Ukraine War and International Economic Sanctions

Nearly all western countries have imposed major economic sanctions on Russia in response to its invasion of Ukraine, as well as on citizens and companies operating in Russia. The purpose of imposing sanctions is to significantly hinder Russian economic activities. But while the media and commentators focus on the effectiveness of the sanctions in terms of the war waging in Ukraine, it is important to keep in mind that these sanctions could also have direct and indirect repercussions on many Israeli companies, including on those that, at first glance, do not appear to have any connection to the situation.

In this concise overview, we provide a general description of the relevant international regime of sanctions and the possible repercussions on Israeli companies and individuals. We note that the international regime of sanctions against Russia is changing rapidly, sometimes even from day to day, and therefore this overview is merely general and the data presented may change within the coming days.

Sanctions Imposed on Russia

The sanctions imposed on Russia in relation to the war in Ukraine include:

• Restrictions imposed on specific people – These include restrictions on international travel, imposed on several regime leaders, including Russia’s President Putin himself and various Russian oligarchs; a ban on the execution of transactions with them or with companies they own; and a freeze on their assets.
• Restrictions on international money transfers – These include a ban on the execution of transactions through numerous Russian banks; the blocking of money transfers via the international SWIFT system from particular Russian banks, such as VTB Bank, the second largest bank in Russia; and the denial of access for financial institutions in Russia to their financial assets in western banks.
• Restrictions on trade with Russia and with particular regions in Russia and on movement – These include a ban on the sale of advanced technologies to particular companies (such as to companies engaging in weapons development); a ban on flights via Russian airlines; and a near total ban on trade with Crimea and the separatist regions in Ukraine (regions that are constantly changing in size according to the fighting).

The sanctions were imposed mainly by the United States and the European Union, but also by nearly every western country to varying degrees. Although one can see a trend toward uniformity among the sanctions over time, they do not fully correspond. For example, the UK was the first to impose sanctions on a particular oligarch, followed by the European Union, but the United States has not yet followed suit.

The United States’ sanctions regime is particularly stringent and its economic control over international financial affairs enables it to effectively block transactions attempting to violate its sanctions regime. The United States’ uncompromising enforcement system is also causing many corporations to be unwilling to take any risk of violating the American sanctions or to engage in transactions with companies violating the sanctions.

The private market is also taking quick action, even compared to the surprisingly swift cooperation among western countries. Commercial companies are expanding the sanctions beyond those declared by countries. For example, major oil companies, fashion companies, and, recently, even McDonald’s (whose opening of branches in Russia heralded the end of the Cold War) have announced they are halting their operations in Russia even though they are under no obligation to do so.

Repercussions for Israeli Companies

To date, the State of Israel has not imposed formal sanctions on activities with Russia in the context of the war in Ukraine.

However, Israeli companies face exposure to business and legal risks relative to the international regime of economic sanctions, even without Israel expressly adopting the sanctions.

The American sanctions regime includes the imposition of substantial fines on sanction violations, even if the violation was committed solely due to negligence. A deliberate violation of the sanctions could also result in criminal penalties. The American sanctions apply to every US citizen, registered company, or company operating in the United States, and to any transaction that also contains American-made products (such as a software product based on American software). Historically, the US have also contended that the mere fact a transaction is executed in US dollars makes it subject to the American sanctions regime.

Furthermore, in recent years the United States created a regime of “secondary sanctions” that also bans trade with companies that violate sanctions, even if they have no affiliation with the United States. In other words, an Israeli company that violates the sanctions, especially if it assists US companies to evade the sanctions, could be added to an American “blacklist” that will prevent it from doing any business with American companies.

Other implications of the sanctions regime for Israeli companies include an “indirect” adoption of the sanctions by Israeli government authorities. For example, as a precondition to granting authorization for defense exports, Israel’s Defense Export Controls Agency requires an applicant company to declare that the requested export does not violate American sanctions or those imposed by the United Nations.

Finally, many American companies will refrain from investing in or doing business with companies suspected of having violated the sanctions. Some investment contracts with American investors even contain specific clauses banning any activity in violation of the sanctions.

Needed Actions

The risk zone: Israeli companies in the “risk zone” include the following:

• Companies with business activity in Russia, Belarus, or Ukraine, including customers, suppliers, subcontractors, employees, or users of services.
• Companies with Russian shareholders or investors or that are under Russian ownership.
• Companies that render payments to or receive payments from Russian financial institutions.

Applicability of the sanctions: Israeli companies located in the “risk zone” should ascertain whether they are subject to the sanctions as companies registered in the United States or in the European Union, whether their operations involve the use of American technology, etc.

Israeli companies that are in the “risk zone” and subject to the sanctions must take action to adopt a sanctions compliance plan.

We believe it is likely Israel will also adopt at least some of the sanctions in the foreseeable future, and we recommend monitoring developments in this regard.

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