July 8, 2022
By: Tom Firestone
External Authors: Ilene Jaroslaw, Dennis Kwok
The Russian invasion of Ukraine continues to rage and despite countries from all over the world decrying Russia’s attack, China is not condemning the war. The recent proclamation that the friendship between Russia and China has no limits has the world on edge, watching how the alignment of Russian President Vladimir Putin and his Chinese counterpart Xi Jinping will affect global economies. This begs a more immediate question, what can American businesses with operations and supply chains in Russia and China do today?
In a recent webinar, Thomas Firestone of Stroock joined Dennis Kwok and Ilene Jaroslaw of Elliott Kwok Levine & Jaroslaw for a compelling discussion about the shifting economies of Russia and China as it relates to the risks for international companies. We share some highlights from their conversation:
Q: Since Russia’s unprovoked attack on Ukraine, sanctions are coming from around the globe. How effective are sanctions in changing Russian behavior?
A: The scope of sanctions on Russia is unprecedented and so far we do not see a dramatically effective outcome. This begs the perennial question about the effectiveness of sanctions. Looking back at 60 years of Cuban sanctions and 40 years of Iranian sanctions, we could draw the conclusion that they simply don’t affect change.But in today’s scenario, the sanctions may simply need more time to work since, as of today, Russian companies have inventory reserves, the Russian Central Bank has managed the value of the ruble and Russia continues to sell energy to Europe, China and India, among others, minimizing the immediate effects. It’s unlikely sanctions alone will drive the Russian military out of Ukraine, but they could lead to important changes in the ultimate outcome of the war. Only time will tell, but we do see one important change so far. The sanctions forced many international companies to rethink their position in the Russian marketplace. And these companies are making the decision to remove operations in Russia. Over time, this could have an effect, especially because Russia is dependent on foreign imports for most technology and spare parts. In the larger picture, perhaps it’s time to reframe the thinking behind sanctions to align with more reasonable expectations. Are we asking too much of sanctions? The expectation that sanctions can bring down a regime is likely unrealistic. However, we can reasonably expect sanctions to be the push parties need to come to the bargaining table.
Q: Are Russian countersanctions changing how U.S. businesses are making today’s decisions?
A: Absolutely. U.S. businesses worry about legal liability if they violate international sanctions as well as liability under Russian law for violating Russian countersanctions. There is tremendous uncertainty surrounding both threats and U.S. companies must factor the costs and risks into the calculus of conducting operations in Russia.
Q: Does the imposition of sanctions against Russia affect China in their own territorial aspirations? And what are the Russians telling the Chinese?
A: China and Russia are important allies who jointly proclaim their enduring friendship has no limits. We may never know if Vladimir Putin informed Xi Jinping of the intention to invade Ukraine, but we surmise it is a serious, personal affront if he did not. Officially, China does not publicly support the Ukrainian invasion, but they certainly do not condemn it and have not provided support to the Ukrainian resistance in any way. We are also sure that China is carefully watching the western reaction to the Russian invasion of Ukraine. The Chinese will surely apply important knowledge gained to their own territorial goals to the holy grail to reunify Taiwan to mainland China.
Q: Are international businesses still able to operate in any capacity in Russia? If so, what other obstacles do they face?
A: Businesses can still operate in Russia, but it’s extremely difficult. The sanctions don’t cover all economic areas and there are licenses from OFAC, yet there is tremendous uncertainty and things change daily. There are obstacles among the many layers surrounding payments, supply chains, and the highly complicated delivery of goods and services. Specifically for American businesses, the U.S. government has sent a clear message about doing business in Russia, which also contributes to the reputational risks.
Q: But what about doing business in China? Are the anti-sanction laws and PRC Data security laws affecting how U.S. companies do business in China?
A: There is no denying that China is a highly important market for international companies. Our global economies are deeply interconnected, and it is likely too hard for international businesses to pull out of China in the same fashion in which they cut dealings in Russia. However, it is becoming more difficult to do business between the United States and China while also complying with the increasingly incompatible laws of both countries. For instance, the PRC Anti-Foreign Sanctions Law presents a quandary. If companies comply with U.S. law, they are breaking Chinese law, and vice versa. The infractions result in heavy fines and even criminal liability for complying with U.S. sanctions within China’s borders. There are also issues with rising Chinese nationalism, securing intellectual property, data security, VPN use, and allegations of human rights violations. Not to mention the increasing importance to understand the politics behind the laws and navigate very carefully. All these issues carve an arduous path for international companies trying to operate in China.
Q: Given the current scenarios with Russia and China, are we on the road to deglobalization?
A: It is safe to say we are heading towards deglobalization, and companies should plan for alternative paths to conducting business. We already see large companies outlining options outside of China. For example, Apple is identifying alternative supply chains in other Asian countries because of the great uncertainty and high risk inherent in their current Chinese supply chains. There is also evidence that the data security laws, and other geopolitical risks, present a case for deglobalization.Yet at the same time, western companies, particularly in the financial industry, are doubling down on investments in China because they see the Chinese financial systems opening to western firms. At the end of the day, it truly depends on the unique risk factors and tolerance for the conditions surrounding each business.
Q: What are the ESG considerations in deciding to go into China?
A: Regulators seem to be taking ESG more seriously lately, particularly for the environmental component of ESG. The sustainability and human rights components are not currently monitored as closely, but we predict this will change. There is increasing pressure to pay attention to serious human rights violations in supply chains as consumer demand for accountability rises.
Q: President Biden announced that the U.S. will freeze and forfeit Russian oligarch assets and use those proceeds to rebuild Ukraine. Is this realistic?
A: It is possible in theory, but it is very hard to accomplish in practicality. The U.S. can certainly block assets, but we need proof the assets are connected to a crime to seize them. These cases are incredibly difficult to make, but the creation of the KleptoCapture Task Force suggests that the government is going to put serious resources into the effort.
Q: Given the rapid changes in the political and legal landscape, how can international businesses mitigate the risks of doing business with Russia and China?
A: There are many practical steps U.S. businesses can take. Here are a few:
Look at contracts closely and adapt to the current context. Many contracts have no provisions to deal with economic sanctions and so ask these questions: Are there clauses for geo-political events that aren’t an outright act of war? Are there clauses for trade sanctions and embargos, physical blockades, massive cyber security attack, or national security incidents? Are you inadvertently going against the national security laws with contracts?
Hone awareness of the current obsession with national security in China. The concept is very broad, all-inclusive and fluid. International companies dealing with Chinese counterparts need to understand that certain activities trigger national security problems in China that will cause tremendous complications for international businesses.
Understand dispute resolution processes and options. Many companies are forced to use certain types of resolution that can be unfavorable. If there are choices, confirm the options are suitable to national security elements as well as legal obligations.
Conduct deep due diligence, define ‘know your customer’ (KYC) standards, and fully vet all business partners. This will protect the company from risk surrounding data security, corruption and money laundering among other undesirable activities.
Consider business needs that engage other eastern European companies such as Poland or Lithuania. These countries may endure hardship from the war, increasing risk for international businesses.
Talk often with company legal departments and/or outside counsel to anticipate what may lie ahead. Be proactive and adopt legal policies that address risks while being politically forward-thinking. Heightened attention to risk sensitivity for compliance and political risk assessments is more important than ever.
Conclusion
There are endless considerations for Western businesses with operations in Russia and China. And there are ways to operate in Russia and China, but it must be done with detailed attention and a high tolerance for risk. As of today, doing business in these countries requires well-thought-out strategies, alternative business plans and legally protective measures.
We are closely monitoring the ongoing situation so that we may guide businesses to shift in appropriate ways to meet their unique needs. We encourage international businesses to collaborate with their legal professionals every step of the way.
Moderator |
|
Illene Jaroslaw, Elliot Kwok Levine & Jaroslaw LLPIlene Jaroslaw is a partner at Elliott Kwok Levine & Jaroslaw, representing individuals, universities, and businesses in high stakes criminal and civil litigation in federal courts throughout the United States. Her experience includes white collar criminal defense matters, internal investigations, and commercial litigation. Ilene previously worked as an Assistant U.S. Attorney for the Eastern District of New York and served as Chief of the General Crimes section in the U.S. Attorney’s Office. |
 |
Panelists |
|
Tom Firestone, Stroock & Stroock & Lavan LLPTom Firestone co-chairs Stroock’s White Collar & Internal Investigations practice and specializes in complex transnational investigations and international risk management. He represents companies and individuals before the DOJ, SEC, OFAC, the Department of Treasury and other U.S. agencies. Tom previously worked as an Assistant U.S. Attorney in the Eastern District of New York, where he specialized in the investigation and prosecution of transnational organized crime. While with the Department of Justice, he also served as the Resident Legal Advisor and Acting Chief of the Law Enforcement Section at the U.S. Embassy in Moscow and twice won the U.S. State Department Superior Honor Award. |
 |
Dennis Kwok, Elliot Kwok Levine & Jaroslaw LLPDennis Kwok was a former lawmaker in Hong Kong (2012-2020) who was the elected representative of the legal profession in Hong Kong's legislature. He is a specialist in litigation and corporate matters involving the Greater China region, with on the ground legal and political experiences spanning over two decades. Aside from his legal career, Dennis is a Senior Fellow at the Harvard Kennedy School, a Distinguished Scholar at Georgetown University, School of Foreign Service, Asian Studies Program and a visiting Associate Professor at the University of Tokyo. He is a partner at Elliott Kwok Levine & Jaroslaw, a boutique law firm specializing in complex business litigation, financial and regulatory investigations, and white collar criminal defense. |
 |
July 8, 2022
By: Tom Firestone
External Authors: Ilene Jaroslaw, Dennis Kwok
The Russian invasion of Ukraine continues to rage and despite countries from all over the world decrying Russia’s attack, China is not condemning the war. The recent proclamation that the friendship between Russia and China has no limits has the world on edge, watching how the alignment of Russian President Vladimir Putin and his Chinese counterpart Xi Jinping will affect global economies. This begs a more immediate question, what can American businesses with operations and supply chains in Russia and China do today?
In a recent webinar, Thomas Firestone of Stroock joined Dennis Kwok and Ilene Jaroslaw of Elliott Kwok Levine & Jaroslaw for a compelling discussion about the shifting economies of Russia and China as it relates to the risks for international companies. We share some highlights from their conversation:
Q: Since Russia’s unprovoked attack on Ukraine, sanctions are coming from around the globe. How effective are sanctions in changing Russian behavior?
A: The scope of sanctions on Russia is unprecedented and so far we do not see a dramatically effective outcome. This begs the perennial question about the effectiveness of sanctions. Looking back at 60 years of Cuban sanctions and 40 years of Iranian sanctions, we could draw the conclusion that they simply don’t affect change.But in today’s scenario, the sanctions may simply need more time to work since, as of today, Russian companies have inventory reserves, the Russian Central Bank has managed the value of the ruble and Russia continues to sell energy to Europe, China and India, among others, minimizing the immediate effects. It’s unlikely sanctions alone will drive the Russian military out of Ukraine, but they could lead to important changes in the ultimate outcome of the war. Only time will tell, but we do see one important change so far. The sanctions forced many international companies to rethink their position in the Russian marketplace. And these companies are making the decision to remove operations in Russia. Over time, this could have an effect, especially because Russia is dependent on foreign imports for most technology and spare parts. In the larger picture, perhaps it’s time to reframe the thinking behind sanctions to align with more reasonable expectations. Are we asking too much of sanctions? The expectation that sanctions can bring down a regime is likely unrealistic. However, we can reasonably expect sanctions to be the push parties need to come to the bargaining table.
Q: Are Russian countersanctions changing how U.S. businesses are making today’s decisions?
A: Absolutely. U.S. businesses worry about legal liability if they violate international sanctions as well as liability under Russian law for violating Russian countersanctions. There is tremendous uncertainty surrounding both threats and U.S. companies must factor the costs and risks into the calculus of conducting operations in Russia.
Q: Does the imposition of sanctions against Russia affect China in their own territorial aspirations? And what are the Russians telling the Chinese?
A: China and Russia are important allies who jointly proclaim their enduring friendship has no limits. We may never know if Vladimir Putin informed Xi Jinping of the intention to invade Ukraine, but we surmise it is a serious, personal affront if he did not. Officially, China does not publicly support the Ukrainian invasion, but they certainly do not condemn it and have not provided support to the Ukrainian resistance in any way. We are also sure that China is carefully watching the western reaction to the Russian invasion of Ukraine. The Chinese will surely apply important knowledge gained to their own territorial goals to the holy grail to reunify Taiwan to mainland China.
Q: Are international businesses still able to operate in any capacity in Russia? If so, what other obstacles do they face?
A: Businesses can still operate in Russia, but it’s extremely difficult. The sanctions don’t cover all economic areas and there are licenses from OFAC, yet there is tremendous uncertainty and things change daily. There are obstacles among the many layers surrounding payments, supply chains, and the highly complicated delivery of goods and services. Specifically for American businesses, the U.S. government has sent a clear message about doing business in Russia, which also contributes to the reputational risks.
Q: But what about doing business in China? Are the anti-sanction laws and PRC Data security laws affecting how U.S. companies do business in China?
A: There is no denying that China is a highly important market for international companies. Our global economies are deeply interconnected, and it is likely too hard for international businesses to pull out of China in the same fashion in which they cut dealings in Russia. However, it is becoming more difficult to do business between the United States and China while also complying with the increasingly incompatible laws of both countries. For instance, the PRC Anti-Foreign Sanctions Law presents a quandary. If companies comply with U.S. law, they are breaking Chinese law, and vice versa. The infractions result in heavy fines and even criminal liability for complying with U.S. sanctions within China’s borders. There are also issues with rising Chinese nationalism, securing intellectual property, data security, VPN use, and allegations of human rights violations. Not to mention the increasing importance to understand the politics behind the laws and navigate very carefully. All these issues carve an arduous path for international companies trying to operate in China.
Q: Given the current scenarios with Russia and China, are we on the road to deglobalization?
A: It is safe to say we are heading towards deglobalization, and companies should plan for alternative paths to conducting business. We already see large companies outlining options outside of China. For example, Apple is identifying alternative supply chains in other Asian countries because of the great uncertainty and high risk inherent in their current Chinese supply chains. There is also evidence that the data security laws, and other geopolitical risks, present a case for deglobalization.Yet at the same time, western companies, particularly in the financial industry, are doubling down on investments in China because they see the Chinese financial systems opening to western firms. At the end of the day, it truly depends on the unique risk factors and tolerance for the conditions surrounding each business.
Q: What are the ESG considerations in deciding to go into China?
A: Regulators seem to be taking ESG more seriously lately, particularly for the environmental component of ESG. The sustainability and human rights components are not currently monitored as closely, but we predict this will change. There is increasing pressure to pay attention to serious human rights violations in supply chains as consumer demand for accountability rises.
Q: President Biden announced that the U.S. will freeze and forfeit Russian oligarch assets and use those proceeds to rebuild Ukraine. Is this realistic?
A: It is possible in theory, but it is very hard to accomplish in practicality. The U.S. can certainly block assets, but we need proof the assets are connected to a crime to seize them. These cases are incredibly difficult to make, but the creation of the KleptoCapture Task Force suggests that the government is going to put serious resources into the effort.
Q: Given the rapid changes in the political and legal landscape, how can international businesses mitigate the risks of doing business with Russia and China?
A: There are many practical steps U.S. businesses can take. Here are a few:
Look at contracts closely and adapt to the current context. Many contracts have no provisions to deal with economic sanctions and so ask these questions: Are there clauses for geo-political events that aren’t an outright act of war? Are there clauses for trade sanctions and embargos, physical blockades, massive cyber security attack, or national security incidents? Are you inadvertently going against the national security laws with contracts?
Hone awareness of the current obsession with national security in China. The concept is very broad, all-inclusive and fluid. International companies dealing with Chinese counterparts need to understand that certain activities trigger national security problems in China that will cause tremendous complications for international businesses.
Understand dispute resolution processes and options. Many companies are forced to use certain types of resolution that can be unfavorable. If there are choices, confirm the options are suitable to national security elements as well as legal obligations.
Conduct deep due diligence, define ‘know your customer’ (KYC) standards, and fully vet all business partners. This will protect the company from risk surrounding data security, corruption and money laundering among other undesirable activities.
Consider business needs that engage other eastern European companies such as Poland or Lithuania. These countries may endure hardship from the war, increasing risk for international businesses.
Talk often with company legal departments and/or outside counsel to anticipate what may lie ahead. Be proactive and adopt legal policies that address risks while being politically forward-thinking. Heightened attention to risk sensitivity for compliance and political risk assessments is more important than ever.
Conclusion
There are endless considerations for Western businesses with operations in Russia and China. And there are ways to operate in Russia and China, but it must be done with detailed attention and a high tolerance for risk. As of today, doing business in these countries requires well-thought-out strategies, alternative business plans and legally protective measures.
We are closely monitoring the ongoing situation so that we may guide businesses to shift in appropriate ways to meet their unique needs. We encourage international businesses to collaborate with their legal professionals every step of the way.
Moderator |
|
Illene Jaroslaw, Elliot Kwok Levine & Jaroslaw LLPIlene Jaroslaw is a partner at Elliott Kwok Levine & Jaroslaw, representing individuals, universities, and businesses in high stakes criminal and civil litigation in federal courts throughout the United States. Her experience includes white collar criminal defense matters, internal investigations, and commercial litigation. Ilene previously worked as an Assistant U.S. Attorney for the Eastern District of New York and served as Chief of the General Crimes section in the U.S. Attorney’s Office. |
|
Panelists |
|
Tom Firestone, Stroock & Stroock & Lavan LLPTom Firestone co-chairs Stroock’s White Collar & Internal Investigations practice and specializes in complex transnational investigations and international risk management. He represents companies and individuals before the DOJ, SEC, OFAC, the Department of Treasury and other U.S. agencies. Tom previously worked as an Assistant U.S. Attorney in the Eastern District of New York, where he specialized in the investigation and prosecution of transnational organized crime. While with the Department of Justice, he also served as the Resident Legal Advisor and Acting Chief of the Law Enforcement Section at the U.S. Embassy in Moscow and twice won the U.S. State Department Superior Honor Award. |
|
Dennis Kwok, Elliot Kwok Levine & Jaroslaw LLPDennis Kwok was a former lawmaker in Hong Kong (2012-2020) who was the elected representative of the legal profession in Hong Kong's legislature. He is a specialist in litigation and corporate matters involving the Greater China region, with on the ground legal and political experiences spanning over two decades. Aside from his legal career, Dennis is a Senior Fellow at the Harvard Kennedy School, a Distinguished Scholar at Georgetown University, School of Foreign Service, Asian Studies Program and a visiting Associate Professor at the University of Tokyo. He is a partner at Elliott Kwok Levine & Jaroslaw, a boutique law firm specializing in complex business litigation, financial and regulatory investigations, and white collar criminal defense. |
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