Western Companies Seek to Exit Russia as Sanctions Escalate​

By BK​

What do you need to know this week?

After months of tensions, on February 24 2022, Russian forces launched a full-scale military invasion of Ukraine. The Ukrainian government has declared martial law. The West has retaliated with several sanctions such as closing airspace to Russian aircrafts, shutting out Russian financial institutions from the SWIFT international payment system and freezing nearly $630 billion of Russia’s foreign reserves. In addition, Russian individuals of high political and economic importance have been subject to asset freezes, travel bans and other curbs.

Russia’s economy has suffered a huge blow. The rouble plunged as much as 30% to an all-time low as the Russian central bank doubled its interest rate to 20% to bolster the rouble and fight inflation.

Why is this important for your interviews?

Investors are worried that the latest rounds of Western sanctions could push Moscow to default on its debt for the first time since 1998. As a result, many multinational companies (“MNCs”) are afraid that continuing their business operations in Russia would not only be risky, but would also send the wrong political message.

For example, BP, Russia’s largest foreign investor, abruptly announced that it was abandoning its 20% stake in state-controlled Rosneft. This move came at a cost of $25 billion, slashing BP’s energy production by a third. BP’s recent decision has “shone a spotlight” on other Western firms with stakes in Russian oil and gas projects, such as US company ExxonMobil, France’s Total Energies, and Britain’s Shell.

Global bank HSBC and the world’s largest aircraft leasing firm AerCap are also looking to exit Russia. US delivery companies such as FedEx and UPS, as well as Swedish telecommunications conglomerate Ericsson, have announced that they were all suspending deliveries to Russia.

How is this topic relevant to law firms?

MNCs wishing to withdraw, halt or divest of their Russian operations will need to enlist law firms to advise on both the corporate, corporate governance and regulatory aspects of this move. For example, clients such as BP will have to restructure their holdings to be able to ‘carve’ out subsidiaries holding Russian assets for sale. In doing so, this will likely be a breach of contract for various financing agreements they are involved in. This will require law firms to advise on how to best mitigate their losses and keep the ‘divorce settlement’ as low as possible.

More generally, many MNC clients will be impacted from the growing list of sanctions mounted by Western nations. The various sanctions levied on Russian financial institutions, airspace and important individuals will make business operations difficult (if not impossible in some cases). For example, Finnair, which relies on Russian airspace for much of its Asian routes, lost a fifth of its revenue amid airspace closures. Law firms will need to assist such clients in grappling with the legal implications of the sanctions on their business operations. This will not only involve advice on corporate governance and trade compliance, but may also involve renegotiating supply and service agreements with its clients’ customers and suppliers.


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