Background
Russia’s war on Ukraine has shaken the world and upended decades of peace on the European continent.[1] As part of a multilayered response to this attack on Ukraine’s sovereignty, the United States, European Union, and several other governments worldwide have applied severe sanctions targeting Russia’s economy.[2] These wide-ranging sanctions are intended to effectively cut Russia off from the U.S.-led global banking system and economy.[3] Specifically, these sanctions block Russian financial institutions such as Sberbank and VTB Bank from processing payments through the United States, constrain Russia’s access to foreign technology and commodities, and prohibit Americans from conducting business with the vast majority of Russian financial institutions.[4] Furthermore, these unprecedented sanctions ban Americans from dealing in new equity and debt in several of Russia’s biggest companies in the energy, shipping, and financial sectors,[5] effectively stopping Americans from purchasing Russian corporate bonds and investing in Russian stocks.
The biggest and possibly most consequential sanctions imposed, however, are those removing Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the entity which enables banks to securely interact with other banks around the world.[6] This step targets the ten largest Russian banks, collectively holding roughly 80% of all Russian banking assets.[7] By taking Russia out of SWIFT, the United States and its allies are ensuring that Russian banks cannot facilitate payments for imports and exports, and cannot execute any financial transactions that their Russian clients attempt to make with foreigners.[8] Russians have reacted to these dramatic steps accordingly, with widespread bank-runs, creating the biggest upheaval in the Russian economy since Russia defaulted on its foreign debt in 1998.[9]
What This Means for the U.S. Economy
In response to the war and the earth-shaking sanctions that ensued, U.S. markets have been highly volatile.[10]Some of the most startling impacts have been in the energy sector, with oil prices rising above $100 per barrel for the first time since 2014, in the wake of a previous Russian invasion of Ukraine.[11] Because Europe is so reliant on Russian energy, however, the sanctions in this sector have not been as all-encompassing as those targeting financial institutions.[12] Many experts expect a massive ripple-effect, making travel and shipping far more expensive, and exacerbating the strain on the already beleaguered international supply-chain.[13] All this turmoil comes at a time of heightened inflation, making any steps the Federal Reserve may take to mitigate the negative effects of sanctions within the United States particularly precarious.[14]
Beyond market-wide consequences in the U.S. economy, multinational corporations that do business in Russia face difficult decisions and high-stakes regulatory compliance issues.[15] For example, U.S. corporations with employees in Russia will be hard-pressed to pay them due to the SWIFT sanctions, and may be placed in the difficult position of having to institute mass layoffs and asset abandonment.[16] Those companies also may be faced with the unenviable decision of whether to comply with U.S. or Russian law, which may place their managers on the ground in Russia in legal jeopardy.[17] Notably, large European and American corporations such as Ikea and TJX (owner of T.J. Maxx and Marshalls) have abruptly left the Russian Market in part to avoid violating sanctions.[18]
Conclusion
The Russian war in Ukraine began only a few weeks ago, so the economic state of play surrounding sanctions is rapidly evolving. As the United States and its allies continue to punish Russia through economic means, U.S. businesses will need to remain fleet-footed to avoid running into the law. Furthermore, both the Federal government of the United States and business leaders must continue navigating an increasingly difficult landscape to keep the American economy healthy and safe during this tumultuous period.
[1] See Zoya Sheftalovich, Battles Flare Across Ukraine After Putin Declares War, Politico (Feb. 24, 2022), https://www.politico.eu/article/putin-announces-special-military-operation-in-ukraine/.
[2] See Press Release, U.S. Dep’t of the Treasury, U.S. Treasury Announces Unprecedented & Expansive Sanctions Against Russia, Imposing Swift and Severe Economic Costs (Feb. 24, 2022), https://home.treasury.gov/news/press-releases/jy0608.
[3] Id.
[4] Orga Cadet et al., U.S. and Foreign Companies Now Subject to Expansive U.S. License Requirements for Business with Russia, BakerHostetler (Feb. 28, 2022), https://www.jdsupra.com/legalnews/us-and-foreign-companies-now-subject-to-2389655/.
[5] See Michael T. Gershberg & Gregory Bernstein, U.S. Imposes Additional Sanctions and Export Controls on Russia in Response to Russia’s Invasion of Ukraine, Fried Frank Int’l Trade & Inv. Alert (Feb. 28, 2022), https://www.friedfrank.com/siteFiles/Publications/FFITISecondTrancheofRussiaSanctions02282022.pdf.
[6] See Amanda Macias, E.U., U.K., Canada, U.S. Pledge to Remove Selected Russian Banks from Interbank Messaging System SWIFT, CNBC (Feb. 26, 2022), https://www.cnbc.com/2022/02/26/eu-uk-canada-us-pledge-to-remove-selected-russian-banks-from-swift.html.
[7] Id.
[8] See Alessandro Rebucci, SWIFT Sanction on Russia: How it Works and Likely Impacts, Econofact (Mar. 4, 2022), https://econofact.org/swift-sanction-on-russia-how-it-works-and-likely-impacts.
[9] Id.
[10] See Jeff Sommer, Talking War and Market Volatility with a Giant of Economics, N.Y. Times (Mar. 3, 2022), https://www.nytimes.com/2022/03/03/business/ukraine-putin-markets.html.
[11] Ashutosh Pandey, Oil Breaches $100, Gold Soars as Russia Attacks Ukraine, Deutsche Welle (Feb. 24, 2022), https://www.dw.com/en/oil-breaches-100-gold-soars-as-russia-attacks-ukraine/a-60897707.
[12] See Patricia Cohen, Within Days, Russia’s War on Ukraine Squeezes the Global Economy, N.Y. Times (Mar. 1, 2022), https://www.nytimes.com/2022/03/01/business/economy/russia-ukraine-sanctions-economy.html.
[13] Id.
[14] Id.
[15] See Lavanga Wijekoon et al., The Ukraine Conflict & Related Sanctions: What is the Impact on Global Workforces?, Littler (Mar. 1, 2022), https://www.littler.com/publication-press/publication/ukraine-conflict-related-sanctions-what-impact-global-workforces.
[16] Id.
[17] Id.
[18] Sapna Maheshwari, Ikea and the Owner of T.J. Maxx are the Latest Retailers to Halt Russia Operations, N.Y. Times (Mar. 3, 2022), https://www.nytimes.com/live/2022/03/03/business/stocks-economy-inflation-ukraine.
