Sanctions implications for New Zealand businesses should Russia invade Ukraine

Last week, officials from the United States, United Kingdom, France, Belgium and Germany met in Europe to finalise an extensive package of economic sanctions and export controls that Western countries may impose if Russia decides to invade Ukraine. Over the weekend, US President, Joe Biden said that he is now “convinced” Russian forces “intend to attack Ukraine in the coming week, in the coming days”.

This alert identifies some of the key Western prohibitions and restrictions under consideration and explains how their implementation could affect New Zealand businesses. We recommend that local businesses with interests in Russia, or who deal with Russian nationals or businesses, monitor developments closely. In particular, they should carefully consider how they are transferring money to/from Russia and how those arrangements could be modified at short notice, should that prove necessary.

Current sanctions

The United Nations (UN) has not imposed any sanctions in response to Russia’s recent provocations and there is no realistic prospect of UN sanctions being imposed in the future. This is because Russia is one of the five permanent members of the UN Security Council, so Russia would veto any effort to impose sanctions on the country.

In contrast, Russia has been sanctioned by Australia, Canada, the European Union (EU), France, Switzerland, the United Kingdom (UK), and the United States (US), among others, for its occupation of Ukrainian territory since 2014. A useful summary of current autonomous sanctions measures targeting Russia is available here. Those sanctions have escalated over time in response to a variety of Russian provocations, including terrorism, cyberattacks, chemical weapons attacks, elections interference, human rights violations, and support for the regimes of President Bashar al-Assad of Syria, President Nicolas Maduro of Venezuela and President Alexander Lukashenko of Belarus. Of note, the sanctions measures imposed to date have largely been designed to have a limited impact on ordinary Russians and Western economies, while exerting pressure on the Kremlin and Russia’s elite. If Russia invades Ukraine, this distinction will no longer be possible and further sanctions would undoubtedly have a much broader economic impact on Russia, causing more collateral damage in Western countries, including New Zealand.

Potential Western sanctions

While a range of Western governments are contemplating an extensive package of economic sanctions and export controls targeting Russia, it is the set of measures being considered by the Biden Administration and the US Congress, discussed below, that are likely to have the most significant implications for New Zealand businesses.

Potential sanctions measure Description Potential implications for New Zealand businesses
Blacklisting certain Russian banks Most significantly, the US is contemplating adding some major Russian banks to the US Government’s Specially Designated Nationals and Blocked Persons List (SDN List), including Sberbank, VTB, Gazprombank, VEB.RF, the Russian Direct Investment Fund (RDIF), Credit Bank of Moscow, Alfa Bank, Rosselkhozbank, FC Bank Otkritie, Promsvyazbank, Sovcombank, and Transkapitalbank. If implemented, US persons would be prohibited from engaging in any transactions with the SDN List banks, either directly or indirectly.

 

The practical implications of this measure would be significant, as it would effectively prohibit the SDN List banks from dealing in US dollars. While Russia has moved to reduce its reliance on the US currency, more than half the country’s trade is still denominated in dollars. If implemented, this measure could have a significant impact on the ability of New Zealand companies to move funds to/from Russia. New Zealand banks would certainly cease processing US dollar transactions involving the SDN List banks and may cease dealing with them altogether on legal or risk management grounds.

 

Blocking Russian access to the SWIFT international payment messaging system The US is also contemplating sanctioning providers of specialised financial messaging systems (notably SWIFT) that continue to provide such services to Russian financial institutions that it adds to the SDN List. These banks would no longer be able to make or receive international payments using SWIFT. Russia does have its own home-grown payment messaging system, which could eventually replace the use of SWIFT, but any transition would take some time. If implemented, this measure would make it more challenging for New Zealand banks to send or receive funds to/from the designated Russian banks. It could also have a chilling effect on financial transactions involving Russia, with Western banks taking a “de-risking” approach and carefully scrutinizing payments in and out of Russia or declining to engage in certain transactions deemed as high risk (including transactions which New Zealand banks consider could be used as an intermediary transaction for payments to Russia).

 

Blacklisting persons in Russia’s energy, mining, financial and aerospace sectors, as well as more Russian “oligarchs” and members of President Putin’s inner circle

 

The US is also considering the merits of designating as SDNs various entities and persons involved in Russia’s energy (including oil and gas), mining (including coal and mineral extraction), financial, and aerospace sectors.

In tandem, it is also looking to designate as SDNs certain Russian officials, including, among others, the President, Prime Minister, and Foreign Minister, and numerous military officials.

If implemented, New Zealand companies would need to carefully consider the legal, risk management and reputational merits of entering into, or continuing to do business with any of the designated persons and entities. Any financial sector sanctions would have the most impact upon New Zealand.
Restrict the export of key commodities to Russia The Biden Administration may also expand existing export control restrictions on Russia. In particular, it may use the foreign direct product rule to prohibit the export, reexport, or transfer to Russia of a broader range of items made outside of the US using strategic US software, technology, plants, or equipment. If implemented, the range would likely include semiconductor microchips, which are used in everything from cars to smart phones, machine tools to consumer electronics. Almost all of the world’s supply is made using US input. If implemented, this measure would target not just Russia’s defence and aerospace sectors, but whole swathes of its economy. It may also impact upon certain members of New Zealand’s high-tech manufacturing industry who produce finished products that comprise significant US technology or software that is controlled for national security reasons.
Prohibit purchases of oil from the Russian energy majors Various Western governments are contemplating the merits of prohibiting or restricting access to oil produced by the Russian energy majors, including Gazprom and Rosneft. Russia is the world’s second largest producer of crude oil. Any significant sanctions targeting the energy sector are also likely to be relevant to New Zealand businesses, as crude petroleum is this country’s primary import from Russia and much of that trade is settled in US dollars.

 

Potential Russian retaliatory measures

If Western governments impose further significant sanctions, the expectation is that Russia will respond in kind. One potential measure under consideration is that Russia may extend its current temporary, two-month export ban on ammonium nitrate. The international implications of this would be significant because Russia provides 60% of the world’s ammonium nitrate, which is a key component of fertiliser. New Zealand is not a major user of ammonium nitrate, but if the export ban were extended to include potassium fertiliser (one of New Zealand’s principal imports from Russia) significant supply restrictions and/or price increases could be expected.

Russia may also decide to extend its current ban on the import of agricultural products from countries that impose autonomous sanctions on Russia. New Zealand was exempt from the last wave of Western agricultural product bans that were imposed in 2014, and may remain exempt given the Government’s inability to impose autonomous sanctions in the absence of a UN resolution (given a lack of autonomous sanctions legislation in New Zealand). As a result, the key implications of any extensions of these bans may be new (albeit increasingly risky) export opportunities and heighted export prices for New Zealand’s agricultural exporters, although New Zealand, and New Zealand businesses, may come under pressure from allied nations not to do business with Russia in light of their collective efforts to sanction and isolate Russia.

How can we help?

We have extensive experience of advising on sanctions compliance and enforcement related matters.  We routinely assist clients to: produce obligations registers; conduct compliance assessments; undertake customer and transaction due diligence and screening processes; structure low risk transactions; and develop or refine sanctions compliance programmes.

Members of our team have represented clients in sanctions investigations undertaken by the New Zealand Customs Service, the UN, and the UK and US governments.  We have also represented clients in sanctions-related mediations and judicial proceedings in New Zealand and the UK.  Our team also includes one of New Zealand’s leading lawyers advising on cryptocurrencies, and the firm is currently advising clients in respect of the seizure of crypto-assets as a result of criminal proceedings in New Zealand and overseas.

We work closely with partner firms in other jurisdictions, including the Asia-Pacific-wide network of MinterEllison offices, when foreign legal advice is required.

This article was co-authored by Sofia Manai and Nathalie Harrington in our Public Law team.

Who can help