This guide outlines the sanctions imposed by the European Union from 31 July 2014 and the corresponding US sanctions. The sanctions are designed to discourage Russia from, in the words of the EU Regulation, “destabilising the situation in Ukraine”.
This guide was last updated in August 2014
Sector wide sanctions imposed by Council Regulation 833/2014 came into force on 31 July 2014. The sanctions will, in the main, apply to new contracts. The provision of financing, products and related services required under pre-existing contractual obligations will be allowed, at least for a limited period and subject to authorisations from particular government agencies in the EU.
Financial instruments and services
EU nationals and companies are prohibited from buying or selling bonds, equity or other money-market instruments with a maturity exceeding 90 days and which are issued after 1 August 2014 by Sberbank, VTB Bank, Gazprombank, Vnesheconombank, Rosselkhozbank, or by another institution or body outside of the EU in which one of those banks is a majority shareholder or via another person or entity which is acting at the direction of one of these five banks.
Services related to the issuing of such financial instruments, such as brokering, are also prohibited.
Energy related equipment and technology
Exports of certain energy-related equipment and technology to Russia require prior authorisation by a competent authority of the relevant EU country. The restricted items include line pipe, drill pipe, casing and tubing used in oil or gas drilling, rock-drilling or earth-boring tools, certain types of pumps, liquid elevators, mobile drilling derricks, floating or submersible drilling or production platforms, and other oil and gas drilling related equipment. A list of CN codes has been published to help exporters identify restricted items.
Export licenses will be denied if the equipment is provided under a contractual obligation which was entered into on or after 1 August 2014 and there are reasonable grounds to consider that the products are destined for projects pertaining to deep water oil exploration and production, Arctic oil exploration or production, or shale oil projects in Russia.
In the UK authorisation is by way of a Standard Individual Export Licence issued by the Export Control Organisation. It can take up to 20 working days for a licence to be issued.
Dual use goods and technology
Exports of dual use goods and technology for military use in Russia or to Russian military end-users are also prohibited. All items in the EU list of dual use goods (269-page / 432MB PDF, see annex for list) are included. As with energy-related equipment the supply of dual use used goods for military use or for a military end-user may be authorised by an EU export control authority if the supply obligations arose from a contract concluded before 1 August 2014.
Crimea and Sevastopol
There is a complete ban on new investment in the following sectors in Crimea and Sevastopol: infrastructure projects in the transport, telecommunications and energy sectors and in relation to the exploitation of oil, gas and minerals. Key equipment for the same six sectors may not be exported to or for use in Crimea and Sevastopol; and finance and insurance services related to such transactions must not be provided.
The prohibitions in respect of the provision of equipment do not apply, until 28 October 2014, to the execution of transactions required by a contract which was concluded before 30 July 2014 so long as 10 working days advance notice is given to a competent authority in the EU.
Asset Freezes and Financial Sanctions
The EU has prohibited any EU company or person, and any overseas company or person while in the EU, from making any funds, or economic resources from which funds could be generated, such as hardware and technology for example, available to or for the benefit of certain designated persons (now 117 individuals and 23 companies). The assets of these designated persons are also to be frozen.
The requirement to freeze or not to make available funds and economic resources is triggered where there is reasonable cause to suspect that the funds or resources are owned or controlled by a designated person or that the designated person will benefit from the provision of the funds or resources, even if the funds and resources are to be provided to a third party. As such, the provision of products to a company that a designated person only has a minority share in could be caught by the sanctions if the designated person will still derive a significant financial benefit from the supply of that product to the company.
The EU restrictions allow for funds and assets to be made available to or for the benefit of a designated person or for funds to be released from frozen accounts if authorised by HM Treasury or another competent authority in the EU. The ability to authorise a release of funds or assets only applies in limited circumstances. The main exception relevant to businesses is that payments due from a designated person under a contract which was agreed before the person was added to the list of designated persons may be authorised by HM Treasury or another competent authority in the EU. In addition, banks and other companies may be authorised to release funds needed for a designated person’s basic family needs or to pay his legal fees.
However, there is no pre-existing contractual exemption that allows designated persons to be provided with or benefit from the provision of economic resources to a third party company.
EU import restrictions
The EU has prohibited the import of goods originating in Crimea or Sevastopol. There is also a restriction on EU companies providing finance, financial assistance, insurance or re-insurance relating to the import of goods originating in Crimea or Sevastopol.
The import bans do not apply to imports arising out of contracts concluded before 25 June 2014 provided that the goods are imported before 26 September 2014 and a relevant EU authority has been notified at least 10 working days in advance of the import date. Advanced notifications also need to be given in relation to the finance, financial assistance, insurance and reinsurance of such contracts.
The sanctions apply to all EU companies and persons operating anywhere in the world and to any overseas company and person when doing business within the EU.
Supplies of products into Russia via non-EU subsidiaries may be caught if title to the products is in the hands of the EU parent company (this is often required for financing reasons) or an EU company or EU based directors need to approve the contract or supply in accordance with the company’s pre-existing governance arrangements.
UK laws to implement the EU Regulations make it an offence to deliberately do anything which has the object or effect of circumventing the prohibitions.
No claim by any Russian person or entity in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by the EU sanctions can be enforced in the EU. Often companies doing business in Russia will have contracts that are subject to a Russian law and jurisdiction clause. Subject to force majeure considerations, such a contract may be enforced within Russia but courts within the EU will not enforce any judgment if the transaction was prevented from proceeding because of the EU sanctions.
On July 16 and 29, the US Treasury imposed sectoral sanctions against Russia targeting major banks, energy companies, parts of the defence and shipping industries. These sanctions, for the most part, apply to new contracts and the provision of financing, products and related services required under pre-existing contractual obligations will be allowed, at least for a limited period.
The sanctions affecting Russia are as follows:
- US persons and people within the US are prohibited from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity issued by major state-owned Russian banks, including Bank of Moscow, Gazprombank OAO, Vnesheconombank (VEB), Russian Agricultural Bank (Rosselkhozbank) and VTB Bank OAO.
- US persons and people within the US are prohibited from transacting in, providing financing for, or otherwise dealing in new debt for two Russian energy firms, OAO Novatek and Rosneft.
- Exports of certain energy-related equipment and technology to Russia will require export licenses from the applicable US government agency (US Department of Commerce Bureau of Industry and Security for dual-use items and US Department of State for defence items). Export licenses will be likely to be denied if the equipment is provided under a contract which takes effect after the sanctions effective date and if the products are destined for deep water oil exploration or production, Arctic oil exploration or production, or shale oil projects in Russia.
- As of April 28, 2014, any license applications submitted for the export and re-export of dual-use items listed on the Commerce Control List to Russia will be denied. Pre-existing contracts are exempt.
- Asset freezes and financial sanctions
The US has issued a series of Ukraine-related sanctions in response to Russia’s actions in Crimea, including three executive orders and the addition of dozens of names to the Specially Designated Nationals and Blocked Persons lists maintained by the US Treasury Department’s Office of Foreign Assets Control.
These new sanctions, issued primarily under the authority of the International Emergency Economic Powers Act, prohibit any US person, entity or individual and any overseas company or person while in the US from making any funds, or economic resources from which funds could be generated available to or for the benefit of certain designated persons. US persons are prohibited from dealing with SDNs wherever they are located and all SDN assets are frozen. Furthermore, entities owned or controlled 50% or more by entities on the SDN or Blocked Persons lists are also subject to sanctions, even if these entities do not appear on the lists.
Most recently, the US has designated eight Russian arms firms responsible for small arms, mortar shells and tank production, as well as a shipping facility in the Crimean peninsula and Russia’s largest shipbuilding company (United Shipbuilding Corporation). Any assets of these designated entities that are within US jurisdiction have been frozen. In addition, US persons or people within the US are prohibited from transacting business with these designated entities.
The US Department of Treasury’s Financial Crimes Enforcement Network has issued two advisories warning financial institutions of heightened money-laundering risks relating to the crisis in Ukraine. These advisories remind US financial institutions that they are required to “apply enhanced scrutiny to private banking accounts held by or on behalf of senior foreign political figures” and to monitor transactions that could potentially represent misappropriated or diverted state assets, other illegal payments or public corruption proceeds.
These sanctions apply to all US companies and persons operating anywhere in the world and to any overseas company and person when conducting business in the US.
Given that it is a criminal offence to breach the sanctions, if a company has any doubt over whether or not a transaction is caught by any relevant financial or trade sanctions, legal advice should be taken.
As an immediate step, companies should check the scope of their pre-existing contracts with Russian businesses or which relate to the provision of financing and relevant products and services. If there is a pre-existing contractual obligation under which the supply is required to proceed, it may be exempt from the scope of the relevant sanctions (subject to any prior notification provisions) or allowed to proceed if authorised or licensed. However, care is needed as the exemptions may not cover supplies under framework agreements where there is no obligation to supply, or to orders under contracts which were extended after the sanctions came into force.
Financing agreements should also be checked as they may contain extensive prohibitions on proceeding with any contracts relating to Russian business now that sector and country wide restrictions are in place.
More generally, companies that conduct business overseas or with foreign businesses should have in place a compliance programme based around a robust policy on sanctions and comprehensive systems to implement the policy effectively. Further, companies should be aware of potential anti-money laundering risks associated with these regions in light of the ongoing crisis in Ukraine.
Such a programme should include:
- customer and transaction due diligence and screening against applicable financial sanctions target lists, including EU, US and UK sanctions lists;
- assessing if equipment and products are on export control lists and ensuring that all necessary licenses to export are obtained;
- checking if imported goods are in any way restricted;
- contractual controls, including sanctions exclusions and warranties;
- training in policies and procedures; and
- regular monitoring of transactions and periodic audits of sanctions compliance.
The information on the EU in this guide was prepared by Pinsent Masons, the law firm behind Out-Law.com, and the information on the US was prepared by US law firm Husch Blackwell.