The desire to end contractual arrangements quickly, sometimes at significant penalty costs, is likely to reflect three factors: investor, customer, and employee pressure; a moral imperative to act in light of recent events; and a view that further sanctions should be pre-empted.
These are just a few of the considerations. Borrowers who deal with Russian entities should also consider a fourth point: Could we risk breaking our loan documentation, even if the Russian counterpart or activity has not been sanctioned yet?
Sometimes, loan documents have more restrictive sanctions provisions than those issued by the government. This is because financial transactions can be used to launder money and are often trans-border.
Banks and financial institutions must ensure that they comply with all regulatory requirements in every jurisdiction. This requirement will be passed on to borrowers as well as customers.
Extra-territorial Reach
A large number of loan agreements define prohibited transactions by referring to sanctions authorities in different jurisdictions. This means that the borrower agrees not to transact with any person sanctioned by other governments or lenders.
Consequently, borrowers must be aware of the fact that sanctions provisions in loan agreements can be driven by fast-moving western countries, which may not necessarily mean that the sanctions regime that is applicable to them at that time is.
A UK borrower could violate its loan documentation by trading in an entity sanctioned under the EU, but not the UK government.
Transactions with sanctioned entities
A borrower’s loan agreement may prohibit any transactions with a person on a sanctioned persons list. However, the legal situation can be more complicated than that. While entities can be placed on the sanctions list of a country, this does not necessarily mean that all transactions with them are prohibited.
Borrowers might find that they are still in violation of their loan agreements if they execute a specific transaction, especially if the situation changes daily.
For example, it was possible for US entities until 8 March to purchase oil and natural gas from Russian energy giant Gazprom. However, Gazprom was on a list of sanctions that prohibited the sale or investment in Gazprom.
However, this perfectly legal transaction involving oil & gas could have been deemed a breach under certain loan agreements, as Gazprom was listed on a sanctions list for certain other transactions.
In order to decide whether to proceed with a high risk transaction or continue with a high risk relationship, borrowers must look at their contracts with banks.