How can the Ukraine-Russia conflict affect trade and investment relations?

What to do in case of the potential impact that the Ukraine-Russia conflict may have on trade and investment relations? Advice and thoughts.

How can the Ukraine-Russia conflict affect trade and investment relations?
February 24, 2022

The conflict between Russia and Ukraine causes many uncertainties.

International law recognizes the sovereign equality of States, the prohibition of the threat or use of armed force and the obligation to settle disputes peacefully. Facing a Russian armed intervention, Ukraine must decide how to maintain its territorial integrity, which would involve invoking the inherent right of self-defense which can be exercised individually or collectively. All this is recognized by the Charter of the United Nations, the legal framework in which the issue must be settled by all the actors involved.

Undoubtedly, any military conflict between the two States also has serious implications for the relations between individuals and the States concerned as well as their nationals. Therefore, any legal operator with interests in the affected area must already consider its impact on its trade relations and investments, both in view of the development of the conflict and the reactions of third States and the European Union.

First, there is an obvious dimension that concerns the physical security of personnel and facilities (in case of investments in the territory concerned). In such a scenario, the operator should implement evacuation protocols following the recommendations of the competent authorities, who have been requesting the immediate departure from the area, as well as asset preservation to the extent possible.

Secondly, there is also an obvious impact on legal certainty in the sense of whether it is possible to keep operations as they have been or not. Depending on the market to which it relates, the operator should consider at least the following scenarios:

On the one hand, from Ukraine’s point of view, if its territory is occupied and communications are interrupted or it becomes difficult or impossible to maintain regular economic activity, the operator doing business there should analyze whether the situation justifies a temporal cease on the fulfillment of legal or contractual obligations, whether its own or those of its counterparties, due to the occurrence of a factual event that qualifies as force majeure, recognized as such either in the contract or in the law applicable to the legal relationship in question. Without trying to exhaust all possibilities, we could imagine cases such as these:

  • the Ukrainian State, its agencies and public enterprises could cease payments to their suppliers of goods and services
  • local producers might find that they are unable to continue production due to their facilities being requisitioned for military use or due to the evacuation or enlistment of workers
  • exporters and importers may feel that they cannot guarantee the departure or arrival of their goods and services from or to Ukraine as a result of the suspension of flights, maritime or land connections
  • in the framework of structured finance schemes, a financial entity may consider the invocation of a material adverse change (MAC) clause instead of the general regime of force majeure

In the same vein, if a temporary or permanent occupation of its investments in the territory of Ukraine were to occur, the operator may initiate a claim (normally by arbitration) under an investment protection treaty, which protect against expropriation, damages arising from armed conflict and, in general, any state treatment that is not considered fair or equitable. A very relevant question is to determine against which State the claim is filed: in this sense, there are precedents of claims against Russia following the annexation of the Crimean Peninsula in 2014 by investors who invested when it was still de facto Ukrainian territory and who saw their investments affected by the new Russian authorities.

On the other hand, from Russia’s point of view, some States on their own behalf as well as the EU in an organized way have started to impose trade sanctions against that State, its political leaders and its companies, and it is likely that more sanctions will be approved. In such circumstances, legal operators with interests in or relations with Russia must remain watchful of the regulations that are adopted in order to check that their activity does not become unlawful, even if they understand that such activity has no connection with the conflict in Ukraine. For example, it will be necessary to analyze their impact on structured finance schemes in which parties include representations and obligations on this matter. Furthermore, it is likely that these regulations will change rapidly in view of the development of this crisis.

In conclusion, the facts already merit a calm analysis of the risks faced by any operator on the Russian and Ukrainian markets. It is necessary to examine the literal wording of the contracts and the applicable laws in order to anticipate whether the counterparty could justify the breach of its obligations on the grounds of force majeure. On the other hand, it will be necessary to examine and carefully follow the sanctions that may be imposed by the international community in order to properly comply with them.

February 24, 2022