Sergey Kondratenko: The Global economic sanctions – How do they affect business?

Sergey Kondratenko, an expert in the fintech industry, clarifies that these sanctions can be political or economic, directed against specific countries, enterprises or individuals.

In today's interconnected world, global economic sanctions have become a powerful tool used by countries to enforce international policies and exert pressure without resorting to armed conflict.

They are used to punish or deter acts such as human rights violations, terrorism and other violations of international law.

The number of new economic sanctions imposed in 2023 is twice the number of sanctions imposed in 2022. Understanding how these sanctions work, understanding the difference between political and economic sanctions, and their overall impact on business is critical to any international business transaction.

In this article, Sergey Kondratenko examines different types of sanctions, their mechanisms, impact on various business sectors, as well as compliance and adaptation strategies in a complex global situation.

Sanctions can be divided into two categories: political and economic.

Political sanctions. include actions such as diplomatic efforts, travel bans and severing diplomatic ties to exert pressure.

Economic sanctions. More directly relevant to business include trade barriers, tariffs, asset freezes and other financial sanctions.

Sergey Kondratenko: Basic mechanisms of global economic sanctions

Sanctions are usually imposed by other countries or international bodies through legislation or executive orders.

Compliance with sanctions is monitored by national and international regulators such as the Office of Foreign Assets Control (OFAC) in the United States, the European Commission, and the United Nations. These bodies ensure that companies and states comply with international sanctions. The customs authorities and financial institutions directly ensure the implementation of sanctions, which must adhere to the lists of legal entities and individuals subject to sanctions.

“If sanctions are violated, secondary sanctions are possible”, emphasizes Sergey Kondratenko. “These are measures that apply to third countries, companies or individuals that interact with already sanctioned states or individuals, helping them to circumvent the primary sanctions. They are aimed at expanding the scope of sanctions pressure.”

Legal entities and individuals, as well as countries under sanctions, are usually listed in the following lists:

1. OFAC Specially Designated Nationals and Blocked Persons (SDN) List - Contains individual and corporate names associated with U.S. trade restrictions.
   
   
2. Consolidated list of EU financial sanctions - includes all persons, organizations and entities that are subject to financial sanctions by the European Union.
   
   
3. The UN Consolidated List is a list of individuals and organizations that the UN has imposed sanctions on.
   
   
4. UK Sanctions list by the Office of Financial Sanctions Implementation (OFSI) - includes individuals and entities sanctioned under UK law.
   
   
5. FATF “black” and “gray” lists, which contain sanctioned countries that violate AML/CFT requirements.
   
   
6. National sanctions lists
   

These lists are regularly updated and are the main sources for tracking the status of sanctions internationally.

Removal of sanctions typically requires the sanctioned party to meet specific criteria set by the sanctioning authority, which often relates to changes in policy or behavior that led to the sanctions.

Economic impact of sanctions on business

Sanctions can isolate companies or countries from global markets, affecting supply chains and international sales. This isolation could lead to significant economic downturns in specific sectors of the economy. Global economic growth has slowed and global commodity prices, including oil and natural gas, have risen sharply, exacerbating inflation in many countries, according to International Monetary Fund (IMF) forecasts. Industries dependent on the export and import of resources have been particularly affected.

Sanctions are forcing businesses and countries to adapt to the new legal reality. This adaptation may include finding new suppliers, expanding into other markets, or even revising business models to comply with international laws, which will significantly change traditional ways of doing business.

Strategies for adapting business under conditions of restrictions (sanctions) – Sergey Kondratenko

First and foremost, in a sanctions environment, businesses must employ adaptation strategies to ensure compliance with applicable regulations and laws, select appropriate jurisdictions for operations, and conduct due diligence on customers and partners. Also, carefully choose the jurisdiction for your activities.

It is important to avoid secondary sanctions by following international AML standards and FATF recommendations, which include mandatory sanctions checks.

Sergey Kondratenko notes that according to statistics and recent trends, in 2022-2024 the main focus is on strengthening sanctions programs, which requires companies to more strictly monitor compliance with sanctions requirements.

To effectively implement the Sanctions Screening procedure, companies must take the following measures: regularly update databases; check of current sanctions lists from OFAC, EU, UN and other regulatory authorities; screening of all clients and partners - conduct a thorough check for presence on sanctions lists before starting any business relationship.

In view of modern dynamics, it is important to use automated screening systems, use modern software solutions to automate the verification process and speed up the response to changes in sanctions lists. And it is definitely necessary to monitor all the most important legislative changes. An effective tool for this is external consulting.

Sergey Kondratenko: The role of legal and financial advice under sanctions

Legal and financial advice is essential to navigating the complex and frequently changing landscape of global sanctions.

Expert consultations help businesses understand their obligations under sanctions regimes and effectively implement compliance programs.

Consulting provides businesses with the necessary tools and knowledge to comply with both primary and secondary sanctions, helping them avoid serious legal consequences and maintain operational integrity.

Legal and financial experts offer guidance on compliance, assessing risk and establishing internal controls and procedures for businesses looking to operate internationally without running afoul of sanctions.

Legal advice helps these businesses identify and mitigate risks associated with indirect infringement, ensuring the compliance and viability of their global operations.

In conclusion, Sergey Kondratenko noted that global economic sanctions present both problems and opportunities for business.

By understanding the types and mechanisms of sanctions, their economic impacts, and implementing adaptation strategies, businesses can effectively navigate this complex environment. Legal and financial advice plays a critical role in ensuring that companies not only comply with existing sanctions but also adapt to new regulatory challenges as they arise, protecting their interests and facilitating continued growth in the global marketplace.