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EU further tightens sanctions imposed in the context of the current Ukrainian crisis

15/09/2014

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Belgium, United Kingdom

As the political relationship between the EU and Russia worsens over the latter's involvement in the current crisis in Eastern Ukraine and the annexation of Crimea and Sevastopol, the EU has significantly broadened the scope of its sanctions.  As tensions continue, the EU has further intensified the sanctions with effect as of 12 September 2014.  The widened sanctions will have significant effects on European stakeholders' business interests in Russia and the pro-Russia part of Ukraine.

In July 2014, the EU intensified sanctions against Russian stakeholders in response to Russia's interference in Eastern Ukraine and the annexation of Crimea and Sevastopol.  The increase of scope and complexity of the sanctions in late July had a significant impact on some stakeholders and brought a high degree of uncertainty to EU business relations with Russia.  The most recent extension will have even broader effects on business relationships and investment decisions of EU companies. 

We reported on the July sanctions in our August newsletter.  We have now updated our previous alert to include the September sanctions, and thus provide a complete overview of the EU sanctions against Russia in effect as of 12 September 2014.

The current sanctions in force consist essentially of three parts[1]:

  • restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine[2];
  • restrictive measures in response to the illegal annexation of Crimea and Sevastopol[3]; and most recently
  • restrictive measures in view of Russia's actions destabilising the situation in the Ukraine.[4]

Restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine

Regulation 269/2014 imposed financial sanctions on specific individuals and entities listed in its Annex I.  The sanctions were first imposed on 17 March 2014 and the Annex I has been updated several times since. 

On 18 and 25 July 2014, Regulations 783/2014[5] and 811/2014[6] respectively, and on 12 September 2014, Regulation 959/2014[7] replaced and significantly broadened the previous versions of Article 3(1) of Regulation 269/2014, which describes the scope of persons and entities the Council can make subject to sanctions. 

The initial version of Article 3 allowed the imposition of sanctions "only" against "persons responsible for actions which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine, and natural or legal persons, entities or bodies associated with them". 

In May 2014, Regulation 476/2014[8] broadened the scope of Article 3 a first time, allowing the Council to impose sanctions also against parties that "obstruct the work of international organisations in Ukraine, and natural or legal persons, entities or bodies associated with them, or legal persons, entities or bodies in Crimea or Sevastopol whose ownership has been transferred contrary to Ukrainian law, or legal persons, entities or bodies which have benefited from such a transfer".

In July 2014, Regulations 783/2014 and 811/2014 expanded the scope of Article 3 further to include:

  • "legal persons, entities or bodies supporting, materially or financially, actions which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine"; and
  • "natural or legal persons entities or bodies who actively provide material or financial support to, or are benefiting from, Russian decision-makers responsible for the annexation of Crimea and Sevastopol or the destabilising of the Eastern-Ukraine".  [emphases added]

Regulation 959/2014 has now expanded the scope of Article 3, under subparagraph (e), to allow EU authorities to designate under the sanction regime any "natural or legal persons, entities or bodies conducting transactions with the separatist groups in the Donbass region of Ukraine".

Similar step-by-step expansions of the scope of restrictions under the Syrian embargo, for example, led to a significant increase in the number of Syrian businessmen and "national champions" included on the sanctions list. 

Likewise, Articles 3(b), (d) and (e) make it even easier for the EU to impose restrictions at short notice on a wide range of Russian and pro-Russian actors in government positions, as well as in industry, finance, and business sectors who are themselves not directly responsible for any war crimes or actions violating Ukrainian sovereignty.  

In July, the EU's adoption of Regulations 810/2014[9] and 826/2014[10] made use of these new provisions, adding 23 individuals and 21 entities to Annex I of Regulation 269/2014, including Dobrolet Airlines, which allegedly benefitted from exclusively operated flights between Moscow and Crimea, and "long-time acquaintances" of President Putin who have allegedly benefitted from his regime, such as Messrs Rotenberg, Kovalchuk and Shamalov.  In September, Regulation 961/2014[11] added 24 individuals to Annex I, among them members of the Duma, close associates of President Putin, and (high) politicians of Crimea and Eastern Ukraine.

The EU sanctions against individuals and companies comprise most importantly (i) the freezing of their funds and economic resources, and (ii) a general prohibition to make funds and economic resources available to those parties. 

The wide scope of the latter provision makes virtually any business activity with sanctioned parties illegal, and the violation of those provisions is actionable through, for example, fines and in the worst case, the listing of the violating entity itself.  Generally, fines need not be imposed at astronomic levels, such as the recent €6.6 billion record fine the US authorities imposed on BNP for alleged violations of the Iran embargo,[12] to have a major impact on a company's business.  Even lower financial penalties, combined with the loss of export privileges and damage to a company's reputation, can hurt a company and significantly impact its business activities. 

In recent years, EU operators have therefore become increasingly reluctant even to engage in allowed business with sanctioned parties.  Listed persons and entities find themselves quickly in a state of political and economic isolation, which can remain difficult to shake even if the listing has been successfully challenged before the European Courts in Luxembourg.

Restrictive measures in response to the illegal annexation of Crimea and Sevastopol

Regulation 692/2014 imposed most importantly a total import ban (subject to certain exceptions) on good originating in Crimea and Sevastopol, and prohibits the provision of related financing and insurance services. 

Regulation 825/2014[13]extended these measures by adding:

  • prohibitions of financial investments, participation and financial assistance (as well as of related technical assistance and brokering services) in Crimea and Sevastopol concerning (i) the creation, acquisition or development of infrastructure in the sectors of transport, telecommunications, and energy, and (ii) the exploitation of oil, gas or mineral resources (listed in Annex II); and,
  • an export ban on key equipment and technology (listed in Annex III, pipes and drilling equipment) related to those sectors.

Similar investment-related prohibitions are also included in the EU Iran and Syria embargoes and have significantly affected EU investments in those countries.

Restrictive measures in view of Russia's actions destabilising the situation in the Ukraine

In late July, Regulation 833/2014 expanded the previously imposed sanctions by targeting Russia directly.  With effect as of 12 September, Regulation 960/2014[14] further broadened these sanctions so that they now include:

  • subject to a grandfathering provision for contracts prior to 1 August 2014, a military and dual-use goods embargo, prohibiting the sale, supply or export to persons in Russia or for use in Russia of (i) military items listed on the EU military list[15], (ii) dual-use items listed in Annex I to the EU Dual-Use Regulation 428/2009[16] they are intended in whole or part for a military end-use(r)) as well as related technical and financial assistance and brokering services, and with regard to military items, insurance and reinsurance (if the end-user/procurer is the Russian military there is a presumption of a military use) (Articles 2 and 4);
  • subject to a grandfathering provision for contracts prior to 12 September 2014, a prohibition of the sale, supply, transfer or export, directly or indirectly, of dual-use goods and technology included in Annex I to the EU Dual-Use Regulation, whether or not originating in the Union, as well as related technical and financial assistance and brokering services, to natural or legal persons, entities or bodies in Russia, as listed in Annex IV.  The prohibitions do not apply to the sale, supply, transfer or export of dual-use goods and technology intended for the aeronautics and space industry, or the related provision of technical and financial assistance, for non-military use and for a non-military end user, as well as for maintenance and safety of existing civil nuclear capabilities within the EU, for non-military use and for a non-military end user (Article 2a);

Annex IV currently includes: JSC Sirius (optoelectronics for civil and military purposes), OJSC Stankoinstrument (mechanical engineering for civil and military purposes), OAO JSC Chemcomposite (materials for civil and military purposes), JSC Kalashnikov (small arms), JSC Tula Arms Plant (weapons systems), NPK Technologii Maschinostrojenija (ammunition), OAO Wysokototschnye Kompleksi (anti-aircraft and anti-tank systems), OAO Almaz Antey (state-owned enterprise; arms, ammunition, research), OAO NPO Bazalt (state-owned enterprise, production of machinery for the production of arms and ammunition) (Article 2a);

  • subject to a grandfathering provision for contracts prior to 1 August 2014, a prior authorisation requirement for the sale, supply or export to persons in Russia or for use in Russia of technologies suited for the oil industry for use in deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia (as listed in Annex II), as well as for related technical and financial assistance and brokering services (Articles 3 and 4);
  • subject to a grandfathering provision for contracts prior to 12 September 2014, a prohibition on providing, directly or indirectly, for deep water oil exploration and production, arctic oil exploration and production, or shale oil projects in Russia the following associated services: (i) drilling, (ii) well testing, (iii) logging and completion services, (iv) supply of specialised floating vessels unless they are necessary for the urgent prevention or mitigation of an event likely to have a serious and significant impact on human health and safety or the environment (Article 3a);
  • a prohibition on directly or indirectly purchasing, selling, providing brokering or assisting in the issuance of, or otherwise dealing with transferable securities and money market instruments with a maturity exceeding 90 days, issued between 1 August 2014 and 12 September 2014 or with a maturity exceeding 30 days, issued after 12 September 2014 by various Russian banks listed in Annex III, and majority-owned subsidiaries and legal persons acting on behalf or at the discretion of those subsidiaries.  The banks currently listed in Annex III are Sberbank, VTB Bank, Gazprombank, Vnesheconombank and Rosselkhozbank (Article 5(1));
  • a prohibition of the direct or indirect purchase, sale, provision of investment services for or assistance in the issuance of, or otherwise dealing with transferable securities and money-market instruments with a maturity exceeding 30 days, issued after 12 September 2014 by (i) legal persons listed in Annexes V or VI as well as (ii) legal persons established outside the Union whose proprietary rights are directly or indirectly more than 50 % owned by an entity listed in Annex V or VI, and (iii) legal persons acting on behalf or at the direction of an entity listed in Annexes V or VI;  (Article 5(2))

Annex V includes legal entities established in Russia that are predominantly engaged and with major activities in the conception, production, sales or export of military equipment or services, except legal persons, entities or bodies active in the space or the nuclear energy sector.  Annex V currently includes OPK Oboronprom, United Aircraft Corporation and Uralvagonzavod;

Annex VI includes legal entities established in Russia, which are publicly controlled or which are over 50 % publicly owned and have estimated total assets of over 1 trillion Russian Roubles, and whose estimated revenues originate for at least 50 % from the sale or transportation of crude oil or petroleum products.  Annex VI currently includes Rosneft, Transneft, and Gazprom Neft;

  • a prohibition on directly or indirectly making or being part of any arrangement to make new loans or credit with a maturity exceeding 30 days to any legal person, entity or body referred to in Article (1) and (2), after 12 September 2014, except for loans or credit that have a specific and documented objective to provide financing for non-prohibited imports or exports of goods and non-financial services between the Union and Russia, or for loans that have a specific and documented objective to provide emergency funding to meet solvency and liquidity criteria for legal persons established in the Union, whose proprietary rights are more than 50 % owned by any entity referred to in Annex III  (Article 5(3).

Prudent business planning

The extension of Regulation 833/2014 by Regulation 960/2014 and the extension of the scope of Regulation 269/2014, despite the Russian retaliation in August 2014 and threats of additional retaliation, confirm the EU's firm stand to "punish" Russia for its deemed support of separatists in East Ukraine and the annexation of Crimea and Sevastopol.

Accordingly, EU entrepreneurs engaging in business with Russian entities should see the recent broadening of the sanctions as a warning sign that further extensions might follow if President Putin does not take concrete steps to support a permanent peace in Eastern Ukraine. 

EU stakeholders are therefore well-advised to increase their focus on compliance with the EU sanctions, and to exercise increased caution when doing business with Russia and Ukraine, especially with regard to East Ukraine.  In particular, it is advisable not to carry out business without enhanced due diligence checks.  It is also common in such a situation to seek the inclusion of specific liability and termination clauses in contracts.

If you have any questions concerning your business with Ukraine and Russia, do not hesitate to contact our export control and sanctions team and/or our CIS group.


Footnotes

1. In addition to the EU legislation discussed here in detail, Council Regulation (EU) No 208/2014 of 5 March 2014 concerning restrictive measures directed against certain persons, entities and bodies in view of the situation in Ukraine OJ 2014 L 66/ 1, imposes .financial sanctions against former Ukrainian president Viktor Yanukovych and persons related to him.

2. Council Decision 2014/145/CFSP of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ 2014 L78/16 and Council Regulation (EU) No 269/2014 of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ 2014 L78/6.

3. Council Decision 2014/386/CFSP of 23 June 2014 concerning restrictions on goods originating in Crimea or Sevastopol, in response to the illegal annexation of Crimea and Sevastopol, OJ 2014 L183/70 and Council Regulation (EU) No 692/2014 of 23 June 2014 concerning restrictions on the import into the Union of goods originating in Crimea or Sevastopol, in response to the illegal annexation of Crimea and Sevastopol, OJ 2014 L183/9.

4. Council Decision 2014/512/CFSP of 31 July 2014 concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine, OJ 2014 L229/13 and Council Regulation (EU) No 833/2014 of 31 July 2014 concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine, OJ 2014 L229/1.

5. Council Regulation (EU) No 783/2014 of 18 July 2014 amending Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ 2014 L214/2.  In addition to the amendment of the wording in Regulation 269/2014, the corresponding wording in Decision 2014/145/CFSP has also been amended in the same way.

6. Council Regulation (EU) No 811/2014 of 25 July 2014 amending Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ 2014 L221/11.

7. Council Regulation (EU) No 959/2014 of 8 September 2014 amending Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine OJ 2014 L271/1.

8. Council Regulation (EU) No 476/2014 of 12 May 2014 amending Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ 2014 L137/1.  In addition to the amendment of the wording in Regulation 269/2014, the corresponding wording in Decision 2014/145/CFSP has also been amended in the same way.

9. See Council Implementing Regulation (EU) No 810/2014 of 25 July 2014 implementing Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ 2014 L221/1.

10. Council Implementing Regulation (EU) No 826/2014 of 30 July 2014 implementing Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ 2014 L226/16.

11. Council Implementing Regulation (EU) No 961/2014 of 8 September 2014 implementing Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine OJ 2014 L271/8.

12. See e.g. Bloomberg "BNP to Pay Almost $9 Billion in U.S. Sanctions Plea Deal" of 1 July 2014.

13. Council Regulation (EU) No 825/2014 of 30 July 2014 amending Regulation (EU) No 692/2014 concerning restrictions on the import into the Union of goods originating in Crimea or Sevastopol, in response to the illegal annexation of Crimea and Sevastopol,  OJ 2014 L226/2.

14. Council Regulation (EU) No 960/2014 of 8 September 2014 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine OJ 2014 L271/3.

15. Common Military List of the European Union, OJ 2014 C107/1.

16. Council Regulation (EC) No 428/2009 of 5 May 2009 setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items, OJ 2014 L134/1.

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