Russian sanctions and their impact on Mexican businesses

The U.S. government has enacted a myriad of new sanctions through executive orders that prohibit U.S. and non-U.S. companies from engaging in a wide range of activities with numerous governmental and private entities and individuals in Russia, Belarus, and in parts of Ukraine. These activities include, but are not limited to:

  1. Restrictions on trade and investment in certain regions of Ukraine;
  2. Designations of individuals (oligarchs) and entities (banks) on the Treasury’s list of Specially Designated Nationals and Blocked Persons (SDN or “blacklist”) and restrictions on sovereign debt transactions;
  3. Restricted activity with Nord Stream 2 AG, the company in charge of the design, construction and operation of Nord Stream 2, an energy project linking Russia and the European Union;
  4. Sanctions against President Vladimir Putin and other senior Russian government officials; and
  5. The removal of some Russian banks from the SWIFT messaging system.

Mexico’s trade with Russia is not substantial; however, it is not negligible. The main Mexican exports to Russia are tequila, beer, beef and automobiles. On the other hand, the main Mexican imports from Russia include chemicals, metals, aircraft and ammunition.

At the time of publication of this Alert, the Mexican government ruled out the implementation of direct measures to sanction Russia for its invasion of Ukraine. Mexico’s stance contrasts with sweeping sanctions imposed by the international community, including its largest trading partner, the United States. The argument has been made that Mexico has historically stayed on the sidelines, adhering to its “hands off” policy. Regardless of its merits, it is the responsibility of all Mexican entities and individuals having transactions in or with U.S. entities and persons to familiarize themselves with the restrictions applicable to Russia and Russian entities. More importantly, it is a legal necessity to understand the restrictions and penalties to avoid violating them.

Moreover, previous administrations have not been shy about using US soft power and statecraft to pressure Mexico into adopting specific measures (for example, the Trump administration’s use of tariff threats to force Mexico to cooperate in the fight against illegal immigration). More recently, the prospect of sanctioning Mexico was raised when Mexico considered buying Russian-made helicopters. The deal ultimately fell through. However, these examples serve as a cautionary tale for those willing to ignore US and international sanctions against Russia. These are particularly noteworthy if the situation in Ukraine continues to deteriorate as the international community further strengthens its engagement and support for Ukraine.

How can Mexican entities and individuals be affected?

The United States is the largest export market for Mexican companies. It is the cornerstone of Mexican exports. According to US Census data, in 2021 the United States imported $385 billion worth of goods from Mexico, by far the largest destination for Mexican goods. Several entities in Mexico have subsidiaries in the United States and/or do business from the United States. These contacts may be sufficient for the bans to apply to these Mexican individuals and entities, such as recent cessation announcements by companies such as Bimbo and subsidiaries of Grupo ALFA in Russia.

Executive Order 14065 of February 21, 2022 defines the scope of sanctions to include not only United States nationals, but also anyone in the United States. See the full definition below (emphasis added):

For the purposes of the command, the term ”Person from the United States” means any citizen of the United States, lawful permanent resident, entity organized under the laws of the United States or any jurisdiction in the United States (including foreign branches), or anyone in the United States.

These last words greatly expand the potential scope. As you can see, the analysis of the claim is factual and more nuanced than determining the nationality of an entity or individual. In any case, best practices suggest that Mexican companies with significant relationships with the United States should be very careful, if not avoid wherever possible, to engage in business relations with Russia, Russian companies or any entity that has been included in the SDN list.

Despite limited trade relations between Mexico and Russia, the economic effects have already been felt in the form of higher fuel prices and disruptions to global supply chains. Therefore, and in order to minimize unintended consequences, the US government has issued eight general licenses that authorize the continuation of certain types of transactions with Russian entities. These licenses include, but are not limited to, certain exceptions for international organizations, food and agricultural products, air ambulances, certain energy-related transactions and negotiations, debt and equity, derivative contracts, and a time limit grace to liquidate certain transactions, among others.

In practice, conditions in Russia deteriorate so rapidly that it may be impractical and unprofitable to do or continue to do business with Russia. Russian banks have been cut off from the SWIFT system, which makes payments for goods and services very complicated to make. The Russian ruble has depreciated significantly and access to US dollars is rare for most Russians. Even existing lenders, particularly aircraft lessors, face the threat of Russian seizure of their assets, denying the ability to seize any collateral or security located in Russia. The adoption of additional retaliatory measures by the Russian government cannot be ignored.

What can you do?

Perform a thorough due diligence check. Businesses should start by carrying out comprehensive due diligence on their transactions, counterparties and agreements to determine whether they are at risk from sanctions, including identifying the beneficiaries of certain transactions, the source of funds and the location of the source. Make sure to avoid transactions with any of the blacklisted entities. Additionally, other countries like Singapore, the UK, and member countries of the European bloc have adopted their own sets of restrictions that can indirectly impede trade transactions between Mexico and Russia.

In conclusion, it is prudent to be aware of the impact and unintended consequences that economic sanctions can have. Many effects of sanctions are not easy to discern, and due diligence could mitigate many risks by reducing long-term costs.