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UPDATED 1 Sept: The EI library in London is temporarily closed to the public, as a precautionary measure in light of the ongoing COVID-19 situation. The Knowledge Service will still be answering email queries via email , or via live chats during working hours (09:15-17:00 GMT). Our e-library is always open for members here: eLibrary , for full-text access to over 200 e-books and millions of articles. Thank you for your patience.
Sanctions against Russia – be prepared
As the situation in Ukraine continues to deteriorate, the possibility of further sanctions against Russia and Russian interests continues to dominate the agenda. As a result, those businesses which are engaged in the energy sector and have commercial connections with Russia need to keep a careful eye on political, business and legal developments, to avoid falling foul of new restrictions.
As Daniel Martin, Partner at Holman Fenwick Willan, an international law firm advising businesses engaged in international commerce, explained to Petroleum Review, the current European Union (EU) and US sanctions involve an asset freeze which, in essence, makes it unlawful to deal with a sanctioned individual or entity. Their funds and assets are blocked and it is prohibited to provide them with further funds and assets. Because these restrictions apply even to the indirect supply of funds and assets, and because companies which are owned or controlled by, or act on behalf of, sanctioned individuals and entities are effectively treated as sanctioned entities themselves, the asset freeze applies to a wide network of companies and individuals.
‘Every company with any business interests which relate to Russia should therefore be looking very carefully at their counterparties, and any other Russian interests who they deal with, to check that these relationships are not prohibited, and also identify any counterparties who may be added to sanctions lists in the future,’ says Martin.
At the time of writing, there are no restrictions targeted at the energy sector, such as bans on the purchase of Russian gas. However, the possibility that such restrictions might be imposed has been widely discussed in diplomatic circles. ‘Given the important trading relationship between Russian and many EU member states, and the greater difficulty of building consensus in the EU, the US might impose restrictions targeted at the energy sector before the EU does so. If restrictions are imposed, they may well have immediate effect (as opposed to a phased introduction), such that there may be limited time to assess the impact of the restrictions on imminent (and continuing) performance obligations, with huge financial penalties for getting it wrong,’ notes Martin. ‘In order to be prepared, every energy company which has any business interests which relate to Russia should be using the current period of relative calm on the sanctions front to review their contracts to see whether there is scope to suspend or terminate their obligations, in the event further restrictions are imposed. They will also want to liaise closely with their banks and insurers, to check that they have the support of those institutions.’
Meanwhile, Dr Elizabeth Stephens, Head of Credit & Political Risk Advisory at JLT Specialty, notes that since European leaders first mentioned the possibility of sanction against Russia in retaliation for its perceived aggression in Ukraine, markets have become more volatile. She reports that Russian stocks have come down more than 20% since mid-February 2014, economic growth for this year has fallen below 1% and tensions are fuelling capital flight that cripples investment. In addition, she claims that more than £30bn has left Russia this year, mostly from ‘Russians stashing money abroad because of uncertainty’. As a result, she believes that to date: ‘The threat of sanctions has proved more debilitating to trade with Russia than sanctions themselves.’
Speaking to Petroleum Review, Stephens says: ‘In February, the credit and political risk insurance market had little appetite for new Ukrainian risk. Early sentiment was that the situation would resolve itself in 60 to 90 days, with a dominant player emerging. Concerns focused on the ability of the Ukrainian economy to withstand the economic implications of the crisis, after significant claims paid on bank collapses during the financial crisis.’
‘As Russian troops occupied Crimea and rhetoric between Washington, Brussels and Moscow became more robust, underwriters paused and reconsidered their exposure to Russian risks. As sanctions were imposed and subsequently extended most, if not all, underwriters have now stopped writing any new Russian exposures. They are unable to trim their exposures bar waiting for the shorter tail business to run off and all existing policies will be honoured. Much underwriter exposure is now for medium to long term deals so underwriters are still carrying a significant level of exposure. If the crisis escalates a number of markets could face some challenges. Russia is one of the largest capacity countries in the market and underwriters will be exposed to billions of dollars of risk if sanctions are extended and the Russian economy is severely weakened.’
‘In the absence of underwriter appetite and the ability to secure credit and political risk insurance, millions of dollars in deals will not go ahead because traders and investors do not have the appetite to operate uninsured or because banks require insurance products to provide capital relief. All new deals coming to the market are impacted. Deals involving the metals sector are almost impossible to place and oil deals are challenging. Underwriters are also reluctant to insure soft commodity trades, for food stuffs like soya beans,’ she concludes.
See also pp17–20 of Petroleum Review’s May 2014 issue for more details regarding Russia and Ukrainian gas supplies, which are continuing to flow – for now – despite political turmoil in the region.
News Item details
Journal title: Petroleum Review
Countries: Russia -
Subjects: Trading, Policy and Governance, Economics, business and commerce, Transportation of products, Oil and gas
