Last week, both the United States and the European Union issued broad, new sanctions targeting the Crimea region of the Ukraine. On December 18, 2014 the Obama Administration announced prohibitions on new investment in the Crimea, the export and import of goods, services and technology to and from the Crimea, approval and facilitation by U.S. persons, and the blocking of property and interests in property of certain persons.
The U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) did not issue a General License to authorize a wind-down period, for ongoing activities and therefore companies must apply for a specific license unless otherwise authorized. OFAC issued new General License 4, which permits U.S. persons to export certain agricultural commodities, medicine, medical supplies, and replacement parts to the Crimea without a specific license.
On December 18, 2014 the European Council approved substantial additional sanctions on investment, services, and trade with Crimea and Sevastopol. These new sanctions reinforce the EU decision not to recognise the annexation of Crimea or Sevastopol. We also set forth below a summary of a Guidance released by the EU on December 16, 2014 regarding the implementation of certain provisions of the EU Russia sanctions.
Summary of U.S. sanctions
Pursuant to the Executive Order, the President imposed the following prohibitions, which are effective as of December 18, 2014:
- No new investment in the Crimea region of the Ukraine by a U.S. person, wherever located.
- U.S. persons are defined to include U.S. citizens, U.S. permanent resident aliens, entities organized under the laws of the United States and their foreign branches, and any person located in the United States. Non-U.S. entities “owned or controlled” by U.S. persons are not included in the definition of U.S. persons.
- While “new investment” is not expressly defined in the Executive Order, OFAC may apply definitions similar to those set forth in other sanctions programs, including Burma. For example, under the Burma program, pursuant to 31 C.F.R § 537.311, “new investment” is defined to include: (1) the entry into a contract that includes the economic development of resources located in the sanctioned country; (2) the entry into a contract providing for the general supervision and guarantee of another person's performance of a contract that includes the economic development of resources located in the sanctioned country; (3) the purchase of a share of ownership, including an equity interest, in the economic development of resources located in the sanctioned country; or (4) the entry into a contract providing for the participation in royalties, earnings, or profits in the economic development of resources located in the sanctioned country, without regard to the form of the participation.” The term new investment generally does not include the entry into, performance of, or financing of a contract to sell or purchase goods, services, or technology.
- No importation into the United States, directly or indirectly, of any goods, services, or technology from the Crimea region of the Ukraine.
- No exportation, reexportation, sale or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any goods, services, or technology to the Crimea region of Ukraine.
- No approval, financing, facilitation, or guarantee by a United States person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited if performed by a United States person or within the United States.
The Executive Order also blocks all property and interests in property that are in the United States, that come within the United States, or that come within the possession and control of U.S. persons, of any person determined by the Secretary of Treasury, in consultation with the Secretary of State:
- to operate in the Crimea region of Ukraine;
- to be a leader of an entity operating in the Crimea region of Ukraine;
- to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to this order; or
- to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to this order.
On the same day, OFAC issued General License 4, which authorizes the exportation or reexportation by U.S. persons of certain agricultural commodities, medicine, medical supplies, and replacement parts to Crimea, or to persons in third countries purchasing specifically for resale to the Crimea, without a specific license from OFAC if the terms and conditions of the General License are met. The conduct of related transactions also is authorized, including the making of shipping and cargo inspection arrangements, the obtaining of insurance, the arrangement of financing and payment, shipping of goods, receipt of payment, and the entry into contracts (including executory contracts).
- Only EAR99 items or items that would be classified as EAR99 if subject to the Export Administration Regulations (EAR) may be exported or reexported under the General License.
- OFAC intends to issue a list of medical supplies, which is defined to include EAR99 medical devices (or EAR99 if subject to the EAR), that will be eligible for the General License. Specific licenses will be required for exports or reexports of any medical devices that are not eligible for the General License.
- Replacement parts for authorized medical supplies may be shipped under the General License provided such replacement parts are EAR99 or would be EAR99 if subject to the EAR and such replacement parts are limited to one-for-one replacement of broken or defective parts.
- The General License does not authorize exports or reexports to military or law enforcement purchasers or importers, or for use in or facilitation of the development and production of chemical or biological weapons.
- Certain agricultural and medicines are excluded from the General License, including:
- Castor beans, castor bean seeds, certified pathogen-free eggs (unfertilized or fertilized), dried egg albumin, live animals (excluding live cattle), embryos (excluding cattle embryos), rosary/ jequirity peas, non-food grade gelatin powder, peptones and their derivatives, super absorbent polymers, western red cedar, or all fertilizers.
- Cosmetics, non-NSAID analgesics, cholinergics, anticholinergics, opioids, narcotics, benzodiazapenes, and bioactive peptides.
Given the definition of U.S. person above and in the Ukraine Related Sanctions Regulations (31 C.F.R. § 589.312), it does not appear that exports or reexports by non-U.S. entities of items subject to the EAR to Crimea, where there is no approval or facilitation by U.S. persons or U.S. currency involved in the transaction, would be subject to OFAC’s restrictions. However, we understand that the Commerce Department expects to issue regulations and/or guidance regarding transactions by non-U.S. persons involving the shipment of items subject to the EAR.
Given the blocking provisions of the Executive Order and the lack of a wind-down period, U.S. companies with affiliates, branch offices, and other operations or activities in the Crimea should immediately assess whether a specific license from OFAC is required to continue or wind-down such operations. Companies exporting or reexporting agricultural commodities, medicine, and medical supplies should assess whether their products and related activities are eligible for General License 4.
Summary of EU sanctions
Decision 2014/933 and Regulation 1351/2014 imposes the following substantial additional sanctions on investment, services, and trade with Crimea and Sevastopol:
- Investment in Crimea or Sevastopol is prohibited. This means that EU persons and entities cannot acquire any new or extend any existing participation in ownership or control of any company in Crimea or Sevastopol. Entering into joint ventures is also prohibited.
- Acquiring real estate in Crimea or Sevastopol is also prohibited.
- EU persons and entities are banned from granting loans or credit or providing any financing or related investment services to entities in Crimea or Sevastopol.
- Investment obligations arising from contracts pre-dating December 20, 2014 are grandfathered, but this is subject to prior notification to Member State authorities.
- The list of goods and technology, suited for use in the transport, telecommunications, energy, and oil/gas/mineral exploration sectors and subject to a prohibition on being sold, supplied, transferred, or exported to Crimea or Sevastopol (Annex II goods) has been significantly expanded. All product lines from a number of chapters of the Combined Nomenclature are subject to the ban, including railway/tramway locomotives, parts and traffic signalling equipment of all kinds; aircraft, spacecraft, and parts thereof; and ships, boats, and floating structures.
- It is now additionally prohibited to provide, directly or indirectly, technical assistance, brokering services and financing, or financial assistance in relation to Annex II goods.
- Obligations arising from contracts pre-dating December 20, 2014 are grandfathered until March 21, 2015, but this is subject to prior notification to Member State authorities.
- Member States can grant an authorisation for the provision of Annex II goods and related technical services, brokering services, financing, or financial assistance if this is:
- necessary for consular missions or international organisations enjoying international law immunities;
- related to hospitals, public health, or civilian education or appliances or equipment for medical use; or
- 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. In cases of emergency, transactions may proceed without prior authorisation, provided that the competent Member State authorities are notified within five working days of the transaction having taken place and justification is provided.
- There is a new prohibition on the provision of tourism services in Crimea or Sevastopol. In particular, EU-owned or controlled cruise ships and cruise ships flying the flag of any Member State are prohibited from calling at the ports of Sevastopol, Kerch, Yalta, Theodosia, Evpatoria, Chernomorsk, and Kamysh-Burun in the Crimean Peninsula, except in an emergency.
- Obligations arising from contracts pre-dating December 20, 2014 are grandfathered, but this is subject to prior notification to Member State authorities. Decision 2014/933 limits the period for relying upon the grandfathering provisions to March 21, 2015, whereas Regulation 1351/2014 does not provide a specific deadline. The EU may clarify the scope of the grandfathering provisions through guidelines or through an amendment to Regulation 1351/2014. In the meantime, EU persons who may want to benefit from this grandfathering provision should seek guidance from Member States authorities.
The EU releases guidance in relation to Russia sanctions
On December 16, 2014 the European Commission published a Guidance Note (Guidance) on the implementation of certain provisions of the EU Russia sanctions, namely Regulation 833/2014 as last amended by Regulation 1290/2014.
The Guidance is set out in Q&A format providing the answers to 26 questions, and includes the following information:
- Payment services and letters of credit constitute financial assistance and are therefore prohibited when linked to prohibited commercial transactions.
- Banks should exercise due diligence on payments and oppose any payments made in breach of the sanctions.
- The trade finance exemption in Article 5(3) of Regulation 1290/2014 allowing the provision of loans or credit with a maturity of more than 30 days to entities listed in Annexes III, V, and VI of Regulation 833/2014 applies to loans for non-restricted imports or exports between the EU and any third State, including Russia. This is a particularly useful clarification, as Decision 2014/872 states that the exception in Article 5(3) of Regulation 833/2014 applies to loans for non-restricted imports or exports between the EU and Russia or any other third State, while Regulation 1290/2014 states the exception applies to loans for non-restricted imports or exports between the EU and any third State, without mentioning Russia.
- Deposit services as such are not prohibited by Article 5 of Regulation 833/2014 (unless they are being used for circumvention purposes).
- Payment and settlement services do not constitute making or being part of an arrangement to make a new loan for the purposes of Article 5(3) of Regulation 833/2014.
- Payment terms and delayed payment for goods are not considered loans or credit for the purpose of Article 5 of Regulation 833/2014 (unless they are being used for circumvention purposes).
- Channeling funds through a sanctioned entity to provide loans or credit to a non-sanctioned entity is permitted under Article 5 of Regulation 833/2014, provided the funds do not stay with the sanctioned entity for more than 30 days.