and correspondent banks;
• guarantees of the counterparty that the goods will not be re-exported to Russia, Belarus or another country under sanctions without the necessary licenses;
• the right to withdraw from a limited liability contract when new blocking sanctions are imposed;
• (a) the obligation of the party affected by the sanctions to make commercially reasonable efforts to obtain the licenses;
• clear procedure for notification of sanctions incidents.

The contract should work not only at the start of the transaction, but also at the time of the sanctions shock.

Step 8. Actions in the event of sanctions obstacles

When sanctions already affect a deal, it is important not to panic, but to activate the prepared protocol.

Algorithm of action:

• immediately record the sanction event, its date and legal basis;
• assess whether it affects the ability to perform the contract in whole or in part;
• initiate notification of the counterparty in strict accordance with the contract;
• apply the sanctions clause (suspension of execution, termination, change of conditions);
• apply for emergency licensing if the transaction can be authorized by the regulator;
• if it is impossible to execute – consider a mutually acceptable exit through a settlement agreement;
• if the counterparty unreasonably refers to sanctions to evade obligations, - to start a dispute with a demand for performance or recovery of losses.

The right actions in the days following the imposition of sanctions often determine whether a business will retain assets and a contract.

Step 9. Obtaining licenses and regulatory approvals

Many sanctions allow exceptions through the licensing mechanism.

Possible types of licenses:

• General licenses of OFAC and BIS, which allow certain categories of transactions;
• Special licenses for a specific transaction or unlock payment;
• permission of the Ministry of Finance of Russia to conduct settlements with unfriendly persons;
• Export licenses BIS, EU Dual-Use, UK OTSI;
• individual exemptions on humanitarian or commercial grounds;
• Licenses to terminate (wind-down) or withdraw investments (divestment).

The process of obtaining a license is a full-fledged interaction with the regulator, requiring a detailed legal justification and disclosure of the structure of the transaction. Without an experienced consultant, the likelihood of rejection increases dramatically.

Step 10. Managing disputes caused by sanctions

Sanctions create a special category of commercial disputes.

Claims may concern:

• recognition of sanctions by force majeure or hardship and release from liability;
• recovery of losses due to unjustified refusal of the counterparty from the contract under the pretext of sanctions;
• payment requirements for the delivered goods blocked due to banking restrictions;
• contesting the unilateral termination of the contract with reference to the sanctions clause;
• the division of losses between the parties when sanctions make it impossible for the seller to deliver and receive payment for the buyer.

Here the choice of arbitration institution and the law that do not block the protection due to the sanctioned public order is critical. The execution strategy is also important – if the loser’s assets are in a sanction-compliant country, enforcement may face obstacles.

The main sanctions regimes and their impact on international trade

The choice of strategy depends not on the regime’s overall reputation, but on how its provisions are refracted in a particular deal involving Russia and the CIS.

How to strengthen the position before the introduction of new sanctions

A proactive strategy does not begin at the moment of a crisis, but when building business processes.

It is desirable to introduce:

• “Live” sanctions monitoring and scenario planning;
• Diversification of currencies, banks and logistics routes;
• the right to unilaterally change the payment currency in contracts;
• the counterparty’s obligations for end-use and supply chain verification;
• mechanisms for rapid suspension and termination of the contract in the event of a sanction event;
• the requirement for the counterparty to insure the risk of loss of the license;
• The introduction of the so-called “Sanctions Exclusion Clause” into contracts, which excludes liability for any actions taken to comply with sanctions legislation.

The earlier these elements are built in, the better the chances of saving a trade or exiting it with minimal losses.

Common Mistakes in Working Under Sanctions

1. Non-U.S. companies often believe that OFAC does not affect them until they use dollars. The FDP (Foreign Direct Product Rule) rules can apply even to transactions in local currency.

2. Registration of a company in the UAE, Turkey or Kazakhstan does not relieve the risk of secondary sanctions if the transaction is related to a sanctioned person from the Russian Federation.

3. A product delivered to a neutral country but then re-exported to Russia for the military or banned sector poses a risk to the original exporter.

4. Providing the bank with incomplete information about the transaction sooner or later leads to the blocking of the account and denial of service.

5. When a new package of sanctions is introduced, the parties are not entitled to suspend execution, and any step is fraught with a violation of either the contract or the law.

6. Try to circumvent sanctions through fictitious fragmentation of supplies or change of nomenclature Such schemes carry the risk of criminal prosecution for violation of sanctions legislation and inclusion in the SDN-list.

7. Many companies interrupt legitimate activities, while they could legally continue business with the permission of the regulator.

8. Even paid and legitimate goods from the point of view of the EU can be blocked at the Russian customs without a license from the Ministry of Industry and Trade or the permission of the Executive Committee.

Checklist for International Business

Before concluding and executing a foreign trade contract, 15 questions must be answered:

1. Which sanctions jurisdictions affect the transaction?
2. Is the product subject to export controls (ECCN, Dual-Use, ITAR)?
3. Are the counterparty, its beneficiaries or management related to the sanctioned persons?
4. Is there a risk that the goods will be re-exported to a prohibited jurisdiction?
5. In what currency will the payment be made and through which correspondent banks?
6. Is the bank ready to provide compliance?
7. Does the treaty contain a sanctions clause and a currency substitution mechanism?
8. Is there a way to proceed if no payment is possible?
9. Is the applicable law specified which recognizes sanctions as grounds for suspension?
10. Is there a need for an export license or an individual permit?
11. Does the treaty take into account Russian counter-sanctions requirements?
12. Is there a documented compliance and escalation procedure within the company?
13. Have you screened the carrier, insurer and other third parties?
14. Which arbitral or judicial authority will consider the dispute in the light of the sanctioned public policy?
15. What is the plan to exit the deal if sanctions make enforcement impossible?

FAQ

Can we continue trading with Russian counterparties that have not been sanctioned?

Yes, if the transaction does not violate applicable sanctions regimes, export controls and Russian counter-sanctions. However, it is necessary to conduct an extended due diligence and be prepared for increased attention of banks.

What are secondary sanctions and how are they dangerous?

Secondary US sanctions allow restrictions to be imposed against non-US persons for substantial transactions with Russian entities under sanctions from sector lists. This entails a disconnection from the dollar system and the risk of asset freeze.

What if a foreign bank freezes a payment?

It is necessary to urgently request the reason for the blocking, prepare a legal justification for the legality of the payment, submit a license request to OFAC/OFSI, and consider alternative payment routes.

Can sanctions be referred to as force majeure?

This depends on the wording of force majeure and sanctions clauses in the treaty and on the applicable law. In some legal systems, sanctions are recognized as a force majeure, but in others they are considered as an entrepreneurial risk. It is better to settle this issue in the contract.

How can you protect yourself from accusations of evading sanctions?

The only way is a documented compliance system, sanction screening, end-user verification and obtaining legal opinions on complex transactions. Mere lack of intent is not enough.

Does Russian counter-sanctions affect arbitration clauses?

Yeah. Russian legislation (art. 248.1 APC of the Russian Federation allows transfer of disputes to the Russian courts if it is impossible to defend in unfriendly jurisdiction. Therefore, the sanctions risks should be taken into account when choosing the arbitration institution and the place of arbitration.

Can the termination of the contract be challenged by a European supplier citing sanctions?

It is possible if the termination does not comply with the terms of the contract and the applicable sanctions rules. For example, if the supplier terminated the contract without an express ban on a particular transaction or did not use the opportunity to obtain a license.

Related services

• Sanctions, Export Controls & International Compliance
• International Trade, Distribution & Cross-Border Transactions
• Commercial Contracts
• International Arbitration, Commercial Litigation & Cross-Border Disputes
• Corporate Investigations, Regulatory Investigations & Business Integrity
• International Regulatory Risk & Strategic Advisory

Related material

• How to choose a sanctions clause for an international contract
• Export controls and dual-use goods: business-risk
• Due Diligence of a Foreign Contractor in the Conditions of Sanctions
• Secondary US sanctions: How to avoid being restricted
• Russian counter-sanctions: effects of international contracts
• Sanctions and arbitration: What to Know When Choosing a Reservation
• Recognition and execution of decisions under the conditions of the sanctioned public order
• How banks check trading payments: compliance with red flags
• Force majeure and sanctions: practical protection strategies
• Building an internal system of sanctions compliance

Conclusion

Sanctions have fundamentally changed the international trade landscape. Today, it is not enough to simply know the lists – it is necessary to build a proactive risk management system, adapt contract designs, check each transaction for multi-level compliance and prepare financial and logistical alternatives in advance.

In the new reality, it is not the one who wins who tries to guess whether sanctions will be imposed tomorrow. The winner is the one who, when signing the contract, understands exactly how he will protect the business if the sanctions change the rules of the game. A legal strategy based on a deep knowledge of sanctions regimes and experience in their application is the only insurance against the loss of contracts, money and the market.