Doing business in Crimea—should you revise your contracts?

Doing business in Crimea—should you revise your contracts?

Commercial analysis: What effect has Russia’s annexation of Crimea had on those doing business with Ukraine and Crimea? Glib Bondar, partner at Avellum Partners in Kiev, explains the impact of the current situation on those with business interests in the region, and advises that all existing contracts with Crimea/Ukraine should be checked.

Recent activity should trigger a review of contracts with any Ukraine/Crimea-based interests. How does the legal status of a country impact a contract, if at all?
As far as Ukraine as a whole is concerned, no change in status has occurred. Contracts with Ukrainian counterparties should generally remain unaffected, except that the recent events (including civil disturbance, the partial mobilisation announced by Ukraine, events in Crimea and the territorial changes that ensued, changes to legislation, etc) may trigger force majeure or material adverse event clauses of certain contracts.

The situation is more complex with respect to Crimea. The Russian Federation now views Crimea as part of its territory and effectively exercises its jurisdiction over the Crimean territory. Ukraine, however, does not recognise this and still views Crimea as a part of the Ukrainian territory, which is temporarily occupied by a foreign state. This significantly affects legal order in Crimea and the ability of counterparties to perform contracts with Crimean interests. For example, as a result of developments in Crimea, contracts with counterparties or in respect of assets located in Crimea may not be enforceable.

The transition period seems short, will there be a change in the applicable law and regulations affecting any businesses conducting an activity in that region?
As far as Ukraine as a whole is concerned, there will be changes to the applicable law—however, it is difficult to assess how fundamental such changes will be. These include temporary anti-crisis measures (including more stringent currency control regulations).

On the other hand, Crimea is experiencing fundamental changes in the area of law. With the alleged accession of Crimea to the Russian Federation, from the Russian Federation’s perspective, Russian laws have begun to apply in Crimea (albeit with an applicable transition period). This situation is not recognised by Ukraine. However, given the de-facto control the Russian Federation currently has over Crimea, it would most likely be impossible to enforce Ukrainian law on the territory of Crimea.

Ukraine still views Crimea as a part of its territory and aims to address the lack of control over the Crimean territory by adopting a law on the status of occupied territories (its draft has been approved in principle by the Ukrainian parliament). The draft law aims to restrict regulated business in Crimea, introduce a special regime for access to the Crimean territory (including the prohibition of international traffic) and substantially restrict transactions with real estate located in Crimea. Currently, the draft is actively being discussed (mainly with the purpose to smooth its effect), and we expect the law, in one form or another, to be adopted within the next month or so.

How does this impact both the currency used under the contract, and the exchange rate?
At the beginning of February 2014, Ukraine fulfilled the IMF’s recommendation and switched to a floating exchange rate for hryvnia. Swift depreciation of hryvnia against major currencies ensued (more than 30% as at 27 March 2014). At the same time, Ukraine further tightened currency regulations, which is understood to be a temporary measure aimed at preventing speculative transactions and stabilising the currency market.

When Crimea acceded to the Russian Federation, the Russian ruble became the official currency in the Crimean territory. Hryvnia will be accepted for payment in Crimea until 2016. Until 2015 the exchange of hryvnia to rubles in Crimea will be made in accordance with the official exchange rate adopted by the Russian central bank.

How does this affect the ability of any suppliers based in the region to continue to perform under a contract?
Recent events (public disturbance, the partial mobilisation announced by Ukraine, etc) may have affected the ability of certain suppliers to perform under a contract. The most drastic repercussions have resulted from the events in Crimea. The border between Ukraine and Crimea has become a controlled area, and crossing of the border is not guaranteed for all vehicles and cargoes. This may further deteriorate with the adoption by Ukraine of the law on the status of occupied territories which contemplates restricted access to Crimea and potential restriction of business activities.

Ukrainian industries have lost the benefit of access to the Crimean seaports and will have to channel their supplies through other ports (mostly in the Odessa region). Another major setback for Ukraine is the possible blocking of major Ukrainian ports in the Sea of Azov (such as Mariupol and Berdiansk) due to the fact that the Kerch Strait (which connects the Black Sea with the Sea of Azov) has fallen under Russian control. It is currently uncertain on what terms vessels from Ukrainian ports will be able to pass the Kerch Strait, if at all.

The ability to move goods over the Ukrainian border with Russia will be affected by both Ukraine’s intention to introduce a visa regime with Russia and the on-going prejudice of Russian customs authorities towards imports originating from Ukraine. On the other hand the association of Ukraine with Europe is intended to lift visa requirements for Ukrainians travelling to the EU.

What type of exit provisions under a contract might be triggered by this activity?
Any contracts that concern Ukraine and Crimea should be screened for the force majeure and material adverse change/event clauses.

Ukrainian law and most contracts protect the party who is unable to perform due to a force majeure—the party affected by the force majeure is released from the liability for the breach. Furthermore, normally, a Ukrainian law governed contract would allow the party who is not affected by force majeure to terminate the contract unilaterally, if the force majeure lasts longer than a certain term.

In view of the situation in both Ukraine and Crimea, suppliers may seek to avoid liability by claiming that civil disturbance, partial mobilisation or restricted access to ports affects their performance under the contract. On the other hand counterparties with payment obligations may try to invoke changes in the currency regime in order to justify payment irregularities.

‘Trading with volatile states’ should be considered when conducting a risk assessment—how can this best be safeguarded against generally under contracts?
When considering trading with Ukraine, foreign counterparties should bear in mind and address the following issues by appropriate contract terms:

• events of force majeure—the uncertain political situation in Ukraine, its poor economic condition, further confrontation with Russia, and the loss of control over Crimea may lead to the inability of certain Ukrainian counterparties to perform under contracts
• currency risks—switching to a floating exchange rate for hryvnia resulted in sharp fluctuations in the exchange rate, this along with stiff currency regulations may affect the ability of Ukraine-based counterparties to pay their bills
• relations with Russia—recent events have led to a substantial deterioration of relations between Ukraine and Russia, the effects of which are yet to be seen
• ports—Ukrainian producers have effectively lost the benefits of Crimean seaports (now controlled by Russia) and Ukrainian Azov seaports (which may be effectively blocked by Russia’s acquisition of the control over the Kerch Strait)

Interviewed by Jenny Rayner.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.