Sanctions Policy and Investment Climate in Ukraine: Legal Risks and Practical Realities

Ukraine has in recent years actively applied special economic and other restrictive measures (sanctions) against both foreign and domestic individuals and entities in response to national security threats, particularly from the Russian Federation. While this is a natural response to aggression and subversive actions, the increasingly frequent use of sanctions creates a number of legal risks for Ukrainian businesses and raises serious concerns about the rule of law, investment attractiveness, and the availability of judicial remedies in Ukraine. The lack of institutional balance, the non-transparent decision-making process, and limited possibilities for challenging such decisions undermine trust in the sanctions mechanism, both domestically and internationally.

Sanctions in Ukraine: Between National Security and Legal Uncertainty

In democratic countries, sanctions are seen as a foreign policy tool applied to subjects outside national jurisdiction. In Ukraine, however, sanctions are increasingly used against its own citizens and companies. This creates a legal conflict, as punitive measures without a court conviction contradict fundamental constitutional principles, particularly the presumption of innocence (Article 62 of the Constitution of Ukraine).

Recent practice shows that sanctions are often a substitute for judicial processes. In cases involving terrorism, treason, or war financing, it is a court that should determine guilt and responsibility. When individuals are restricted in their rights without a court ruling, and their assets are frozen based on political decisions, this undermines the right to a fair trial.

Such actions not only threaten the rights of specific individuals or companies but erode public trust in state institutions, reduce legal certainty, and create a climate of legal nihilism. Foreign investors observing such practices may conclude that in Ukraine, rights can be restricted not by a court but by the outcome of closed political deliberations. This portrays sanctions not as a means of protection, but as a potential instrument of pressure.

For example, in 2023, several Ukrainian companies with no public links to the aggressor state were included in sanctions lists due to alleged indirect ties with counterparties who had previous Russian connections. In most cases, no evidence was made public, and court appeals were unsuccessful. This results in reputational harm and direct financial losses, such as frozen accounts, halted transactions, and terminated partnerships.

Institutional and Procedural Gaps

Despite the Law of Ukraine On Sanctions being in force for more than a decade, there is still no unified, clear regulation of how sanctions should be applied. Key issues remain unresolved: procedures for preparing materials, evidentiary thresholds, terms and durations of sanctions, and review mechanisms.

Decisions are often made based on operational information rather than verified evidence. This fosters a flawed “preemptive” approach, where a person is added to a sanctions list first and analysed later. Such practice contradicts the principles of legal certainty and due process.

In Ukraine, sanctions can remain in effect for years without review. By contrast, in the EU, sanctions lists are revised at least on an annual basis. In some Ukrainian cases persons remained under sanctions for over five years without updated evidence or ongoing risk assessment, violating principles of proportionality and time limitation.

Another critical issue is the lack of information access. Without clear grounds or explanations for inclusion in the list, effective legal challenge becomes impossible. Courts cannot properly assess the legality of state action without full reasoning.

International Practice: USA, EU, Canada, UK

Comparative analysis shows that democratic states ensure sanction mechanisms are transparent, reviewable, and subject to judicial oversight.

In the USA, the Office of Foreign Assets Control (OFAC) applies sanctions based on extensive inter-agency coordination and legal analysis. The OFAC must publish explanations for listing individuals or entities. Sanctioned persons may appeal, submit new evidence, or seek judicial review. Notable cases such as Deripaska v. Mnuchin and Al Haramain Islamic Foundation v. U.S. Department of the Treasury illustrate judicial control over national security-related sanctions.

The EU requires strict compliance with due process. After the Kadi case, the European Court of Justice mandated that all sanctions be justified and subject to appeal. Sanctions listings are publicly disclosed with reasoning, and affected parties can bring actions before the EU General Court.

Canada enforces sanctions through the Magnitsky Act, with mechanisms for parliamentary and judicial oversight. Individuals can seek judicial review or request explanations from government agencies.

Post-Brexit, the UK established an autonomous sanctions system based on evidentiary standards and a statutory right of appeal. In Bank Mellat v. HM Treasury, the UK court declared the sanctions as unlawful due to procedural violations.

Risks for Investors and Ukrainian Business

The Ukrainian approach to sanctions poses risks for the investment climate. Amid ongoing martial law, Ukraine needs economic resilience, investor trust, and preservation of employment. Yet legislative flaws and discretionary application of sanctions have led to capital flight, business closures, and reduced tax revenues.

Of particular concern is the energy sector: companies involved in oil and gas production face sanctions that result in the loss of licenses (Article 13-7 of the Subsoil Code of Ukraine), production halts, job losses, and economic destabilization. These actions damage the economy and diminish trust among international partners and donors.

There is currently no public research assessing the net benefit or harm of sanctions on domestic business and public finances. Given that Ukrainian businesses pay taxes, support the military, and provide employment, the state should prioritize preserving economic resources rather than restricting them administratively.

Key Considerations for Investors: Legal Guidance and Strategy

Foreign investors entering the Ukrainian market should consider not only traditional risks (like tax, financial, security) but also the legal uncertainty of the sanctions regime. This is especially critical in highly-regulated sectors (energy, defense, agro-export, finance, infrastructure).

• Thorough compliance and due diligence.Investors must conduct comprehensive legal and factual due diligence of not just partner companies but their entire supply chain, checking for ties to sanctioned entities or beneficial owners;
• Contract structuring.Contracts should include sanctions clauses allowing early termination, arbitration provisions, and designation of jurisdictions where enforcement remains feasible;
• Legal support.Early involvement of Ukrainian counsel can help to structure documentation, ensure regulatory compliance, and mitigate risks;
• Reputation risk management.Being listed in any public register (judicial, sanctions, customs) is a threat to access to Western banks. Crisis response protocols, including legal advocacy and media communication, are essential.
• Understanding case law.Investors should monitor the Supreme Court of Ukraine and commercial court decisions involving sanctions, especially regarding asset loss, contractual enforceability, and IP rights.

Conclusion

Sanctions can serve as an effective tool for safeguarding national security, but only if they rest on solid legal foundations: transparency, accountability, procedural clarity, and access to judicial review. Otherwise, there is a real risk of sanctions evolving into a quasi-judicial mechanism that is incompatible with Ukraine’s international commitments.

For investors, this means one thing: in today’s Ukraine, it is not enough to invest — one must invest wisely and with full awareness of legal scenarios. Despite the risks, Ukraine remains a market of significant potential. The key question is whether the state and its legal institutions are ready to safeguard that potential.