On December 19, 2014, the European Union published Council Regulation (EU) No 1351/2014 (the EU Regulation) amending Council Regulation (EU) No 692/2014, which previously was amended by Council Regulation (EU) No 825/2014.  The EU Regulation imposes new sanctions against Crimea and Sevastopol, prohibiting investment in Crimea, the provision of infrastructure assistance to Russian oil and gas exploration in the Black Sea, and certain tourist activities in Crimea.

Furthermore, on December 19, 2014, President Obama issued Executive Order (EO) 13685 prohibiting new investments in Crimea; the import and export of goods, technology and services from or to Crimea; and the purchase of real estate in Crimea.  The EO also authorizes the blocking of persons determined to “operate” in Crimea or to be “the leader of an entity” operating in Crimea.  Concurrent with the EO, the US Treasury Department, Office of Foreign Assets Control (OFAC) issued General License No. 4 authorizing the export and re-export to Crimea of agricultural commodities, medicines, medical supplies and associated replacement parts.  On December 30, OFAC issued General License No. 5 authorizing certain transactions related to winding down activities in Crimea.

Finally, on December 19, 2014, OFAC designated seventeen individuals and seven entities as Specially Designated Nationals (SDNs) under EO 13660, targeting separatists and the Night Wolves motorcycle club affiliated with Vladimir Putin.

EU Sanctions on Crimea

We have previously advised on the EU’s imposition of sanctions against Crimea and Sevastopol through Council Regulation (EU) No 692/2014.  Council Regulation (EU) No 1351/2014 maintains the Article 2 ban on the importation into the EU of goods originating from Crimea and Sevastopol, and adds new sanctions.

Prohibition on Investment

The EU Regulation now prohibits certain investment activities, including:

  • new purchases of real estate in Crimea or Sevastopol, or the extension of an existing participation in real estate ownership (such as the increase of an existing participation or a renewal)
  • new investments in Crimean or Sevastopol entities, or the extension of an existing participation
  • providing financing to any entity in Crimea or Sevastopol
  • creating a joint venture in Crimea or Sevastopol
  • providing investment services related to the above activity

The prohibition on financing is particularly significant, as it essentially cuts off Crimean entities from access to the EU financial system.

The above prohibitions do not apply to contracts executed prior to December 20, 2014 or related ancillary contracts.  Furthermore, Member States may grant an authorization for certain narrowly defined activities related to health, safety, and consular missions.

Prohibition on Annex II Items

The EU Regulation prohibits the export to Crimea and Sevastopol of goods and technology listed in Annex II to the regulation.  Listed items include those for use in the transportation, telecommunications, and energy sectors, as well as prospection, exploration, and production of oil, gas, and mineral resources.  The EU Regulation does not define what is included within the “energy” sector, which arguably could include electricity generation.

The targeting of exploration and production of gas and minerals is especially notable, as this goes beyond existing EU restrictions in place against Russia.

The regulation further prohibits the provision of technical assistance, brokering services, and financial assistance related to such items.  Moreover, the regulation prohibits technical assistance, brokering, construction services, and engineering services related to infrastructure in the foregoing sectors of the Crimean economy.

These prohibitions do not apply to performance under contracts concluded prior to December 20, 2014, provided that performance takes place by March 21, 2015.  Furthermore, as above, there are certain narrow exceptions related to health, safety, and consular missions.

Prohibition on Tourist Activities

The EU Regulation prohibits the provision of services directly related to tourism activities in Crimea and Sevastopol. Specifically, EU cruise ships are banned from entering into or calling at any port situated in the Crimean Peninsula, as listed in Annex III.  These ports include: Sevastopol; Kerch; Yalta; Theodosia; Evpatoria; Chernomorsk; and Kamysh-Burun’.

The prohibition does not apply to contracts executed before December 20, 2014, or to emergency port calls.

Jurisdictional Scope of Sanctions

Like most previous EU sanctions, the new restrictions apply to any activity satisfying any one the following jurisdictional bases:

  • the activity occurs (in whole or in part) within the EU, or on board any aircraft or vessel under the jurisdiction of a Member State
  • the activity involves a natural person who is a national of a Member State
  • the activity involves a legal entity established under the law of a Member State

Jurisdiction to grant authorizations under the EU sanctions typically rests with designated authorities of the Member State(s) most closely connected to the activity at issue.

New US Sanctions on Crimea

New Investment and Trade Restrictions

The EO prohibits US persons from engaging in the following activities:

  • new investment in Crimea
  • import of goods, services, or technology from Crimea
  • export or re-export of goods, services, or technology to Crimea
  • “facilitation” of non-US persons’ engaging in the foregoing activities

The prohibitions apply to US persons, defined in to include US citizens, permanent resident aliens, entities organized under the laws of the United States (including foreign branches), and persons located in the United States.  The term does not include foreign-incorporated subsidiaries of US companies.

These prohibitions are quite broad, and mark a sweeping ban on trade with Crimea for US persons.  Notably, the US Commerce Department, Bureau of Industry and Security (BIS) has not introduced accompanying restrictions under the Export Administration Regulations (EAR) (15 C.F.R. Parts 730-774) at this time.  If BIS were to take this step, then items “subject to the EAR,” a term that includes all US-origin items, could be restricted for export to Crimea, and non-US persons exporting or re-exporting covered items would be subject to such restrictions.  However, BIS has not taken this measure as of this time, and the only restrictions currently in place are the OFAC restrictions on US persons.

Furthermore, the prohibition of “facilitation” is notable, as neither the previous Ukraine-related Executive Orders—EOs 13660, 13661, and 13662—nor the Ukraine-Related Sanctions Regulations, 31 C.F.R. Part 589, explicitly prohibit facilitation.  However, it is quite likely that facilitation is prohibited under those EOs and the implementing regulations as a matter of enforcement practice and discretion by OFAC.

Blocking Provisions

The new EO further provides for the blocking of the property and interests in property of persons determined to:

  • “operate” in Crimea
  • be the leader of an entity “operating” in Crimea
  • be owned or controlled by a person blocked under the Executive Order
  • have provided material support for a person blocked under the Executive order

US persons are required to freeze the assets of blocked persons in their possession or control, and essentially are prohibited in engaging in all transactions and dealings with such persons.  Pursuant to guidance issued by OFAC, any entity owned in the aggregate 50% or more by one or more blocked persons is itself considered to be blocked.

It is particularly notable that the EO authorizes blocking of persons determined to “operate” in Crimea, which arguably is quite a broad provision.  While certain measures, such as EO 13662, authorize the imposition of sanctions against persons determined to “operate” in certain sectors of a country’s economy, it is somewhat unusual for an EO to authorize sanctions against all persons that “operate” in a particular region or geographical area.  Arguably, this provision could go beyond targeting separatist leaders and illegitimate governmental authorities in Crimea, and could reach the activities of companies that engage in any type of business in Crimea.  Caution is therefore warranted.

General License No. 4

New General License No. 4 authorizes the export to Crimea of the following items, provided they are classified as EAR99 under the EAR or, if not subject to the EAR, would be classified as EAR99:

  • agricultural commodities (including food, seed for crops, fertilizer, and reproductive materials for food animals, but not cosmetics or certain other listed items)
  • medicine
  • medical devices
  • replacement parts for medical devices
  • medical supplies (specified medical devices that OFAC will publish on a list on its website)

The scope of General License No. 4 is similar to authorizations in place for certain exports to Iran.  See our previous advisory for more details.

General License No. 5

New General License No. 5 authorizes transactions “ordinarily incident and necessary to” the divestiture of investments based in Crimea and the winding down of operations and contracts related to trade with Crimea.  The general license authorizes activity through February 1, 2015.  US persons who engage in authorized transactions must file a report with OFAC, within ten days of concluding the wind-down activity, that details the parties involved, the activities conducted, and the dates of the activities.  The general license does not authorize transactions with SDNs or transactions that are prohibited under other OFAC sanctions regulations.

Newly Sanctioned Individuals and Entities 

OFAC designated seventeen individuals and seven entities as SDNs pursuant to 13660, which targets persons involved in threatening the territorial integrity of Ukraine, undermining its democratic processes, and misappropriation of its state assets.  The SDNs include separatist leaders and financiers, as well as the Night Wolves motorcycle club that is closely affiliated with Vladimir Putin.

Conclusion

The imposition of these sanctions underscores that the European Union and the United States do not recognize Russia’s annexation of Crimea, and will continue to impose restrictive measures in response to the annexation.  Given the stark differences in position between the West and Russia on the question of Crimea, it may be quite some time before there can be a full unwinding of sanctions against Russia.  Furthermore, the scope of these new sanctions against Crimea—which include EU prohibitions on new investment and measures targeting the Crimean gas and mineral industries, and a US ban on new investment and most types of trade—may foreshadow future measures that the West may consider imposing against Russia itself.