Sanctions Against Russia: What Investors Must Know

The current Russia-Ukraine conflict has sent ripples throughout the global economy. With the U.S. and other Western countries imposing expansive sanctions against Russia, companies are on high alert to ensure that they are in full compliance with the recent announcement made by the U.S. and European governments. This has major repercussions on current and future investment opportunities, both for asset managers and asset owners. With these directives coming into effect, it is all the more important for these businesses to protect themselves and their high-stake ventures.
By Tali Bartkunsky
March 15, 2022

Updated May 2, 2022

What are the new sanctions against Russia?

There are considerable actions that are being put into place to preclude financial activity with Russia and Belarus, with several countries recently expanding their sanctions in response to the ongoing war in Ukraine.

On April 20, the U.S. levied an additional round of sanctions on Russia, specifically targeting “Russian commercial bank Transkapitalbank and a global network of more than 40 individuals and entities led by U.S.-designated Russian oligarch Konstantin Malofeyev, including organizations whose primary mission is to facilitate sanctions evasion for Russian entities.” In addition, the Treasury Department is going after companies involved with the virtual currency mining industry in Russia, marking the first time the U.S. is targeting a cryptocurrency company.

Meanwhile, the E.U. is working on a new proposal for its sixth sanctions package that could include a phased-out ban on oil imports from Russia. This comes after European diplomats banned coal from Russia, which will be phased out over four months, as well as blocked Russian vessels from E.U. ports, trucks from Russia and Belarus from E.U. roads, and halted the import of seafood, cement, wood and liquor, and the export to Russia of quantum computers and advanced semiconductors on April 8.

As reported by the NY Times, in a slew of new sanctions issued on April 21 and April 25, the U.K. targeted Russian military personnel and other entities supporting Russian operations in Ukraine, including lieutenant colonel Azatbek Omurbekov. The British government has also expanded its import tariffs for certain products and banned certain Russian imports like silver and wood and exports of some products and technology to Russia.

On April 22, Australia unveiled new sanctions against 144 Russian senators, two of President Putin’s daughters and Sergey Lavrov’s, Russia’s foreign minister, daughter.

A few days earlier on April 19, Canada extended its list of targeted Russian individuals to include two of Putin’s daughters.

Japan also continued to put more pressure on Russia by freezing the assets of 398 Russian individuals, including two of Putin’s daughters, as well as 28 organizations on April 12.


The effect on the alternative investments industry

Both fund managers and allocators are considerably affected by the new sanctions—namely, by ensuring that their deals are currently viable according to OFAC’s recent actions.

Managers of private equity funds and venture capital subject to U.S. jurisdiction could face exorbitant monetary fines, and even time in prison, if they fail to abide by the new sanctions. Given the strict enforcement of these penalties, many companies have invested heavily in time and resources to reshuffle accounts, reinvest funds, and restrategize their operations to comply with the latest restrictions.

Private organizations are going beyond the letter of the law, with banks and corporations increasingly engaging in “self-sanctioning” and withdrawing business from Russia to avoid both issues with regulators and public disapproval.

These effects are not only felt by asset managers, but by asset owners as well.

For example, New York State Comptroller Thomas DiNapoli has completely barred new investments in Russian companies. He’s even having the $279.7 billion New York State Common Retirement Fund’s investments reassessed for additional restrictions or divestment.

By the same token, the Church of England is said to be planning on selling its stakes in Russian holdings, over £20m worth of investments. Likewise, Norway’s NOK11.6trn (£976bn) sovereign wealth fund will pull the plug on all of their stakes in Russian entities in response to the current events in Ukraine.

This strong reaction to the new regulations is a sentiment shared by numerous organizations. Evidently, these drastic measures are reflective of lengths people will go to in order to mitigate the looming financial risk. According to a list compiled by the Yale School of Management, more than 750 companies have already withdrawn from Russia. This list is regularly updated as organizations continue to reduce their operations in Russia.

With the expectation that even harsher sanctions are on the horizon, investors have to keep a close eye on their business ventures and be prepared to adapt accordingly.


Consequences and penalties are serious

According to Jordan Silber from TheFundLawyer, violations of sanctions regimes in the U.S. “are enforced on a ‘strict liability’ basis—meaning if you have sanctioned persons or entities in your limited partner base (directly or indirectly with reference to the above 50% standard) you are in violation—there is no ‘intent’ element. Further, failure to timely identify sanctions issues may lead to a continuing series of violations. OFAC, for its part, treats violations as a serious threat to national security and foreign relations. As a result, offenders face very significant monetary fines. In addition, criminal penalties, including prison time, can be pursued for willful (i.e., knowing and intentional) violations.”


Protective measures for fund managers

Given the reputational damage and financial liability that could ensue from conducting business with non-compliant organizations, it is critical to ensure that protective measures against undue or unintentional transgressions are well established.

As a result of the stiff penalties imposed on transgressors, deep background research and intelligence, both on companies and individuals, is becoming a must-have. A crucial component of evaluating current investments or investigating new investment opportunities is vetting businesses and their management teams. As firms are now particularly attentive to ties with Russian financial institutions, thorough screening procedures are essential to provide organizations with actionable data.

The following questions should be addressed by fund managers in relation to concerns regarding Russian and Belarus sanctions exposure:

1. Are any limited partners located in Russia, Belarus or any Russian-occupied territories in Ukraine?

2. Is any business currently being conducted or negotiated with entities found on the various sanctions lists such as OFAC, HMT, EU, UN, AUSTRAC?

3. Is there a possibility that any sanctioned parties may indirectly hold interests in my direct limited partners?

Intelligo’s background checks include a comprehensive regulatory review that covers international sanction lists, watchlists, PEP lists, enforcement actions, blacklists, and other similarly related indices, both for individuals and companies.

This valuable data is exceptionally relevant now more than ever as reliable, accurate, and comprehensive background checks are fundamental in identifying potential red flags. The risk of investing with anyone who is in violation of the new sanctions is simply too high to jeopardize.


Intelligo safeguards your investments

Given that the forthcoming regulations have already prompted proactive responses, Intelligo recognizes the urgency of updating our systems to include the new sanctions against Russia.

Intelligo has a responsibility to customers to support them in their pursuit of mitigating investment risk. As noted by Idan Gera, Chief Product Officer at Intelligo, given the widespread impact of these sanctions, the Intelligo team is working diligently on keeping watchlists, data sources and regulatory information current and in line with updates from various institutions and agencies:

“We are taking every step to ensure our customers are exposed to the most updated sanctions information and watchlists data to keep them protected in such periods of uncertainty.”

As circumstances are anticipated to deteriorate, our Live Monitoring tool is also being adjusted to ensure that real-time alerts include dynamic adverse activity relating to the new sanctions.


Stay (financially) safe

The new international sanctions have businesses on edge. Any exposure to Russia-related investments is being subject to sharp scrutiny and, in some cases, abandoned altogether.

While background checks have always been a vital step in the pre-investment due diligence process, they are all the more essential now that the situation has escalated.
Alternative investment firms are going to great lengths to not only protect their investments but to uphold their reputation in the financial industry.

Violating the new sanctions is a transgression that no one wants to be liable for. By adhering to best practice recommendations and conducting thorough screening procedures, companies can stay financially safe in these unpredictable times.

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