Impact of Russian Sanctions on Equity Compensation and Potential Lessons to be Learned

March 29, 2022

In the last four weeks, the world has witnessed the widespread devastation and growing humanitarian crisis in the Ukraine caused by the Russian invasion.  At the same time, multinational businesses have made significant decisions regarding the continuation of business in Russia and the Ukraine and regarding how best to protect their local employees.

One aspect of those decisions relates to the operation of equity compensation plans in light of sanctions enacted in response to the invasion as well as counter-measures enacted by Russia.

Summary of Recent Developments[1]

Immediately following the Russian invasion, the United States and a number of other countries enacted sanctions with a focus on certain Russian financial institutions and transactions with those institutions.

Apart from individuals who were specifically identified on the sanctions list ( ), the US sanctions had a limited impact on equity awards and the sanctions issue was generally only implicated if a Russian resident decided to repatriate proceeds back to Russia and was contemplating the use of a sanctioned Russian bank for the transaction.  For the most part, this had limited impact on most US issuer equity plans and the sanctions issue could be navigated through the selection of a non-sanctioned Russian bank.

However, subsequent counter-measures enacted by Russia (in particular, Decree No. 79 dated February 28, 2022, effective March 1, 2022, and Decree No. 81 dated March 1, 2022, effective March 2, 2022) created a substantial obstacle to equity awards granted to Russian residents by US issuers.[2]  Following the publication of the Decrees, we concluded that US companies could no longer engage in share transactions with Russian residents, unless expressly allowed by the Russian Government (which seemed unlikely).  Consequently, this meant that any option exercises and RSU settlements should be suspended as of March 2, 2022.

This development arriving in the middle of grant season (with less than a day's notice), caused a number of companies to scramble and determine the approach going forward, especially for awards that were due to settle following vesting in early March.  While companies did approach the counter-measures in different ways, there were some common areas of follow up:

1) Would penalties for failing to comply with the counter-measures apply to the issuer, or the employee, or potentially both parties?  

This wasn't directly addressed in the decrees but initial assessments suggested that the penalties would be imposed on the employee rather than the issuer and the reporting mechanism for compliance would be the annual foreign asset/foreign account filings required of Russian residents.

2) Did these counter-measures only apply to Russian employees physically located in Russia or to any Russian national living anywhere in the world?

It appeared that for purposes of the Russian counter-measures, "Russian resident" includes Russian citizens and foreign citizens with a Russian residency permit, even if they are not residing in Russia. Such individuals would cease being Russian residents for purposes of the counter-measures only if they relinquish their Russian citizenship/residency permit. 

Consequently, in theory, these counter measures would apply to any Russian national living anywhere in the world.  However, for Russian nationals who were no longer living in Russia and who had no intention of returning to Russia, they would generally not be filing the annual Russian foreign asset/foreign account disclosures.

As a result, many of the US issuers were focused on the application of Russian counter-measures to employees that were physically resident in Russia and less concerned about the application to other Russian national employees no longer living in Russia.

And while many issuers were still evaluating approaches and employee communications on this topic, there was a further update regarding the counter-measures.  On March 18, 2022, the Russian Central Bank issued clarifications to the previously-issued Decrees, which provided that the applicable restrictions impacting transactions with companies of "unfriendly states" (including the United States) should not apply to (1) transactions with non-Russian securities if such securities are held with a non-Russian depository, bank or broker and (2) settlements in relation to such transactions that are conducted via accounts with non-Russian banks or brokers if such accounts are duly disclosed in Russia.

Based on our initial interpretation of these clarifications, it appears possible for individuals who qualify as Russian residents to:

  • receive new grants of equity awards (including stock options, and restricted stock units),
  • receive shares upon settlement of awards in non-Russian bank or broker accounts,
  • pay the purchase price for shares using funds in non-Russian bank or broker accounts; and
  • sell shares issued pursuant to such awards and receive the sale proceeds in non-Russian or Russian bank or broker accounts,

provided the awards/shares relate to a publicly-traded company and the individual complies with their Russian foreign asset/foreign account disclosures.

The original sanctions imposed by the US (and many other countries) continue to restrict the flow of funds to and from Russia through sanctioned banks.  So as this blog is written, the situation has a more limited impact on equity awards[3], which is closer to the situation immediately before the original Russian counter-measures were enacted.

Lessons Learned?

Apart from a reminder of humility for legal advisors, are there some lessons to be learned from this most recent quasi-circular regulatory journey?  Issuers needed to absorb a regulatory change with very limited guidance in a very short time-frame and then reduce the analysis to actionable steps.  Some of the considerations will likely be relevant for other future regulatory changes and they include:

Is there a formal team that gets tasked with these OUS regulatory changes or is it ad-hoc by necessity?

Does the issuer accord significant weight to local management in the affected jurisdiction(s) in determining the course of action?

In situations where it appears that risk is primarily on the employee, does the issuer take a consistent approach across jurisdictions and is that approach paternalistic (so that restrictions are applied to prevent putting the employee in the situation where their personal risk is increased) or not?  If not, does the issuer typically communicate those risks to the employees so they can make their own risk assessment?

Can the issuer identify the impacted employees using the existing HRIS platform where the key data point is an individual's nationality (which is frequently not tracked internationally for data privacy reasons)?

Is the issuer comfortable with quickly communicating to affected employees that the issuer is reviewing a new development and will shortly provide additional details, or is there a preference to complete the internal analysis before any employee communication?

How quickly can the issuer suspend share settlements that are in process following a vesting date and how best to align with the broker procedures and deadlines?

When modifications to outstanding awards are considered, how much flexibility is included in the plan provisions or award agreement provisions?  Almost all of the US issuer plans include a basic provision that shares will not be issued if doing so will violate "applicable law".  Those provisions typically contemplate a "short" delay or suspension to provide a period of time to achieve securities or other regulatory law compliance.  This basic provision is unlikely to be sufficient, for example, if awards need to be materially restructured, settled in cash via local payroll or ultimately cancelled.  Some issuers have additional provisions for OUS awards which may provide additional flexibility.  If changes to plan language and/or award agreement are being considered to address this point for future grants, keep in mind the potential accounting implications of the additional flexibility.

[1] Given that there are daily developments in this area, this summary will likely be out-of-date and incomplete on the date of publication and readers are encouraged to check for more recent updates.

[2]  The same restrictions were applicable to issuers incorporated in other countries classified as "unfriendly" by the Russian government.

[3] Note that this blog doesn't attempt to address issues for ESPPs.


This blog is a guest contribution from Baker McKenzie. For additional insights on this topic, along with other topics facing multinational corporations, view their Global Equity Equation resources.

  • By Baker McKenzie

    Global Equity Services