The Impact of Russian Sanctions on Multi-National Brands
By: Marc Reiner and Douglas Hand
With the outbreak of hostilities in Ukraine, and the resulting international sanctions on Russia, many brands have ceased doing business in Russia at least temporarily. For example, Chanel, Prada, LVMH, and Kering have all suspended business operations in Russia, including closing boutique stores and ceasing shipments into the country.
Although these actions are likely motivated at least in part by solidarity with the Ukrainian people, they are also a practical response to the current circumstances. Shipping companies are currently not shipping to Russia, making order fulfillments nearly impossible, and credit card and other financial systems are shut down, making payment highly difficult. In addition, brands have been monitoring the rapid descent in value of the ruble and are concerned there will be a run on their products, leaving the brands with comparatively worthless currency. In light of all of these factors, suspension of operations in Russia is a logical conclusion.
Companies with assets in Russia face a critical risk because of Russian countersanctions laws, which were recently enacted in response to the international sanctions imposed on the Russian economy. These laws create the risk of direct expropriation by the Russian government and the threat of litigation in Russia by Russian contractual counterparties.
Russia is generally seen as an unfavorable forum for non-Russian parties to pursue their rights, especially for parties that are seeking to comply with sanctions. One way to address the risk of adverse foreign law is to have choice of law, forum selection, and arbitration clauses to avoid Russian law and Russian courts. But in 2020, Russia adopted countersanctions legislation that include provisions that would invalidate forum selection and arbitration provisions in disputes involving Russians and their affiliates. These laws also authorize the issuance of injunctions in Russian courts that might expose parties to fines or imprisonment for pursuing dispute resolution in a contractually agreed upon forum.
If a company may be subject to a countersanction lawsuit, one strategy is to go on the offensive and seek a declaratory judgment that the relevant Russian contract has been terminated. Though such an action would be unlikely to prevent a counter-suit in Russia, it can provide for injunctions against the Russian counterparty. To the extent that the Russian party has assets in Western countries or has executives that wish to travel there, the threat of fines or imprisonment for contempt may be a significant deterrent to a countersanctions lawsuit in Russia. This step is obviously a significant and potentially costly one, but the failure to act can be devastating when significant assets are at risk in Russia.
Another potential issue arising out of the current conflict is that Russia may launch a digital assault against American infrastructure. Indeed, the New York Times reported that the Biden administration recently observed “preparatory activity” for potential hacking of American infrastructure, and had shared that information with companies in a classified briefing last week. While fashion brands are not the type of critical infrastructure (think energy companies and hospital systems) typically targeted in such a digital attack, the disruption of retail operations, theft of personal information fashion brands and retailers possess as well as the general interruption of day to day life, could well be Russian goals. As such, retail brands are well advised not only to bolster their own IT systems data protection, but also to review their privacy policies and website terms and conditions to ensure they are not making promises of data protection that their own IT systems cannot meet.
If you need assistance or guidance in addressing the impact of Russian sanctions on your business, please feel free to reach out to Douglas Hand (firstname.lastname@example.org) or Marc Reiner (email@example.com) at HBA.