How to pull out of supply chains in the Russian market

  • 31 May 2022

By Marcin Durlak, Managing Partner and Joint Founder of IMD Solicitors LLP

Nokia has become the latest conglomerate to fully pull its operations from Russia, following the invasion of Ukraine. After the introduction of UK sanctions, there’s been pressures on all UK companies, large and small to stop working in the country, even if they can operate within the law and not do business with suppliers who benefit Putin, the Russian government and its supporters.

Some SMEs will not want to withdraw from Russian suppliers, but will be extremely selective in who they work with and, of course, abide by the regulations. 

 

But many companies have sought to remove ties, even if unaffected by the sanctions, in the hope a collective effort will encourage the Russian government to halt its invasion of Ukraine. For other companies which have close business and personal relations in Russia and Ukraine, this has been an extremely difficult situation, especially for Ukrainian and Russian small business owners who reside in the UK too.

However, the conflict has made business for some SMEs untenable, not just ethically. For some, supply chains have been disrupted to such an extent that it’s impossible to receive products from suppliers.

So how can UK SMEs exit agreements with suppliers and mitigate the financial impact if they were to exit? SMEs will be stuck in a difficult position, being less able to weather the financial shocks that come with pulling out of the Russian economy, and will need to proceed with caution.

Switch your suppliers

SMEs may have begun this process already. It could be a while before this conflict is over and the knock-on effects to supply chains could continue in the long-term. Divesting out of Russia and setting up with new suppliers could still be very expensive, so it’s important to understand your true financial outlook before making big decisions – which could potentially affect the survival of your company.

Check contracts

You will need to check the stipulations of contracts you agreed with suppliers. Review the exit strategies, including what circumstances would warrant an exit from a contract. You’ll then need to gather evidence to support the justification of invoking a force majeure clause or putting forward your contract has been frustrated. It is worthwhile checking sanctions and any Russian counter-sanctions so you can state how a knock-on effect impacted your relationship with the supplier (when your SME operations aren’t prohibited by the sanctions).

 

If your contracts didn’t include any stipulations in this area, or the details are vague or unapplicable, you could end up being stuck between a rock and a hard place, and it is worth seeking legal advice to understand how you could wrangle out of the contract without provoking a dispute.

Check insurance

As a small business, you must consider if your business insurance covers the costs of sanctions. Force majeure clauses in these contracts usually cover unexpected government decisions but it is worth double-checking. This will help you understand what the true financial impact could be from withdrawing, as well as if you can claim for the loss of business the company has already suffered due to the conflict and its impact on the supply chain.

When looking to source alternative suppliers, you will need to check their supply chains to ensure they aren’t fully reliant on the Russian market, which again could have a detrimental impact on your down the line.

Source alternative funding

In order to provide stability when sourcing a new supply chain, it is worth looking into financing options. SMEs may already be in a tight place due to the after-effect of the pandemic making access to commercial lending less viable. Off-balance-sheet financing options could be worth seeking out to lower borrowing costs – but it’s worth talking to an accountant first.

 

For any businesses unsure how to manage any of the issues above when looking to withdrawing from a supply chain in Russia, it is worth seeking legal advice, speaking to professional bodies in your sector as well as contacting the Export Support Service.

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