Smart contracts will help Russian and US businesses evade sanctions

The United States has imposed various sanctions on Russia. They include restrictions by the US department of the treasury’s office of foreign assets control (OFAC), which prohibit transactions with Russian entities. The UA has also targeted exports to Russia. The US department of commerce, bureau of industry and security (BIS) has issued various rules that prevent American businesses from transacting with Russia. 

The sanctions raise the question of whether there is a way for US corporations to do business with Russia despite the sanctions imposed by their government. 

The sole reason a company exists is to actualise profit. It is for this reason that various businesses have elected to continue doing business with Moscow. The main concern for such companies is not whether they should have a political conscience, but how, in light of sanctions, can they profitably trade. 

The question of how corporations can trade independently of national laws and sanctions is a question that has kept businessmen busy for centuries. The answer has often been provided by savvy corporate lawyers who are able to manipulate legal loopholes, and facilitate lawful trade across enemy lines. 

A case in point is the Panamanian law firm, Mossack Fonseca, and its involvement in assisting North Korean officials legally evade sanctions imposed by the US treasury. But it seems the discussion of how to legally evade sanctions will be centred less around corporate lawyers and more around smart contracts.

A fully established definition of smart contracts is yet to be formed, and regulatory bodies are yet to make clear their official legal status. Nonetheless, smart contracts may simply be defined as digital contracts that are capable of self-execution if certain programmed preconditions are met. 

In other words, smart contracts are capable of autonomously enforcing the terms and conditions of a contract. Accordingly, from this definition, and from many blockchain experts, smart contracts threaten corporate lawyers with redundancy. Perhaps a good place to observe the beginning of this redundancy is Russia’s invasion of Ukraine.

The US companies that have elected to act in accordance with their political conscience, by halting business in Russia, will have to navigate their way out of the contractual obligations to their Russian counterparts. If these businesses are unable to reach amicable solutions with their counterparts, contractual disputes will arise. 

When a contractual dispute arises, it is usually resolved through the legal process of mediation, arbitration and, finally, litigation. Every stage is operated by corporate lawyers. But the introduction of smart contracts challenges the existence of this process, as well as the lawyers who make money out of it.

Because smart contracts are capable of self-execution, they significantly minimise the likelihood of contractual disputes arising. In light of this, Russian companies may begin shifting their business approach and start compelling their business counterparts to bind themselves using smart contracts instead of traditional contracts. 

The benefit of this approach is that there won’t be any contractual disputes regarding lack of performance. A further benefit is evidenced by the fact that smart contracts are capable of operating in a private blockchain, where only the contracting parties have access to contractual transactions. Secrecy is thus ensured, which is an attractive feature for US companies that are concerned with bad PR, but otherwise wish to trade with Russia. 

If Russian businesses shift to smart contracts, they have to rely on expensive corporate lawyers to enforce contractual agreements when business is stifled by sanctions. By the same token, if rebel US corporations continue doing business with Russia, smart contracts offer a discreet way of doing this. Depending on whether you support Washington or Moscow, this may either be an unfortunate or fortunate eventuality. Regardless of your political affiliation, however, smart contracts are an impending global eventuality.  The impending blockchain revolution is upon us, and this is evidenced by a number of international banks constructing platforms that use smart contracts. It is only a matter of time for businesses and governments to walk down the virtual aisle and say “I do” to blockchain technology. When that time comes, the terms of the marriage will be written on smart contracts.

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Lukhanyiso Hogana
Lukhanyiso Hogana is a law graduate from the University of the Witwatersrand with an interest in technology and the law, particularly blockchain processes.

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