25 June 2015

Russia and Iran: sanctions risks and opportunities

Extension of Russian sanctions

Over the last few days, the EU Council has extended the existing EU sanctions against Russia until 31 January 2016.  Similarly, the EU restrictive measures in place against Crimea and Sevastopol have recently been extended until 23 June 2016. 

These latest developments follow the G7, earlier this month, affirming their commitment to sanctions against Russia.  A so called “sanctions-in-waiting” strategy has been adopted with reports suggesting that additional measures have been provisionally approved, which may include asset freezes against more Russian officials and businessmen, measures targeting fuel exports and further restrictions on Russian banks.  The G7 have made it clear that “the duration of sanctions should be clearly linked to Russia’s complete implementation of the Minsk agreements and respect for Ukraine’s sovereignty…However we also stand ready to take further restrictive measures in order to increase cost on Russia should its actions so require”.

After a period of considerable uncertainty, businesses and financial institutions have, to a large extent, begun to come to terms with the current framework of Russian sanctions. However, should further sectoral measures be implemented then there will be a need for parties to reassess their activities in the region.  Further, carefully drafted sanctions provisions designed to mitigate sanctions risks and allocate those risks between parties will be put under proper scrutiny for the first time.       

The possibility of a deal with Iran

Put simply, policy makers in both the US and EU see sanctions as a hugely effective tool in shaping foreign policy over the next few years.  In particular, as a measure of success, commentators are pointing to the fact that a deal with Iran is inching closer with the current deadline set for 30 June 2015.

It has been reported that any relaxation of Iranian sanctions will be on a phased basis (albeit Iran are publically seeking an immediate suspension of all sanctions).  The gradual lifting of sanctions will, in turn, be linked to Iran reaching certain milestones and obligations imposed in respect of its nuclear capability.   

Significantly, for businesses looking to re-instate operations or invest in the region, the US are seeking so called “snap back” measures whereby it can unilaterally re-impose sanctions should Iran not abide by its commitments. 

Another significant factor to consider before launching new initiatives in Iran is that mainstream banks are likely to remain extremely conservative when it comes to assessing Iranian risk and the appetite for Iranian business.   Indeed, stringent sanctions clauses prohibiting all dealings with countries such as Iran have become increasingly common in recent years and, even if there is a lifting or easing of the sanctions, these contractual restrictions will not necessarily be waived.   

Proceed with caution

The current situation in Iran and also with Russia leaves businesses in a difficult position.  There are, however, certain points that it is sensible to consider both at the outset and as any transaction is progressing:

  1. Full and rigorous KYC and sanctions screening of all counterparties (and their ownership) is essential.
  2. In specific sectors subject to sanctions, (e.g. banking / oil and gas) navigating what is and is not lawful business requires careful consideration and advice. It is always worth revisiting exactly what is being proposed to ensure it is (and remains) permitted.   
  3. Specifically with respect to Iran, pending any possible suspension of sanctions, restrictive measures remain in force and care should be taken that any steps taken now do not breach or circumvent existing measures.
  4. Express warranties should be sought that counterparties are not (and have not been) subject to sanctions and have the ability to contract lawfully.
  5. Sanctions conditions precedent should be sought to provide parties with the ability to “walk away” in the event sanctions are imposed between exchange and completion or, for example, whilst financing is being put in place.  
  6. Express contractual protections should be sought to mitigate the risks of sanctions being imposed – for example, termination rights and indemnities.

For very different reasons, the next few weeks may see significant developments as regards Iran and Russia respectively.  As such, businesses should be more alert than ever to deal with the consequent risks, but at the same time be aware of what may be new opportunities.

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