Threat of Hard-Hitting Russia Sanctions Leaves U.S. Companies Planning for All Scenarios

“It’s very challenging to sanction-proof your operations [in Russia], especially when you don’t know what kind of actions [from the U.S. government] that would be,” said Mr. Smith, a partner at law firm Gibson, Dunn & Crutcher LLP who specializes in international trade compliance.

The Biden administration last week said the U.S. and its allies are prepared to impose sanctions and export controls on critical sectors of Russia’s economy in response to an attack on Ukraine.

Administration officials didn’t give many specifics, but said the goal would be to strike critical industries in Russia and potentially the country’s artificial intelligence, quantum computing and aerospace sectors to deny industry high-technology components it can’t get domestically or through alternate suppliers.

Legislation targeting the Russian economy also is nearing completion in the Senate, key lawmakers said Sunday.

Amid the escalating tensions with Moscow, a compliance executive at a U.S. financial services company said it has spent several weeks parsing proposed legislation and scenario-planning, because it does business with key Russian banks, including VTB Bank and Sberbank. Biden administration officials on Friday said sanctions targets could include the two banks, though final decisions haven’t been made, The Wall Street Journal reported.

A Treasury spokesperson said in an email that the U.S. “is looking at a range of options—with allies and partners—to deliver severe costs to the Russian economy,” adding that “assessing potential spillovers and exploring ways to reduce those spillovers is good governance and standard practice.”

Even with careful scenario planning, the executive said preparing for sanctions is a challenge since they are by design meant to surprise and prevent asset flight. “It always ends up still being a bit of a scramble, because there’s only so much you can do in terms of planning,” he said.

“Once you have to really put it into effect, that’s when you really end up having to freeze assets and shutting down business lines,” he added. “There’s contracts and arrangements that are of longer tenure, and so you can’t just walk away or cancel those. And once the sanctions are imposed, you have to figure out what you’re going to reap. Then you have to put a different plan in place.”

The U.S. can take several approaches and use existing tools to sanction Russia, but the consequences could be great, said Mr. Smith, who served on the National Security Council during the Obama administration and worked on its Russia sanctions in 2014 following the invasion of Crimea.

Mr. Smith expects sanctions would likely carve out exemptions and licenses for certain activities and offer a grace period for businesses to wind down operations. But that would still require guidance and advisories from U.S. agencies to clarify the actions. “All of these nuances make it very difficult to navigate,” he said.

The Biden administration should be providing guidance publicly and privately to companies, particularly those in the financial sector, on how to comply with measures now under consideration, said Alex Zerden, a former U.S. Treasury official in the Obama and Trump administrations.

Meanwhile, compliance officers should be evaluating sanctions compliance programs based on existing risks and preparing to adapt to new possible actions, Mr. Zerden, now the principal of financial technology and risk advisory firm Capitol Peak Strategies LLC, said.

Cari Stinebower, a partner at law firm Winston & Strawn LLP in Washington who focuses on sanctions and export controls, said she has been speaking with U.S. and foreign clients to discuss contingency plans in case sanctions are imposed.

She suggests companies assess their risk exposure based on targets proposed in sanctions legislation and draft a memorandum on the findings. If sanctions are imposed, she said businesses will likely rush to various agencies, such as the Treasury Department’s Office of Foreign Assets Control, which enforces U.S. sanctions, to obtain licenses or extensions to wind down activities.

Considering the tight links between the U.S., European and Russian economies, complying with sanctions would prove very complicated, so businesses shouldn’t delay in touching base with government officials to express their concerns and to seek guidance, Ms. Stinebower added.

“The dialogues between business, the White House and the Hill are important to soften the unintended impact on business,” she said.

Write to Mengqi Sun at mengqi.sun@wsj.com