The spring and summer of 2014 saw the United States and European Union impose a range of sanctions relating to Ukraine and Russia in response to the series of events leading to the fall of the Yanukovyich government in Ukraine, the de facto incorporation of the Crimea peninsula into the Russian Federation, the uprising in the Eastern regions of Ukraine, and perceived destabilising actions by Russia. More than a year has now passed since the first sanctions were imposed, and as recent events have shown, including the recent decision of the EU to extend sanctions through to January 31, 2016, it is unlikely that these sanctions will be mitigated or removed in the near future, or that Russian counter sanctions will be repealed.
This article takes a look at the measures introduced, how the sanctions picture has evolved and what the future may hold.
Overview of EU and US measures
Since March 2014, the following major actions have been taken in the EU and the US with respect to sanctions:
In the EU, four separate but related measures regarding Russia and Ukraine have been adopted:
5 March 2014
An asset freeze targeting those believed by the EU to be responsible for either misappropriating Ukrainian State funds or for human rights abuses in Ukraine.
17 March 2014
An asset freeze targeting those whose actions are believed by the EU to have undermined, or threatened the territorial integrity, sovereignty or independence of Ukraine (many of the individuals in this list were involved in the referendum in Crimea to join the Russian Federation; the EU does not recognise the referendum as valid).
23 June 2014
Restrictive measures isolating Crimea, including import and export restrictions, restrictions on the provision of financial assistance in Crimea, tourism services in Crimea, etc.
31 July 2014
Restrictive measures against Russia, constituting export restrictions on dual use goods and on certain equipment for use in oil production, and preventing key named Russian banks and energy companies from accessing EU debt and equity capital markets.
In the US, the following measures have been taken in response to the situation in Ukraine:
6 March 2014
An asset freeze targeting those believed by the US to be responsible for undermining the Ukrainian democratic process or misappropriating Ukrainian state assets.
16 March 2014 An asset freeze targeting those Russian individuals believed by the US to have sought to undermine the democratic process and sovereignty in Ukraine.
20 March 2014
The Secretary of the Treasury authorised requiring US persons, including foreign branches, to block the property and interests in property of certain specially designated persons; additional authorization to block the property of individuals and entities deemed to materially assist, sponsor, or provide support for goods or services of any person or entity whose property is blocked pursuant to the order.
28 April 2014
Restrictive measures against Russia and Crimea – export licensing restrictions, particularly for “high technology items” and “high technology defence articles or services”.
16 July 2014
A newly-created Sectoral Sanctions Identification List (“SSI List”) targets certain companies in Russia’s financial services and energy sectors, restricting their access to new capital.
12 September 2014
Expansion of the SSI list and new restrictions imposed that prohibit US persons from exporting any goods, services (other than financial services), or technology in support of exploration or production for Russian deepwater, Arctic offshore, or shale products that have the potential to produce oil to certain SSI-Listed energy companies; increased debt restrictions on SSI-Listed Russian financial institutions.
18 December 2014
President Obama signed the Ukraine Freedom Support Act (UFSA/H.R. 5859) into law. The UFSA provides the President with a “menu” of 9 types of sanctions and directs him to impose a number of them on entities in the Russian defence sector, including Russian defence conglomerate Rosoboronexport, and authorizes the imposition of additional sanctions on Gazprom and other entities in the Russian energy sector. Since the signing of UFSA, only the provisions related to providing military assistance to Ukraine have been implemented, with the remainder ready to be activated depending on developments.
19 December 2014
the US implements a broad trade embargo on the Crimean peninsula, prohibiting US investment in, as well as exports to and imports from, the region.
The EU measures have been amended and expanded throughout the remainder of 2014, leading, in both the EU and the US, to an ever changing set of restrictions, and ever changing lists of sanctions targets.
Challenges posed to the business community
This suite of measures has posed significant challenges for companies doing business in the region or with persons and entities from Russia and Ukraine. These challenges are in part due to the rapid evolution of events and of the sanctions measures, in part because the package of restrictive measures included some novel and unfamiliar elements, and in part a reflection of the fact that EU and US firms have many and more extensive relationships with Russia and Russian persons/entities than they have with many other countries subject to sanctions. Some of the particular challenges which have arisen include:
- The restrictive measures were amended and expanded repeatedly in 2014 and into 2015. This necessitated careful monitoring in order to keep up to date.
- Corporate information in Russia is opaque, making it difficult to determine to an acceptable degree of certainty whether a Russian entity may be owned or controlled by a listed person or entity.
- The measures aimed at isolating Crimea give rise to practical difficulties (e.g., when is an entity “operating in Crimea”? how to identify when technology is for use in Crimea?). This is exacerbated by the cloud of uncertainty as to the status of Crimea – the EU and US do not recognise the Russian de facto incorporation of Crimea – and by the fact that Crimea is in any event not an independent state, but a region within a state.
- The sectoral measures against Russia are qualitatively different from other sanctions. Unlike other comprehensive sanctions programmes such as those in relation to North Korea, Iran or Syria, these measures are not designed to close off commercial relations with Russia; rather, they are designed to put pressure on key sectors of the Russian economy but without closing off ordinary commercial activity. However this difference has not always been well understood, leading to what might be considered over-compliance. There is a discernable but unnecessary inclination by companies towards avoiding engagements with Russian entities which are not in fact prohibited. In fact, business between EU or US entities and Russian entities, including those listed under the Russia sanctions, is still very much possible, as evidenced by the array of deals signed at this year’s St. Petersburg Economic Forum. Such deals include many that constitute Western investment into the Russian energy sector, which is currently subject to targeted economic sanctions by the US. and EU1.
Following the initial publication of the measures against Russia, there was considerable frustration by companies on all sides that the measures were so broadly and ambiguously framed as to be unworkable. Indeed Rosneft, the Russian state oil company and one of the listed entities, has brought an application in the UK courts seeking to block the UK measures pursuant to the EU sanctions on the basis of this ambiguity. This legal challenge is currently under preliminary reference to the CJEU, the EU court, although in the meantime, Rosneft remains subject to the restrictions imposed by the EU measures.
In December 2014, a clarificatory amending regulation refined the formulation of some of the EU sanctions measures adding precision and clarity, and this was followed shortly afterwards by some European Commission guidance on the implementation of certain provisions. However, despite the clarifications and the Commission guidance, companies continue to experience difficulties. For example:
- The distinction between newly issued share capital in listed entities (which may not be traded) and old share capital (which may be) can be hard to apply in practice. ISIN numbers do not contain any information on securities’ issue dates, with the inevitable problem that it is not always possible to identify transferrable securities issued after the relevant date from those issued earlier. The European Commission guidance simply confirms that “market participants bear the onus of ensuring that any trades they enter into do not involve the banned securities”.
- The EU prohibition on new loans does not clarify at what point an amendment to an existing loan agreement would be such as to render the loan a “new loan” (and thereby prohibited) - although there is guidance from OFAC on the corresponding US restriction.
Russian reaction and countermeasures
In retaliation against the EU and US and other Western countries’ measures, Russia imposed at least two restrictions:
- In August 2014, it banned, without any grace period or exemption for prior contracts, the import of “all beef, pork, fruit, vegetables, and dairy products from the European Union, the United States, Canada, Australia, and Norway for one year”. This has impacted not only suppliers, to and purchasers in, Russia, but also those providing ancillary services such as transport, storage and insurance. The ban has been particularly hard on certain EU States and Russia has since indicated that it will continue for as long as Western sanctions against Russia continue. However it has arguably caused more hardship in Russia broadly than the western sanctions. President Putin has also hinted that the ban may be lifted more swiftly for certain more Russia-friendly EU states such as Hungary, Cyprus and Greece than for the rest.
- Second, Russia introduced last year a travel ban prohibiting 89 EU persons and an unspecified number of US persons from entering Russia, although the criteria for addition to this list, or for its removal, are not clear.
In February this year, a ceasefire was agreed as part of the Minsk Agreement, which served to cool tensions. The European Council concluded on 19 March 2015 that the sanctions against Russia should be linked with the complete implementation of the Minsk Agreement – and the EU measures have now been formally extended to 31 January 2016 (for the Russia sanctions) and 23 June 2016 (for the Crimea sanctions). However, the longer term picture is less clear. With Russia showing no sign of reversing course with respect to Crimea, and tensions rising again, it seems that the current measures are likely to be maintained long into 2016, and some are pushing for further measures. Donald Tusk, the EU President noted after the recent G7 meeting, “if anyone wants to start a debate about changing the sanctions regime, the discussion could only be about strengthening it”. Both Washington and Brussels reportedly have further measures already drafted to be introduced quickly should the need arise, depending on developments on the ground. What is less clear is what sorts of event might trigger further sanctions. We will be monitoring developments and will report further as the sanctions framework evolves.