The recent crisis in Ukraine has sent the Russian markets tumbling. In the aftermath of prolonged protests in Kiev, which led to the ousting of Pro-Russian President Viktor Yanukovych, Russian forces have entered Crimea and threatened to push further into eastern Ukraine. The crisis has already had an impact on global markets as investors grow concerned about the stability of Russian assets. In the short term, economic sanctions may prevent any significant transactions involving Russian companies, and in the long term, this instability may impact investor confidence in the region for years to come.

The ongoing crisis is likely to have negative impact on global M&A activity. According to Mergermarket’s 2013 Trend Report, Russia typically accounts for a significant share of global M&A, having represented 17.2% of global M&A value last year. The Russian M&A market is particularly important for Canadian companies, who received 47% of outbound Russian M&A in 2013, making Canada the most popular jurisdiction for Russian purchasers. Just as the Georgian conflict in 2008 contributed to a weak Russian M&A market, the current crisis could slow an already tepid market for mergers and acquisitions.

In the short term, the threat of economic sanctions may deter deals. It remains unclear whether western nations will impose economic sanctions, and if they do, what those sanctions will be. However, any sanction is likely to have an impact on M&A prospects. Currently, the U.S. House of Representatives is considering sanctions that would target Russian officials and the powerful business owners known as Oligarchs. Because a large segment of Russian industry is owned by the state or by the Oligarchs, the New York Times speculates that these sanctions could stand in the way of many potential deals.  In response to the threat of sanctions from the U.S., Russian lawmakers are considering legislation that would allow the state to confiscate assets belonging to U.S. and European companies. Needless to say this is not encouraging for prospective foreign purchasers.

In the long term, the greater impacts will be as a result of a loss of investor confidence in the stability of Russian assets. This will slow the purchase of Russian companies by foreign buyers, and make it more difficult for Russian companies to acquire the foreign capital necessary for their own purchases. We saw similar effects in the wake of the Georgian crisis in 2008, which was a comparatively minor confrontation.

However, this economic instability it may also accelerate attempts by Russian companies and individuals to purchase foreign assets which are now perceived as comparatively safer. As noted in the Economist, Russia already suffers high rates of capital flight, particularly among the Oligarch class, who seek ways to preserve their wealth outside of Russia. Continuing conflict in Ukraine may exacerbate this trend, pushing more Russian purchasers to look to the west for their next acquisition.

The author wishes to thank Joshua Stark, articling student, for his valuable assistance in preparing this legal update.