The Russian military’s recent invasion of Ukraine, and the related sanctions against Russia have many companies asking: how does this chaos impact our workforces in those countries? This broad question is answered below, with the caveat that these answers are subject to change, given the very fluid nature of the situation.
Background
As fighting between Russian and Ukrainian forces continues, the United States, United Kingdom, European Union, and a host of other jurisdictions have imposed sanctions against certain Russian corporate entities and individuals, as well as against the Russian state as a whole. Thousands of global employers, especially those with operations in Russia and Ukraine, are bracing for the inevitable economic impact, as workforces and supply chains are disrupted, just as the region was starting to recover from the crippling effect of the COVID-19 pandemic. Indeed, it appears that the sanctions have already bitten into the Russian economy, with the S&P lowering its credit rating to “junk” status.
What are the sanctions imposed?
Financial institutions: The U.S. Department of the Treasury has targeted the “core infrastructure” of Russia’s financial system, sanctioning multiple financial institutions, including Sberbank, VTB Bank, and their subsidiaries.1 The sanctions against VTB Bank (Russia’s second-largest financial institution) and three other Russian financial institutions freeze any of these entities’ assets touching the U.S. financial system (as well as the assets of any entity owned 50% or more by the sanctioned institutions) and prohibit U.S. persons from dealing with them. The sanctions against Sberbank, Russia’s largest financial institution, effectively cut off Sberbank’s ability to conduct transactions in the U.S. dollar. The United States is also taking measures to freeze Russian Central Bank transactions and prohibit the bank from deploying its international reserves.
Partial ban on SWIFT transactions: On Saturday, February 26, 2022, the United States and other jurisdictions announced that they will be cutting off certain Russian banks from the Belgium-based Society for Worldwide Interbank Financial Telecommunication (SWIFT) international payment system.2 This could be the most severe financial penalty imposed on Russia.
SWIFT connects more than 11,000 financial institutions around the world; cutting off Russia from it may essentially sever it from much of the global financial system. Blocking Russia from SWIFT would curb its ability to conduct international financial transactions by forcing importers, exporters, and banks to find new ways to transmit payment instructions.
Debt and equity restrictions: The following state-owned enterprises and entities are barred from raising money through U.S. markets via new equity and new debt: Sberbank, AlfaBank, Credit Bank of Moscow, Gazprombank, Russian Agricultural Bank, Gazprom, Gazprom Neft, Transneft, Rostelecom, RusHydro, Alrosa, Sovcomflot, and Russian Railways.
Restrictions on exports of sensitive tech: The United States has implemented a near-total embargo of U.S. items to Russian military end-users, and placed other restrictions on import into Russia of U.S.-origin technology that could assist Russian defense, aviation, and maritime sectors. This technology includes semiconductors, telecommunication, encryption security, lasers, sensors, navigation, avionics, and maritime technologies.
Restrictions on President Vladimir Putin and other Russian elites: Russian President Vladimir Putin, members of Russia’s Security Council,3 and other Russian elites and their family members will be cut off from the U.S. financial system, and their U.S. assets frozen.
Sanctions on Belarus: Because Belarus is seen as supporting Russia’s actions, 24 individuals and state-owned enterprises, banks, and companies have also been sanctioned.
EU leaders were set to impose sanctions on Russia’s financial, energy and transport sectors, introduce export controls, and blacklist more Russians. European airspace will also be shut to Russian aircraft.
The EU also eyed freezing European assets linked to Russian President Vladimir Putin and Foreign Minister Sergey Lavrov over their decision to invade Ukraine.
An equally big move would be to ban Putin and Lavrov from EU travel. But EU leaders made it clear that would be off the table for now, since it might complicate diplomatic moves once all sides get around the negotiating table.
The UK has imposed severe sanctions against Russia, targeting the Central Bank of the Russian Federation, the Russian National Wealth Fund, Russian banks, the Russian state, members of Putin’s closest circle, and wealthy Russians who enjoy high-rolling London lifestyles.
In the 10-point sanctions package, the UK government said it would impose an asset freeze on major Russian banks, including state-owned VTB, its second-biggest bank, and stop major Russian companies from raising finance in the UK. This includes prohibitions against export of technical equipment; measures to prevent Russian companies from issuing transferable securities and money market instruments in the UK; and powers to prevent specified banks from accessing pounds sterling and clearing payments through the UK.
The UK will also ban Russia’s flagship airline Aeroflot from landing in the UK, suspend dual export licenses to Russia, and ban exports of some high-tech exports and parts of the extractive industry. Russia is considering mirroring these sanctions with a ban on foreign airlines entering its airspace.
How Are Workforces in Russia Impacted?
- Limited ability to pay workers in Russia
The restrictions on international financial transactions will pose a barrier to multinational employers (MNEs) outside Russia paying their workforces in Russia. MNEs that do not pay their employees on time are liable for daily interest on any arrears, and their employees have an option of stopping all work while still being entitled to their continuing pay until they are paid in full.
While MNEs may look for other means through which to pay these workers – including via alternatives provided by China and third-party payment vendors and prepaid credit cards – they should carefully consider such options, as such alternative means may constitute illegal circumvention of the sanctions.
- Mass layoffs/ceasing operations/divesting and dissolving Russian legal entities
The inability to pay workers will force MNEs to consider options such as placing the workers on unpaid leave or mass layoffs and even ceasing all operations in Russia that include abandoning property and equipment located in Russia and defaulting on their leases and other contracts. Any such options should be considered carefully in light of the applicable Russian employment laws that require written notices to the employees and the government agencies. For example, there are prohibitions on terminating certain categories of employees (such as single mothers), even in a mass layoff, and mandated specific severance pay amounts driven by the length of time it takes for the employees to secure other employment. The legal consequences of not following these procedures range from fairly insignificant administrative fines (starting at approximately $50 USD) to potential personal civil and even criminal liability for the managerial employees located in Russia, especially those in charge of payroll.
Due to the restrictions on flights out of Russia, foreign citizens currently in Russia may find themselves stranded there. U.S. citizens have been advised to consider leaving Russia immediately and that the American embassy will be unable to assist them should they choose to stay, but many choose to remain in Russia. Employers may feel tempted to have these individuals work remotely while in Russia, but this triggers risks under Russia’s immigration, tax, and employment laws. Therefore, this remote work option should be evaluated carefully.
How Are Workforces in Ukraine Impacted?
- Getting workers out of harm’s way
Employers’ duty to ensure their workers’ health and safety while at work paired with the current dangerous situation, suggests that Ukrainian workers should be allowed to seek refuge and move to safety as quickly as possible. Indeed, many Ukrainians have already crossed the western border into Poland, or are otherwise leaving Ukraine. However, Ukrainian men aged 18 to 60 are prohibited from leaving the country and have been urged to join the army (and some have been drafted; see further below).
For non-Ukrainian expat staff in Ukraine, employers may be duty-bound to repatriate those workers as quickly as possible. For local Ukrainian workers, the situation is more complex as some may wish to remain and some may wish to move to safer parts of the country or across the border. Employers should pay attention to advice from the Ukrainian government in implementing contingency measures to allow for these workers’ safety.
All of this may mean that employees may have to abandon their jobs, at least temporarily. Employers are well-advised to handle such situations delicately and with sensitivity. Indeed, employers will have to look at their employment contracts and policies in view of Ukrainian law and the unraveling situation on the ground, in considering their options.
- Job abandonment due to the mandatory military service
Another reason for job abandonment in Ukraine is the mandatory military service that was recently imposed on Ukrainian men aged 18 to 60 years. Employers will likely have to consider leaving those jobs open to such military recruits for the time being. They will also have to consider whether they will have to continue paying these recruits, in light of Ukrainian law.
- Paying workers in Ukraine
The rupturing of the Ukrainian financial infrastructure by the military attacks will likely lead to difficulties in paying workers currently in Ukraine. Thus, the inability to pay workers will force employers to consider options such as placing the workers on unpaid leave or even terminating contracts. Any such options should be considered carefully given applicable Ukrainian employment law, and the sensitivities of taking adverse employment action in the current atmosphere.
Will This Impact Workforces Elsewhere?
The ripple effect of the conflict as well as the sanctions will inevitably impact other countries that rely on trade and business with Russia and Ukraine. The rupturing of ties with business partners in these two countries will adversely impact projects in other countries.
The impact will be particularly acute on European companies.4 The EU is Russia’s largest trading partner, accounting for 37% of Russia’s global trade in 2020. For decades, Russia has been a key destination for European companies in a range of industries, including finance, agriculture and food, energy, automotive, aerospace and luxury goods.
This “knock-on” effect will stress workforces outside of Russia and Ukraine, leading to employers having to put projects on hold or cancel them, leading to furloughs or layoffs.
Employers should also be sensitive to the emotional impact of the situation. Employees who see colleagues and their families directly affected by the military activity may find it difficult to focus on business as usual. It is important that employers show that they are aware of this, and that they are not perceived as blind to or unmoved by the human impact.
Conclusion
The impact of war on European workforces is unfamiliar to just about everyone in today’s workplaces. Sadly, that is changing. A good measure of understanding, patience, and tolerance will be needed to support Ukrainian and Russian workforces over the coming weeks.
The situation, both in terms of the conflict itself as well as the associated sanctions, is rapidly evolving. We are monitoring these developments closely and will provide periodic updates.
Footnotes
