Is it worth doing business with Ukraine and Russia?

Revenue is important but your company’s reputation is even more important. Your revenue may not be as large in the short term as you would like it to be but you can always improve that in the long run. Reputation is very difficult to recover.

So if your sales people bring you a potential business from Ukraine and Russia. Ask yourself:

Do I want my company on 60 Minutes? On CNN? For violating Ukraine and Russia sanctions? Certainly not.

Now say OFAC three times fast:

‍Do you want to be on the OFAC list of people/ companies that have done business with entities that are on the sanctioned parties list? Do you want a visit from the Office of Foreign Assets Control?

So unless you have a legal team in-house that can review every single transaction before it ships and that team has the knowledge and empowerment to stop any transaction that may fall under the current sanctions (these change weekly, if not daily) then I would say – No thanks. Too risky and we are better off looking for revenue somewhere else.

As you know, companies face different challenges when doing business internationally. Often companies will not only be susceptible to the whims of the marketplace but also to political turmoil. Due to current factors in the Ukraine and Russia, this is no longer a hypothetical thought exercise but a new challenge that international companies must now tackle if they are to stay compliant and maintain the customer service levels their international clients expect.

The newest round of Russian sanctions are continuing to restrict and complicate international business in terms of selling good and services into Russia and receiving payments from Russian customers. We have outlined the current and anticipated sanctions by both the United States and the European Union in response to Russia’s actions relating to Ukraine.

Current Sanctions

The White House has published various executive orders to authorize Russia-Ukraine sanctions. Sanctioned parties now include a number of individuals with close relationships to President Putin as well as financial, energy and defense firms. To date, OFAC has added 57 individuals and 31 entities to the SDN list and BIS has added 35 entities to its list. While some of the sanctions prohibit any transaction with the sanctioned parties and asset freezes, others have to do with debt financing of transactions. Still others target the oil and gas industry and military end uses.

The EU Council has also designated dozens of Ukrainian and Russian person as being subject to EU sanctions. These sanctions are similar to the US sanctions, but differ in other ways. EU sanctions also have asset freezes and restrictions on EU capital markets, but the trade sanctions are aimed at Russian military and oil, not the gas sector.

Russia has also been developing sanctions of their own. These include bans on the importation of certain food products, individual due to human rights violations and threats to Russian security and a ban on procurement of certain foreign goods by the Government. There are also a new national payment system that requires non-Russian payment systems to post deposits with the Central Bank of Russia.

What does this mean for my international business?

As the scope of sanctioned parties has expanded to include Russia’s business leaders, banks, energy and transportation companies, sanctions are restricting and complicating international business and finance. Uncertainties about the scope of sanctions and about sanctioning of additional persons are leading to suspension and termination of planned transactions.

Furthermore, U.S. and EU authorities have made it clear that, absent resolution of disagreements about Russia’s actions in Crimea and Eastern Ukraine, they will expand sanctions further to impede international transactions involving Russia. Russia is also expanding its sanctions which could threaten U.S business interests within the country.

Potential Additional Sanctions and Implications

New sanctions and their implications may be along the following lines:

• Expansion of the list of sanctioned government officials, military personnel and businessmen.
• Longer “blacklists” will place more weight on due diligence to explore issues such as indirect, beneficial ownership or control of assets and operations by designated persons. This is a difficult task given factors such as non-transparent offshore structures that are common among Russian businesses.
• Designation of additional Russian banks and other sanctions that block access to western banking systems. Such measures could undermine financings, particularly those for U.S. dollar denominated transactions. Already, credit card companies have recognized impediments to processing payments involving sanctioned banks, resulting in losses for the banks, cancelled transactions for cardholders and potential legal controversies.
• An arms embargo against Russia. A U.S. arms embargo would forbid not only sales of weapons systems but also most transfers to Russia of goods, services, software and information relating to defense activities.
• Prohibition on government support for financings and other transactions. Bans on support from the U.S. Export-Import Bank and Overseas Private Investment Corporation could forestall planned transactions and result in defaults and disputes in the context of transactions in process.
• Russian reprisal is also a concern. The Russian government has repeatedly stated that they will impose their own economic embargo or sanctions on the US and EU Member States and they’ve started doing so. The retaliation could be greater and could include asset forfeiture of US and EU assets held in Russia

I am not suggesting that you write off Ukraine and Russia. What I am suggesting is that any transaction that your company is potentially engaging in in Ukraine and Russia should be a CEO level decision. Chances are that they may have to answer on camera in the future or be held personally liable for it.

OFAC is the most efficient Government entity collecting fines and penalties with a collection record that would make it one the fastest growing Top 500 Corporation based upon its “revenue growth”. As a point of reference OFAC issued penalties or settlements for $91,650,055 in 2011 and as of today $1,207,067,713 for 2014. I would suggest that you don’t want to be in their sights.

If you have any questions please contact me at Global4PL – we have helped many start-ups, small businesses and some very large companies, and our customers do sleep better.

Global4PL: We are your cost, compliance, and efficiency experts.

Sergio Retamal has 22 years of executive Supply Chain and Procurement experience. He holds a Masters Degree in Change Management from Pepperdine University’s Graziadio School of Business and a Masters Degree in Business Administration in international business from California State University, Northridge. He also holds a Bachelors of Science in International Business from California State University, Northridge