World attention has been focused on the very serious events that are taking place in Ukraine as a result of the attack launched by Russia on February 24. We dedicate this article to analyzing the impact that this crisis is having on international companies that participate in some way or plan to enter the US market. Some aspects such as sanctions or export restrictions can indirectly generate problems in your operations. Others are a source of potential opportunities.
The United States government immediately initiated a series of punitive actions in response to the Russian attack, through executive orders from President Biden translated into concrete actions managed by the Bureau of Industry and Security (BIS) of the Department of Commerce, and the Office of Foreign Assets Control (OFAC) of the Department of the Treasury. They are intended to have immediate and lasting effects on Russia’s economy, financial system, defense industrial base, and military and intelligence services. These actions have progressively increased in scope and have included Belarus for its support of the invasion.
It is to be expected that both BIS export restrictions and OFAC sanctions will evolve in the coming months depending on how events unfold.
OFAC provides via this page detailed and up-to-date information of the sanctions derived from the war. The sanctions seek to penalize certain individuals and entities directly related to the invasion, to the Russian government or military, or to critical sectors. On the other hand, they prohibit trade in goods, services, or technology (imports and exports) with the Crimean region, as well as investments in that region. The sanctions block or limit the possibility of doing business with a series of government agencies, companies (in particular a good part of the financial entities) and other organizations, as well as a series of natural persons.
It is important to understand that some companies and individuals outside of Russia and Belarus have also been included in these sanctions. An example is Nord Stream 2 AG, the Swiss company behind the Nord Stream 2 pipeline between Russia and Germany, and its German CEO, Matthias Warnig.
Given the complexity and volatility of these sanctions, we are not going to try to describe them in detail and we recommend consulting the websites cited.
Any international company that has ongoing or planned business with, or is in any way related to, persons or entities from Russia, Belarus, or Ukraine, should be careful with these U.S. sanctions regardless of its geographical location. There is a tool provided by the US government that allows you to easily search names of persons and entities in the consolidated list of persons and entities affected by all the sanctions in force. It can be found following this link.
In some cases, when the United States cannot impose penalties on a foreign entity or individual that has violated a sanction, it may take action against its US affiliates or assets, or request other governments to take some action in their country.
One example is the arrest of the CEO of Huawei Technologies Co (a Chinese company) in December 2018 at a Canadian airport due to sanctions violations by that company in its dealings with Iran, which led the United States to request the Canadian government to carry out the arrest and request her extradition. After almost 3 years in Canada, she was finally able to return to China in September 2021 after an agreement was reached.
In another case from 2015, BNP Paribas SA (BNPP), a global financial institution headquartered in Paris, was sentenced for processing billions of dollars in transactions through the US financial system on behalf of Sudanese, Iranian and Cuban entities subject to US sanctions. The US imposed an unprecedented fine of 8,834 million dollars on BNP Paribas.
Thus, US subsidiaries or assets of international companies may suffer significant penalties if activities in other countries by their affiliates or owners violate any active sanctions.
BIS manages the new export restrictions, detailed in this section of their website. US export restrictions are of great relevance in sectors such as defense or the aerospace industry, a barrier to entry that we have already described in this article from our blog. In particular, the International Traffic in Arms Regulations or ITAR, and the Export Administration Regulations or EAR are of special relevance.
The new restrictions already mentioned and managed through BIS tighten the existing ones with regard to the export of certain items, technology and services when they are intended for certain people or entities related in any way to Russia, Belarus or Ukraine.
On the other hand, the US has imposed a broad embargo on two Ukrainian regions, Donetsk and Luhansk, extending measures that had already been applied for some time in Crimea.
Similar to the expansion of controls over the Chinese company Huawei a few years ago, foreign companies, many of which have never before applied for an export license from the US, will now likely have to apply for US export authorizations for business in Russia, Belarus or Ukraine, or related to these countries in any way.
Therefore, international companies exporting to these countries must ensure that they are not exporting or re-exporting items that are the direct product of any item or technology subject to old or new export restrictions.
For example, a US affiliate of a foreign company could be severely penalized if it has lawfully transferred items or technology to a foreign affiliate and that affiliate re-exports it to a Russian person or entity in violation of any of the new export restrictions. export.
Opportunities as a result of changes in demand and the supply chain
As a consequence of all that has been said and with the intention of minimizing economic dependence on Russia, the United States has begun a process of substituting imports from that country, to the extent possible, replacing them with other sources. This particularly affects products such as fuels, steel and iron, precious metals and stones, fertilizers, and chemicals.
Obviously, the potential of the US defense sector has increased considerably due to the expected increase in demand from the US government and its allies. Also noteworthy is the explosion of interest in the cybersecurity sector, which has already begun in recent years and has grown even more this year due to the existing fear that Russia will launch massive attacks against companies and organizations governmental. A reflection of this interest is the recent acquisition of one of the leaders in cybersecurity, Mandiant, by Google for 5.2 billion dollars.
Another sector directly affected in a positive way is that of renewable energies. There was already an enormous interest in promoting them as a way to fight against climate change, reflected in the infrastructure law approved by the US Congress in November 2021, which we already talked about in this article from our blog. This trend will now grow even more given the strategic need to reduce dependence on foreign energy.
Likewise, international tension and its impact on global supply chains will give an additional push to the trends of “reshoring” (reducing the weight of manufacturing carried out abroad) and “near-shoring” (bringing part of foreign manufacturing closer to nearby or low-risk countries) that had already begun as a result of the COVID-19 pandemic. All this acquires even greater importance due to the existing concern that new conflicts could be generated in countries that export critical components, as is the case of Taiwan and microprocessors. All this significantly increases the interest in the US in companies that can allow the domestic production of components that today are imported from abroad, through advanced technologies in areas such as robotics, 3D printing or artificial intelligence.
Like all major crises, the war in Ukraine presents a series of problems and opportunities that can have a significant impact on international companies doing business in the US.
It is important to carefully review with experts the legal and operational implications of the new export sanctions and restrictions especially if any subsidiary of the group is involved in persons or countries that may have been affected.
Similarly, the crisis has become a boost for several key sectors that can generate opportunities of great interest in the US for many companies if they have the appropriate knowledge or technology as well as the agility required to take advantage of them.