Impact of potential Russia sanctions on the life sciences industry

Parallel sanctions processes are unfolding

The Biden administration’s approach may target large state-owned banks and Russian sovereign debt, while expanding export controls on Russia by imposing licensing requirements on certain foreign items developed from U.S. technology, software, plant or equipment.  In general, the actions being contemplated by the Biden administration would not amount to a complete U.S. trade embargo against Russia and may differ in scope from what the U.S. Congress is proposing.  These measures could be imposed quickly, without any new legislation, if Russia takes action in Ukraine.

On the other hand, the anticipated sanctions packages being considered in the U.S. Congress are more draconian.  In particular, designation of major Russian banks to the Specially Designated Nationals and Blocked Persons List (SDN List) would prohibit all transactions with such banks and could have a significant impact on the ability of companies to move funds to/from Russia.  In addition, the designation of more Russian “oligarchs” or members of Putin’s inner circle to the SDN List could impact collaboration with Russia’s life sciences industry if any newly designated individuals own or control life sciences companies or joint ventures.  Under an aggressive timeline, any consensus legislation could be signed into law by the President as early as the second week of February.

Key features of the proposed sanctions legislation include the following:

• Sanctions on Russian financial institutions
  • The President would be required to impose sanctions designating certain banks to the SDN List.  Financial institutions mentioned specifically are:  Sberbank, VTB, Gazprombank, VEB.RF, The Russian Direct Investment Fund, Credit Bank of Moscow, Alfa Bank, Rosselkhozbank, FC Bank Otkritie, Promsvyazbank, Sovcombank, and Transkapitalbank. The Biden administration could designate additional banks beyond those listed in the legislation.
  • U.S. companies would be prohibited from engaging in any transactions with SDN banks.  Designation of Russian banks as SDNs would therefore require U.S. companies to suspend any business relationships with such banks and ensure that any payments or other financial transactions are not conducted through SDN banks, directly or indirectly. Alternatively, companies could seek authorization from the U.S. government to wind down transactions with SDNs or continue certain transactions.
• Blocking Russian access to the SWIFT international payment messaging system
  • Under the propose legislation, the President is authorized to sanction providers of specialized financial messaging systems (including SWIFT) that continue to provide or “enable or facilitate access” to such services to Russian financial institutions sanctioned under the proposed legislation, including any entities acting as intermediary financial institutions with access to such messaging services.  Reports to Congress identifying entities that provide such messaging services to sanctioned Russian financial institutions will be required.
  • Banks cut off from the SWIFT system would no longer be able to make international payments using SWIFT, which would make it more challenging for Western banks to send or receive funds to/from the designated banks.  Russia does have its own home-grown payment messaging system, which could eventually replace the use of SWIFT, but this may take some time.  The SWIFT action could also have a chilling effect on financial transactions involving Russia, with Western banks taking a “de-risking” approach and carefully scrutinizing payments in and out of Russia or declining to engage in certain transactions deemed as high risk.
• Sector designations
  • Under the proposed legislation, the President would be required to impose sanctions on foreign persons operating in certain sectors of the Russian economy.  The proposed legislation specifically identifies sectors including energy (including oil and gas), mining (including coal and mineral extraction), financial, and aerospace, as well as other sectors that may be identified later.  This likely would involve SDN designations of certain persons operating in these sectors.
  • U.S. companies would need to terminate business with any entities that are designated as SDNs.  While these sectoral sanctions appear unlikely to directly target the life sciences industry, we note that the Russian financial sector is broadly mentioned as a targeted sector in the proposed legislation, which could affect certain business activities of global life sciences companies.
• Additional sanctions
  • While less likely to directly impact the life sciences industry, we also note that the proposed legislation requires the imposition of sanctions with respect to entities that are responsible for planning, construction, or operation of the Nord Stream 2 pipeline and prohibits transactions by U.S. persons involving the sovereign debt of the Russian government.

Export control restrictions

In addition to the proposed sanctions measures set forth above, the Biden administration could expand export control restrictions on Russia.  Such restrictions could include the expansion of the U.S. Department of Commerce’s foreign direct product rule, which would prohibit the export, reexport, or transfer to Russia of a broader range of items made outside of the United States using U.S. software, technology, plants, or equipment.  These controls are expected to target semiconductors, electronics, and other strategic technologies.  Again, while unlikely to directly target the life sciences industry, these restrictions could impact the ability of life sciences companies or joint ventures in Russia to procure certain electronics necessary for manufacturing of medical devices or other items.  However, it is not yet clear what kinds of export controls will be imposed and how an expanded foreign direct product rule for Russia would operate in practice.

What this means

In sum, we recommend that life sciences companies assess their operations in Russia and how funds are transferred in and out of the country.  If banking restrictions are imposed, it could be difficult to make funds available to employees, clinical trial sites, consultants, contract research organizations, and other business partners in Russia. 

As such, life sciences companies should consider mapping their business partners (including customers, distributors, suppliers, and intermediaries) and the banks used by their affiliates or business partners in Russia.  In particular, companies should consider whether they make payments to or receive payments from the banks expressly set forth in the legislation (see above).  They should also consider whether any of their business partners are owned or controlled by prominent Russian oligarchs.  Finally, companies with a physical presence in Ukraine should consider contingency planning for maintaining the continuity of operations and employee safety if Russia takes action in Ukraine.

Next steps

Please contact us if you would like to know how the issues mentioned in this article may impact your organization.

Authored by Ajay Kuntamukkala, Meredith Manning and Deborah Wei.