2014 was a busy year for EU sanctions. In this update, we give an overview of the various sanctions that have been implemented by the EU authorities over the last 12 months following the events that took place in Ukraine during 2014.
There has recently been a renewed push for peace talks to resolve the continuing fighting in the East of Ukraine, but there has still been little progress towards a lasting ceasefire. Further, despite the fact that peace talks have been taking place, there is currently no indication that the sanctions implemented to date are going away. Indeed, EU foreign ministers have just agreed to extend existing sanctions against Russia until September 2015 and to discuss the addition of further names to the list of individuals subject to EU asset freezes and travel bans. Sanctions will undoubtedly continue to play a role in 2015, with the potential for further measures to be introduced, if no solution is found to the crisis.
This article provides a summary of the recent sanctions that have been introduced and that will impact on any business with these affected regions.
The EU issued its first round of sanctions in relation to the situation in Ukraine in March 2014, freezing the assets of individuals in Ukraine and Russia (Regulation 269/2014). On 23 June 2014, EU Regulation 692/2014 came into force, which prohibited the import of goods from Crimea and Sevastopol.
Following the shooting down of a Malaysian Airlines aircraft (flight MH17) in Ukrainian airspace on 17 July 2014, the international community levied increasingly restrictive measures on Russia in order to try to persuade the Russian government to take steps to de-escalate the ongoing crisis in Ukraine. As fighting continued, and indeed escalated, in the East of Ukraine, further restrictions were introduced by the EU authorities through to the end of 2014.
Application of the EU sanctions
The jurisdictional reach of the EU sanctions regimes in respect of Ukraine and Russia is the same as that found in other EU sanctions regimes such as Iran and Syria. As such, the sanctions apply as follows:
- within the territory of the EU;
- on board any aircraft or vessel under the jurisdiction of an EU country;
- to any EU national wherever located;
- to any legal person, entity or body incorporated or constituted under the law of an EU country; and
- to any legal person, entity or body in respect of any business done in whole or in part within the EU.
Those with EU connections should remain vigilant when transacting any business with a Russian or Ukrainian element (including Crimea / Sevastopol). As noted in our previous sanctions updates, even if you consider that neither you nor your business is subject to the sanctions, there could be an impact on those providing financing to certain projects or insurance to elements of the business. Indeed, even if not a concern for you, it may be a requirement that your counterparty ensures compliance with the EU sanctions in any transactions with you.
Leaving aside the restrictions that have been imposed on certain Ukrainian individuals and entities, the EU sanctions affect two geographical regions: (A) Crimea / Sevastopol and (B) Russia. We discuss the restrictions affecting each of these regions in turn:
(A) Crimea / Sevastopol
Pursuant to UN General Assembly Resolution 68/262 of 27 March 2014, Crimea and Sevastopol continue to be considered part of Ukraine. The EU authorities have continued to condemn what is considered the illegal annexation of Crimea and Sevastopol and restrictions have been introduced in response to this annexation, effectively trying to restrict trade and assistance to the region.
On 19 December 2014, the latest EU Regulation on Crimea / Sevastopol came into effect (Regulation 1351/2014). The restrictions contained in this Regulation have replaced a number of the earlier restrictions, and are more extensive in scope. In summary, the restrictions implemented by this Regulation and previous legislation can be broken down as follows:
- Importation of goods originating in Crimea
It is prohibited to import into the EU goods originating in Crimea or Sevastopol and to provide, directly or indirectly, financing or financial assistance, insurance and reinsurance related to such import.
- Sale or supply of goods and technology
It is prohibited to sell, supply, transfer or export certain goods and technology to any natural or legal person, entity or body in Crimea / Sevastopol or for use in Crimea / Sevastopol. These are goods and technologies that relate to the following key sectors:
- energy; and
- the prospection, exploration and production of oil, gas and mineral resources.
Prohibited goods include, amongst others, minerals fuels and oils, iron and steel, motor vehicles for the transport of people and goods, aircraft and ships.
There is a limited exception to this restriction relating to the execution until 21 March 2015 of obligations arising from contracts (or ancillary contracts) concluded before 20 December 2014, provided that certain formalities with the relevant authority are complied with.
It is also prohibited to provide technical assistance, or brokering, construction or engineering services directly relating to infrastructure in Crimea / Sevastopol to the industry sectors outlined above.
It is prohibited to provide services directly related to tourism activities in or for use in Crimea / Sevastopol.
“Tourism activities” is not defined in the sanctions legislation, but there is an express prohibition on cruise ships flagged by an EU Member State or owned / operated by an EU entity calling at any port situated on the Crimean peninsula, namely Sevastopol, Kerch, Yalta, Theodosia, Evpatoria, Chernomorsk and Kamysh-Burun. Consideration will have to be given to whether other activities can be considered as “tourism activities” in Crimea / Sevastopol.
Again, there is an exception that allows obligations under contracts concluded prior to 20 December 2014 (and ancillary contracts) to be performed and for ships to call at the listed ports for reasons of maritime safety.
- Investment in Crimea
There are also a number of restrictions that curtail investment in Crimea / Sevastopol. These include restrictions on real estate in the region, ownership or control of entities in Crimea / Sevastopol and the creation of any joint venture.
- Sanctioned persons
Sanctions often include restrictions on providing funds and economic resources, directly or indirectly, to designated persons. These persons are commonly referred to as ‘sanctioned persons’. It is worth highlighting that a number of commercial enterprises in Crimea are subject to these designations, including the Crimean ports of Sevastopol and Kerch. Any business involving such entities is likely to be in breach of the sanctions and checks should therefore be carried out on all counterparties and beneficiaries of transactions.
EU Regulation 833/2014 came into force on 31 July 2014 in response to Russia’s failure to comply with EU demands regarding the annexation of Crimea and Sevastopol. This Regulation targeted the military, oil and financial services industry and was further amended by EU Regulation 960/2014, which entered into force on 12 September 2014, and EU Regulation 1290/2014, which entered into force on 5 December 2014. A summary of the restrictions imposed to date are as follows:
It is prohibited to make available dual-use goods and technology, originating inside or outside the EU, to anyone in Russia or for use in Russia, if those items are for military use or for military end users, such as the Russian army. In addition, it is prohibited to provide directly or indirectly technical assistance, brokering services or financial assistance related to these goods. An authorisation may be granted if an obligation arises from a contract entered into before 1 August 2014.
The Regulation prohibits making available, directly or indirectly, a wide range of technologies originating inside or outside the EU, to anybody in Russia or to anyone outside Russia for use in Russia, without prior authorisation. If the authorities have reasonable grounds to determine that the technologies will be used in deep water or Arctic oil exploration / production and shale oil projects in Russia, no authorisation will be given, save that authorisation may be granted if a contract was entered into before 1 August 2014.
The types of technology that are prohibited include, amongst other items, drill pipes, mobile drilling derricks, floating or submersible drilling or production platforms and sea-going light vessels.
- Oil exploration
It is prohibited to provide, directly or indirectly, the following services necessary for deep water oil exploration and production, arctic oil exploration and production of shale projects in Russia:
- well testing;
- logging and completion services; and
- supply of specialised floating vessels.
The prohibition does not apply if an obligation arises from a contract (or ancillary contract) entered into before 12 September 2014.
- Financial instruments
It is prohibited to directly or indirectly purchase, sell, provide investment services or assistance in the issuance of, or otherwise deal with transferable securities and money-market instruments with a maturity exceeding 90 days, issued between 1 August – 12 September 2014, or with a maturity exceeding 30 days if issued after 12 September 2014, by certain entities who are linked to certain Russian banks (including those entities outside the EU owned 50% or more by a listed bank).
- Sanctioned persons
Certain Russian persons have also been designated as sanctioned persons for their involvement in events in Crimea. In addition, the EU authorities have designated various Russian entities as subject to certain sectoral sanctions. These sectoral sanctions are designed to prevent specific business dealings with the entity involved. They restrict, for example, financial investment involving these persons, but notably fall short of listing that entity as a sanctioned person and the wider restrictions that would be imposed by such a designation, not least an asset freeze. With the varying levels of restrictions, checks should be undertaken on any business involving such entities to ensure that the relevant EU sanctions are complied with.
Russian retaliatory measures
In response to the EU and US sanctions, the Russian government has banned a wide range of imports from the EU, Norway, the United States, Canada, and Australia. From 7 August 2014, fruit, vegetables, meat, fish and dairy from those countries can no longer be exported to Russia. The ban is said to last for one year.
The EU has, in particular, targeted the transport, telecommunications and energy sectors in Crimea and the energy and arms sectors in Russia. The US has introduced similar restrictions. Given the situation in Ukraine and the continued fighting, it seems likely that there could be an introduction of further sectoral or other sanctions against Russia by the EU and US. As such, we recommend that contracts related to these areas be kept under review and that legal advice be sought where necessary. Those subject to the EU sanctions would do well to ensure rigorous due diligence before entering into new business connected to Russia or Crimea and to include appropriate sanctions exclusion clauses in any new contracts that could be affected by existing or future sanctions against Russia and/or Crimea.