Impact of the Latest EU Sanctions on Russian Entities and Global Financial Markets

Currently, the 13th EU package of sanctions with the aim of influencing the ongoing Russian war offensive in Ukraine is at stake.[1] The Russia-Ukraine war marked an event, which starting point had, also until now, a crucial impact on the world’s economy but also on political relationships. It began in February 2022 — but the escalation has its roots already in the early 21st century, to be specific, in the year 2014. The relationship between the neighboring countries has always been characterized by strong tension, four years ago these tensions exploded. Since this defining moment, this war has affected the entire world economy and indirectly the entire world population, with repercussions on a previously unimaginable scale. Political disagreements and fluctuations in the economy have been the subject of daily discussion ever since. In order to influence or take sides in this war, measures were taken by various parties to support the Ukraine or to achieve a containment of the ongoing Russian offensive.

In the following article, reference is made to the EU sanctions and the exact measures taken by the EU are explained in more detail, as the significance — measures taken by a supranational organization — is of the greatest relevance here. The legal and, above all, the economic effects on the financial market and the Russian entities and their background — as well as the legally available options and social effects — will be presented and explained in more detail below.

Firstly it is important to distinguish between personal and sectoral sanctions, the personal sanctions are the ones that consider the listing of people with great influence of the Russian regime. The sectoral sanctions aim at prohibiting the export of several goods to the Russian area to also weaken the economic power and furthermore reduce the overreaching power of Russia when it comes to the military power. In the following the main focus will rely on the personal sanctions, especially when it comes to the influence as already mentioned.

The financial and economic sanctions are being used to actively influence or weaken the economic situation of Russia and the numerous investors supporting this war. Russian companies and private individuals who can exert financial influence on this event should be restricted in their ability to act. Above all, the assets that are needed for their economic activity should/are already frozen to prevent access to them. Even if their influence can be limited by this, it must not be forgotten the enormous extent of these restrictions of this/these player(s) on numerous other economic sectors with regard to the entire global economy. The global financial market has undergone vehement changes and restrictions. It must not be forgotten how influential numerous/several Russian entrepreneurs and their companies are represented in the field of global transactions.[2]

With regard to the freezing of assets/stocks of shareholders in relation to Russia the following issue remains still unsolved and highly debated among scholars: Undisputedly prohibited by the freezing is the selling or transferring of the covered assets, additionally the usufruct rights, granting of liens or even sub participations.[1] Concerning some legal scholars opinion all rights arising from shares are completely frozen. This means that the shareholder cannot exercise its property rights (f.e. the right to subscription, receive dividends and interests,..), rights related to the minority as contained in the partnership agreements but also its controlling rights (right to vote, appeal, get crucial information but also the general participation rights). In contrast to that, another opinion states that, the right to participate but also to appeal and get crucial information shouldn’t be included in the freezing, since a general freezing of these rights would violate the proportionality principle since its done without a general inclusion of the certain case by case facts. Even if there’s a freezing of all shareholders rights, the basic right to appeal when it comes to violation of the principle of equality should be granted. Furthermore this contrasting opinion stresses that a denial of all rights would cause a disproportionate damage with relation to the aims of the EU regulation. Concerning another scholars opinion, with regard to the general aim of EU sanctions referring to influential natural or legal persons in relation to Russia the aim would be already fulfilled when preventing access of these persons to their economic resources.[2]

In general the following effects on the structure/processes of M&A transactions can be seen:

1. M&A transactions involving the stocks of Russian entities and also transactions concluded with parties, that show significant relations to the Russian regimes, are the target of the sanctions of the EU, since all the assets concerned are frozen, the influence of the sanctions on the M&A transactions can be of great relevance since the target company could be based in Russia or Belarus.[3] These regulations cover shares owned, held or controlled by these persons, entities and organizations. This also applies to the assets of all companies that have a connection with persons listed in Annex 1 of Regulation (EU) 269/2014. The sanctions of the EU do not only concern the assets of the natural or legal person itself, but additionally the assets of non-sanctioned companies in which a sanctioned person holds shares of a value than more of 50%. By the termination of assets also shares, bonds, derivatives, warrants, securities certificates, promissory bills and mortgage bonds as well as the income derived from interests and dividends are covered.

In order to reach a granted transaction, extensive documentation, including disclosure of transaction details, sources of financing and proof of economic necessity may be needed. As already stated, the influence of the sanctions on the M&A transactions can be of great relevance since the target company could be based in Russia or Belarus and can be for economic benefits there.

It is therefore of great relevance, related to the general detailed documentation of the transaction, to analyze the existence of several feasible connections of the parties/targets involved with the Russian regime. There may also be the need of an approval of the transaction of the Government Commission for Control over the Implementation of Foreign Investments in the Russian Federation. This approval is needed for transactions concerning shares in companies with limited liability and also for shares in public limited companies. On the other side, also in relation to these increased bureaucracy efforts, a decrease in the investments in relation to the Russian market can be seen. The unwillingness to trade inevitably has an impact on market prices or the value of the shares concerned as well as in the liquidity of the corporations — a variety of Russian entities have also been delisted from influencing exchanges, f.e. the London Stock exchange. This unwillingness may further also be the result of the general volatility of the market, linked to the uncertainty resulting due to the EU sanctions, since the covered assets/people may change daily — a breach of following the sanctions may also lead to sanctions for the parties itself. Following that, the ongoing trade on the Russian stock can nowadays be seen as rather uniform, almost no foreign investors are present.[1] Following these remarks, the theory of the hegemonic power must also be taken into mind to fully understand the feasible reactions of the global financial market. By referring to hegemonic power scholars want to stress about the leading role of certain economic powerhouses f.e. like the US. If this power is successfully exercised, investors may follow the ‘guideline’ of the US and won’t place their investments into stocks relating to Russia.

A feasible reaction could therefore be a positive association between CARs (cumulative abnormal return) and countries which participated in the imposed Russia sanctions — assuming that the hegemonic power prevails. Opposed to that, if there’s a general presumption of the failing of the hegemonic power — firms situated in participating countries will receive a decrease/disruption in their supply chain. Decreased firm values will be the consequence as well followed by decreasing stock markets prices — investors will be more willing to place their investments into countries not ‘affected’ by the failing of the hegemonic power of the sanctions, to rephrase into stock markets not located into participating countries. The relation with the CARs would therefore be reversed — negative. In general, a recent study encouraged the result of the global stock market, especially in the area of the US, of the first described scenario.

2. Additionally, one of the most substantial indirect effects of the EU sanctions can be recognized in the area of the financial sector. The ongoing sanctions on the Russian banks, with bans from the trading markets, mechanisms like the SWIFT but also the asset freeze of them had a vast impact of the international area of financing. This indirect effect can therefore be seen in countries which still used to perform trade with the Russian country/the Russian companies.

Encapsulating the former arguments, the sanctions have had an ongoing impact on all market participants, including states, companies and private individuals. This enormous direct and indirect effect is due to the spill-over effect. Even though the EU sanctions may not cover all areas of modern economic areas directly itself, the impacts they forced on these areas strongly influenced the other areas of the daily economic business.

The market players have to deal with general currency fluctuations, challenges when it comes to the ongoing supply chain but also effects like a deglobalization — since the available market has ‘shrunken’ due to the trading restrictions. The most perceptible spillover effect, when it comes to the mankind, may nevertheless be the influence on the sector of raw and industrial materials as well as the energy supply — this effect is due to the significantly high dependence of these sectors on Russian companies/suppliers. It remains to be seen whether all these effects that have occurred so far and the new trends that have emerged in terms of investment and trade will continue to develop forward or whether the previous ‘ways of trading’ will be revived. It also remains to be seen what the direct effect will be on the economic situation in Russia and on the Russian offensive in the ‘target war’.

CC: Tamara Weber