Do you have any contracts with state governments? If so, beware of emerging state sanctions bonds linked to Russia and Belarus | Venable LLP

U.S. entrepreneurs with global operations are likely aware of the significant restrictions imposed by the federal government in response to the Russian invasion of Ukraine, in the form of new sanctions, allied trade embargoes and increased export controls. However, you should also be aware that many State governments have imposed new executive orders (EOs) or passed laws aimed at severing state business with contractors operating in or with Russia or Belarus. While these new measures vary in scope and severity, some impose reporting or certification burdens on state-level government contractors, particularly those operating in Eastern Europe or Russia.

New Jersey, for example, recently banned its state agencies from doing business with companies closely tied to the governments of Russia or Belarus. Governor Phil Murphy introduced these restrictions in EO 291 (March 2, 2022), ordering a mandatory review of New Jersey state contracts, including those with “companies that directly invest in…companies [owned or controlled by the government of Russia, Belarus, or their instrumentalities]directly or as subcontractors. While this EO does not directly impose liability on the business community, a related New Jersey state statute, PL2022, c.3 does. Under this statute, agencies are generally prohibited state to do business with entities or persons determined by the state to be “engaged in prohibited activities” in Russia or Belarus, including those with close ties to the governments of Russia or Belarus or having their headquarters in Russia. It is important to note that an entity contracting with the State of New Jersey must certify that neither it, nor any of its subsidiaries or affiliates under common ownership, is “engaged in prohibited activities” in Russia or Belarus. Otherwise, it must explain precisely these activities in these countries. Additionally, if the contracting company engages in “prohibited activities,” it will be obligated to terminate such activities within 90 days and certify this to the state. Finally, under this New Jersey law, false certification may result in civil penalties and the suspension or termination of contractual rights.

The state governments of California, Colorado, Indiana, Massachusetts, Minnesota, New York, North Carolina, Ohio, and Washington and others have also recently taken various steps to dissociate Russian companies, public entities or their subsidiaries. In California, for example, a new executive order requires contractors with projects valued over $5 million to report to the state their compliance with federal economic sanctions, as well as any actions taken in response to Russian actions in Ukraine. Meanwhile in New York, the Governor has directed State agencies from refraining from entering into contracts with entities “conducting business operations in Russia” and from asking bidders for certification regarding operations in Russia as part of the procurement process. Some states have also decided to divest of all state-owned Russian assets. Others have enacted bans banning the sale of Russian-origin vodkas in state liquor stores.

As with sanctions programs at the federal level, the impact of these state measures on your business is very specific and must be assessed on a case-by-case basis.