Sanctions Tug of War – What Happens to Swiss Entities if the Next Level of Sanctions Are Enacted Against the Russian Federation?

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Swiss entities doing business with entities located in the Russian Federation should review and adapt their business perspectives and contracts, if possible, given the increased risk of sanctions enacted against the Russian Federation in case of territorial incursion into Ukraine.

I. Overview of the Current Geopolitical Climate

It is no secret that tensions a running high on the Ukrainian-Russian border. Russia believes that it is facing an existential threat to its national security if Ukraine is allowed to join the EU or NATO. The United States, some EU members and NATO members believe that the Russian Federation is fomenting an invasion of Ukraine. They threaten the Russian Federation, with economic sanctions, among other measures, if it were to trespass on Ukrainian territory.

II. Overview of Current Sanctions against Russian Interests and Russian Countersanctions

As economic sanctions are typically consequences of foreign policy choices, states invoke multiple reasons to enact sanction regimes. The United States has enacted sanctions following several events, such as the death of the Russian accountant Sergei Magnitsky, the annexation of Crimea, the interference in the 2016 election, the poisoning of Sergei and Yulia Skripal, etc. Those sanctions have resulted in banning certain individuals from traveling to the United States or using the US banking system, the expulsion of Russian diplomats, forbidding certain dual-use exports to Russia, and banning the import of foodstuff, among others.

Some of the same events have led other countries, such as Canada, Norway, Australia, the United Kingdom, Japan, and the members of the European Union, to enact similar sanction regimes to a varying degree.

Switzerland also enacted measures, but only to prevent circumvention of international sanctions in connection with the situation in Ukraine, which do not follow the measures taken by the EU.

The Russian Federation also enacted countersanctions, notably by banning certain US, Canadian, EU politicians from entering its territory, or setting up a one-year embargo on agricultural products originating from countries that had enacted similar sanctions against it. The Russian Federation has also enacted sanctions against Ukraine, such as banning its airspace to Ukrainian aircrafts.

III. Envisaged Sanctions

Assuming military forces from the Russian Federation trespass on Ukrainian territory, several nations, most prominently the United States, the United Kingdom and Canada, as well as the countries within the European Union are expected to impose “unprecedented”, “mother of all” sanctions on the Russian Federation. While no one knows exactly what these sanctions might entail, some ideas for consideration are the following:

  • Banning access to US dollars and/or Euro;
  • Blocking access to international debt markets;
  • Blacklisting financial institutions and other entities;
  • Banning export of certain goods;
  • Imposing energy restrictions (e.g., Nord Stream 2);
  • Banning flights over sovereign airspace; or
  • Imposing additional individual sanctions.

Another unknown is how the Swiss authorities will react and whether they will amend their own sanctions, which will further complicate the decision-making process for Swiss companies.

A further unknown is whether the Russian Federation will enact its own countersanctions against companies which are following the sanction regimes adopted by those countries, including Swiss entities.

IV. Potential Consequences for Swiss Entities

Sanctions are crippling, both against the target and the contractual partners dealing with the target. For instance, compliance with sanctions would notably require Swiss entities:

  • Not to perform their contractual obligations (such as the blocking of bank accounts);
  • Not to get paid (e.g., participate in foreign bankruptcy proceedings, obtain funds through the banking system, etc.);
  • Not to be able to retrieve assets located in targeted areas; and
  • Not to be able to obtain judicial redress if the currency of the contract is a currency which the target of the sanctions cannot use (article 84 of the Swiss Code of Obligations).

There exists therefore a serious risk that Swiss entities may find themselves entangled in sanctions if they are unable to anticipate potential sanctions against their contractual partners located in the Russian Federation, in particular if their contracts do not contain an immediate/early termination clause in case of sanctions.

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