By Mike Josypenko – IOE Director of Special Projects and Anthony Griffiths M.I.Ex, IOTL, Partner at Strong & Herd LLP
EU economic sanctions against Russia, following the downing of Malaysia Airlines flight MH17 in eastern Ukraine, are a major cause of concern for British companies.
This latest round of penalties, believed to be the worst between the West and Moscow since the Cold War, are targeting the country’s oil industry, defence, dual-use goods and sensitive technologies.
In retaliation, President Putin has this week imposed a ‘full embargo’ on fruit, vegetables, meat, fish, milk and dairy imports from the EU, US and other countries such as Canada, Norway, Australia and Japan – who have imposed sanctions against him.
Below are some critical questions being asked by UK companies who currently trade with – or who are seeking to trade – with Russia.
What is Russia’s historic trading relationship with the UK and Europe?
The UK has historically been one of Russia’s leading foreign trade and investment partners and hundreds of British companies operate in the Russian market. According to the European Commission, EU food exports to Russia in 2013 were worth £11.8bn / €9bn.
What are the main concerns surrounding the sanctions?
British businesses are unclear about the ‘wooliness’ of the regulations, how they impact on sectors such as oil, gas defence – and whether they can apply for a licence.
An important factor seems to be the volatility and speed of the changing events – for example, what is permissible today, may not be allowed next week, which is a particular problem for manufacturers who have to produce goods with a lead time between receipt of order and shipment.
If goods are produced to client-specific requirements or specifications, this can add a further complication as they may be unable to sell the goods elsewhere if sudden changes in measures prevent them from completing the sale to their original Russian buyer.
What impact will US sanctions have on British exports?
The US is potentially a complicating factor, as sanctions which it imposes may also apply to non US companies with an involvement with the USA. It is also worth bearing in mind that companies selling to private Russian buyers are often asked to deliver goods to destinations in mainland Europe, from where they are uplifted by buyers. This can mean that goods may be beyond the reach or control of the shipper in the event of any sudden escalation in sanctions – placing companies at risk of non-compliance.
What impact would Russian retaliatory measures against EU sanctions have?
The Russian Prime Minister, Dmitry Medvedev, has announced that the retaliatory measures against sanctions, including the food bans he announced this week, will remain in place for a year. This will undoubtedly hit EU exporters hard, because Russia is the EU’s second-biggest food export market after the US.
Similarly, Russia’s threat of a ban on airlines overflying Russian airspace would raise the operating costs for airlines serving routes from Europe to Asia and elsewhere.
In the short term, the industries which are more likely to be subject to government control are the strategic, infrastructure and large volume value companies, irrespective of size.
Companies selling into other sectors, particularly to private buyers such as consumer goods, may be less severely impacted in the immediate short term, as long as Russian consumer demand is unaffected; however such sectors may be prone to Russian retaliatory measures restricting the importation process.
Ultimately the biggest effects of Russian sanctions could be on Russia itself. With a reliance on imported food, even the country’s central bank has warned that this will push up the country’s already high inflation rate and increase food prices as well as place pressure on its economy.
The situation in Russia continues to evolve rapidly and the information supplied is current of being posted.
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