The current EU and US sanctions against Russia create a host of different issues for international oil and gas companies. While the rules are highly complex, and include a number of overlapping restrictions, they do not amount to a full embargo on trade with Russia, and businesses will be rightly keen to ensure they do not exclude lawful opportunities, given challenging conditions elsewhere. On the other hand, because the restrictions are so complex and dynamic, with over 20 EU Regulations issued in less than a year, and because the penalties for breaching sanctions can be so severe, there are very real challenges for the unwary. This article will summarise the key restrictions, and set out some practical steps to ensure compliance.
The current EU sanctions comprise four broad components, namely (i) the asset freeze, (ii) the ban on most EU trade with Crimea and Sevastopol, (iii) the restrictions on supply of oil and gas equipment to Russia and (iv) the restrictions on certain Russian companies access to EU debt, equity and capital markets. While the detail of the US restrictions is outside the scope of this article, the US measures are broadly aligned with those imposed by the EU.
The effect of the first component (ie the EU asset freeze) is that it is prohibited to make funds or economic resources available, directly or indirectly, to/or for the benefit of the named individuals or entities. The EU currently publishes two lists, under the titles “Misappropriation and Human Rights” and “Sovereignty and Territorial Integrity”.
The first list comprises 22 individuals who have been designated because they are “subject to investigation in Ukraine for involvement in crimes in connection with the embezzlement of Ukrainian State funds and their illegal transfer outside Ukraine”.
The second list comprises 151 individuals and 37 entities which have been designated for “undermining or threatening the territorial integrity, sovereignty and independence of Ukraine”, and includes the likes of Arkady Rotenberg, Feodosia, Kerch Commercial Sea Port and Russian National Commercial Bank.
The EU sanctions include a defence where the person who would otherwise have breached the sanctions can show that they did not know or have reasonable cause to suspect that their actions would infringe the sanctions. Businesses need to conduct due diligence on their counterparties and other entities they engage with, to ensure they are not dealing directly or indirectly with prohibited persons.
The second component (ie the ban on trade between the EU and Crimea/Sevastopol has a number of key elements), but the most relevant restrictions are likely to be the bans on (i) importing any goods originating in Crimea or Sevastopol into the EU and (ii) supplying key equipment, technology and construction/engineering services for the following sectors of the economy in Crimea or Sevastopol: transport, telecommunications, energy and exploitation of oil, gas and mineral reserves.
The third component (the restrictions on the supply of oil and gas equipment to Russia) will affect any supply of listed equipment to a Russian company or for use in Russia. A licence is needed for that supply (whatever the project and whichever Russian or non-Russian entity is involved) and no licences will be granted for new Russian deep water, arctic or shale oil projects. There are associated bans on the provision of technical assistance, brokering, financial assistance and certain services for deep water, arctic and shale oil projects. Businesses engaged in the supply or transport of goods, services or equipment to Russia’s energy sector should carefully consider the nature (and use) of the goods, services or equipment which is being supplied, to ensure compliance with these restrictions.
The fourth and final component (the restrictions on certain Russian entities’ access to debt and capital markets) will only restrict certain activity with certain Russian entities. The first point to stress is that this measure is not a comprehensive ban on all Russian entities’ access to debt and capital markets – non-listed Russian entities can continue to access EU debt and capital markets. The second point to stress is that this measure is also not a comprehensive ban on all trade – only certain activity with the relevant entities is prohibited, but businesses are otherwise free to continue dealing with them. As such, while the entities which are subject to these restrictions (which include Sberbank, VTB Bank, Rosneft, Transneft and Gazprom Neft) are listed in the EU Regulations, this listing needs to be distinguished from a listing as an asset freeze target.
The restrictions prevent the listed entities (as well as any non-EU entities which they own 50% or more of) from accessing EU debt and capital markets, and also from accessing certain loans and credit (there is a specific carve out which permits particular trade finance and emergency funding).
Businesses need to be aware of any transactions which they have with these Russian entities, so that they can ensure that they do not fall foul of these complex restrictions.
As well as taking the above measures to ensure that they comply with the restrictions affecting trade with Russia, Crimea and Sevastopol, businesses which are operating in these areas need to ensure that they contract on suitable terms so that, in the event the sanctions change, their position is protected. They should also consider obtaining suitable warranties from counterparties, to support their own due diligence, and maintaining careful records of the due diligence which they carry out.