The ripple effects of sanctions

Having been accused of getting off to a slow start in relation to the imposition of sanctions arising out of developments in Russia and Ukraine, the UK Government appears to be generating something of a head of steam and has in recent days sanctioned 7 Oligarchs and 386 members of the Russian Duma. Indeed the unprecedented pace of sanctions from across the globe has created a major issue for many businesses, and the intended and unintended consequences of those sanctions will only become apparent in the days, weeks and months ahead.

The UK sanctions against Roman Abramovich, the owner of Chelsea Football Club, have generated significant press coverage, because of his association with Chelsea Football Club (details of the sanctions can be found here).[1]  That coverage is a good illustration of one of the downsides of sanctions, viz that they can be a very blunt instrument, and can damage all sorts of legitimate business, that has no direct connection at all with events in Russia and Ukraine.  That coverage has also illustrated a noticeable change in mood amongst businesses, some of whom are now terminating arrangements because of the perceived reputational taint in being associated with sanctioned businesses or individuals, even though the sanctions themselves do not prohibit the underlying transaction.  That raises some tricky issues around contractual interpretation and the respective rights of the parties.

The UK Government has granted Chelsea a licence that allows it to continue to operate in limited circumstances, this includes paying its players and staff. The club can also receive payments in respect of prior player loan and sale arrangements, broadcasting fees and prize money - however, these funds must immediately be frozen. The club cannot, however, sell any more merchandise or tickets - only those with season tickets or that had previously purchased tickets can attend matches.

The initial licence was very rapidly amended following a request from Chelsea. It has, also, been reported that the Government may be willing to (i) grant further amendments to licence in the future, such an increase in the cap on travel costs for away matches if Chelsea progress in the Champions League and (ii) a second licence to allow the club to be sold if a suitable buyer is identified.

The UK Government’s willingness to engage on amendments to the licence and implement changes so rapidly is interesting and highly unusual. Our experience is that once sanctions are imposed, it is extremely difficult and time consuming to obtain appropriate licences to carry out particular business and/or to have licences amended-time frames are usually measured in months not weeks or days. If you are not an internationally renown entity of cultural significance, like Chelsea, you can expect the process of obtaining a licence (or amending an existing licence) to be a lot slower and more difficult.

Despite the amendments to the licence, the limitations imposed on Chelsea remain severe and there are inevitably going to be sizable impacts on other businesses. Any business with financial dealings with Chelsea may be impacted in some form. Some of these effects have already been reported - for example, Three, Chelsea’s kit sponsor, has suspended its sponsorship. However, some of these impacts are less immediately apparent. For example, the licence expressly prohibits Chelsea from engaging in any new capital works or refurbishment of its buildings (however it can continue with ongoing capital works contractually agreed prior to 10 March 2022). Any contracts that Chelsea had in place for future renovation works at Stamford Bridge, Kingsmeadow or its Cobham training facility may be impacted.  Companies that Chelsea had contracted with, and subcontractors, may likewise be affected.

The Chelsea example, illustrates that the ripple effects of these sanctions will be significant and felt far and wide. The impacts are likely to be unexpected and not immediately foreseeable – particularly given the urgency with which these sanctions have been imposed. A significant number of businesses will notice the impact of these sanctions in some way - planned operations will be disrupted, financing for projects will be jeopardised and contractual chains will fail.

Crisis in Ukraine