Introduction

The EU, Canada and US have again strengthened sanctions against Russia. The EU list of individuals subject to visa bans and asset freezes has been expanded recently and additional EU sanctions on investment, services and trade with Crimea Region of Ukraine (Crimea) and Sevastopol have been imposed. Separately, the US has enacted new restrictions in respect to Crimea, it has also enlarged the list of individuals subject to sanctions and has imposed new sanctions in connection with Russia’s defense and energy sectors. Canada has also extended the list of individuals subject to sanctions, has expanded and clarified debt and equity financing provisions and has introduced new prohibitions in respect of goods related to oil exploration or production.

European Union

On December 18, 2014 the Council of the European Union (the Council) adopted further specific sanctions on investment, services and trade in Crimea and Sevastopol (Regulation 1351/2014). This Regulation prohibits certain activities, including the export by EU persons of certain goods and technology to Crimea; new investments in Crimea and the provision of tourism services by EU operators in Crimea and Sevastopol.

In November 2014, the Council had extended the list of persons subject to an asset freeze and an EU travel ban (Regulation 1270/2014) and in December 2014 the Council amended the rules in relation to sanctions against Russia (by amending Regulation 833/2014) with a view to clarifying certain provisions (Decision 2014/872/CFSP and Regulation 1290/2014).

New measures concerning Crimea and Sevastopol

Regulation 1351/2014 bans new investments in Crimea or Sevastopol as from December 20, 2014. As a result, Europeans and EU-based companies are prohibited from buying real estate or entities in Crimea, finance Crimean companies or supply related services.

In addition, EU operators will not be allowed to offer tourism services, including in the maritime sector, in Crimea or Sevastopol. European cruise ships may not enter into or call at any ports situated in the Crimean Peninsula, except in case of emergency. This ban applies to all ships owned or controlled by a European ship-owner or flying the flag of a Member State. Existing cruise contracts may still be honoured until March 20, 2015.

The new measures include a prohibition on the export of goods and technology concerning the transport, telecommunications and energy sectors or the prospection, exploration and production of oil, gas and mineral resources to Crimean companies or for use in Crimea or Sevastopol. Technical assistance, brokering, construction or engineering services related to infrastructure in the same sectors have also been prohibited.

These measures add to the import ban on goods from Crimea and Sevastopol and the prohibition on providing financing or financial assistance related to the import of such goods, imposed in June 2014 by the Council (Regulation 692/2014). They also broaden the restrictions on trade and investment related to infrastructure projects and key equipment in the transport, telecommunications and energy sectors and in relation to the exploitation of oil, gas and minerals, which were imposed in July 2014 (Regulation 825/2014). The latter measures comprise a ban on new investment in Crimea and Sevastopol for infrastructure projects in the above mentioned sectors and a prohibition on the export of key equipment for the same six sectors as well as a ban on the provision of finance and insurance services for such transactions.

Extension of the List of persons subject to sanctions

On November 28, 2014, the Council extended the list of persons subject to an asset freeze and an EU travel ban for its involvement in action against Ukraine’s territorial integrity. In particular, 13 persons and five entities (public and social organisations) were added to the list, bringing the total number of individuals and entities under EU restrictions over the situation in Ukraine to 132 individuals and 28 entities.

Regulation 1290/2014

On December 4, 2014 the Council amended its rules in relation to sanctions against Russia (by amending Regulation 833/2014) to clarify certain provisions. More specifically, the new measures provide clarification on when the competent authorities may grant an authorisation for exports, sale or supply of dual-use goods and technology and also on authorisations in relation to the provision of technical and financial assistance related to such goods and technology. It also clarifies the categories of oil exploration and production projects which are subject to a restriction in relation to their supply, sale or export in Russia and its Exclusive Economic Zone and Continental Shelf. Finally, the new Regulation also provides clarification in relation to the prohibitions on making new loans or credit with maturity exceeding 30 days to certain entities and in relation to the exceptions to such prohibitions.

To whom the sanctions apply

The EU Regulations imposing sanctions apply:

  • to nationals of EU Member States (wherever located);
  • to any legal person, entity or body, established in an EU Member State or otherwise constituted under the law of a Member State (including the subsidiaries of non-EU persons, entities or bodies);
  • to any legal person, entity or body in respect of any business done in whole or in part within the EU (including the branches of non-EU persons, entities or bodies); and
  • within the territory of the EU (including airspace) and on board of any aircraft or vessel under the jurisdiction of a Member State.

Background

Following the announcement, in March 2014, of a referendum about Crimea joining Russia, and the subsequent crisis, the European Union has imposed a number of sanctions against Russia as well as against Ukrainian separatists, which have been subsequently strengthened. Since April 2014, the EU has been regularly updating the list of designated persons and entities subject to sanctions in light of the subsequent developments in Eastern Ukraine.

In addition, on July 31, 2014, the Council imposed economic sanctions aimed at entire sectors of the Russian economy, so-called ‘sectoral sanctions’ or ‘Stage III’ sanctions which target the following sectors: capital markets, defence, dual use goods and sensitive technology (for the energy sector) (Decision 2014/512/CFSPand Regulation 833/2014). The sectoral sanctions against Russia include:

  • Prohibiting investment in the following sectors in Crimea and Sevastopol: infrastructure projects in the transport, telecommunications and energy sectors and in relation to the exploitation of oil, gas and minerals. Key equipment for the same six sectors may not be exported to Crimea and Sevastopol and finance and insurance services for such transactions must not be provided.
  • Banning the provision of tourism services in Crimea or Sevastopol, including cruise services.
  • Prohibiting trade in new bonds, equity or similar financial instruments with a maturity exceeding 30 days, issued by listed companies. Services related to the issuing of such financial instruments, such as brokering, are also prohibited.
  • Prohibiting, subject to certain caveats, directly or indirectly making or being part of any arrangement to make new loans or credit with a maturity exceeding 30 days to the listed entities.
  • Banning the export of arms and related material as well as of dual use goods and technology for military use in Russia or to Russian military end-users.
  • Subjecting exports of certain energy-related equipment and technology to Russia to prior authorization requirements.

Furthermore, imports into the EU of goods originating in Crimea or Sevastopol have been banned and the provision of financing or financial assistance as well as insurance and reinsurance related to the import of such goods has been prohibited by the Council.

List of entities currently subject to EU sanctions

Capital markets sector

Regulation 833/2014 restricts EU nationals and companies from entering into certain capital market financings with the following five state owned financial institutions and their subsidiaries or persons acting on their behalf:

  • Sberbank
  • VTB Bank
  • Gazprombank
  • Vnesheconombank (VEB)
  • Rosselkhozbank

Energy sector

Regulation 960/2014 prevents EU nationals and companies from providing investment services or assistance in capital market financings (such as transferable securities and money-market instruments) to the following Russian energy-related companies:

  • Rosneft
  • Transneft
  • Gazprom Neft

Defense Sector

Regulation 960/2014 prevents EU nationals and companies from providing investment services for or assistance in capital market financings (such as transferable securities and money-market instruments) to the following Russian military companies:

  • OPK Oboronprom
  • United Aircraft Corporation
  • Uralvagonzavod

Dual use goods

Regulation 960/2014 prevents EU nationals and companies from providing technical assistance, brokering services or other services related to dual use goods and technology and from providing such goods to the following Russian entities:

  • JSC Sirius (optoelectronics for civil and military purposes)
  • OJSC Stankoinstrument (mechanical engineering for civil and military purposes)
  • OAO JSC Chemcomposite (materials for civil and military purposes)
  • JSC Kalashnikov (small arms)
  • JSC Tula Arms Plant (weapons systems)
  • NPK Technologii Maschinostrojenija (ammunition)
  • OAO Wysokototschnye Kompleksi (anti-aircraft and anti-tank systems)
  • OAO Almaz Antey (state-owned enterprise; arms, ammunition, research)
  • OAO NPO Bazalt (state-owned enterprise, production of machinery for the production of arms and ammunition)’.

The United States

On December 19, 2014, President Obama signed an Executive Order “Blocking Property of Certain Persons and Prohibiting Certain Transactions with Respect to the Crimea Region of Ukraine.” The new Executive Order prohibits certain activities, including the export by US persons of goods, services, or technology to Crimea; the import of goods, services, or technology from Crimea into the United States; and new investments in Crimea by US persons. It also authorizes the Secretary of the Treasury to impose sanctions on certain individuals and entities operating in Crimea. The US Department of the Treasury, Office of Foreign Assets Control (OFAC), simultaneously issued General License No. 4, authorizing certain exports and reexports to Crimea of agricultural commodities, medicines, medical supplies, and associated replacement parts. OFAC also imposed sanctions pursuant to Executive Order 13660 on 24 Ukrainian and Russian-backed separatists and the militias or entities they lead or support. In addition, on December 18, 2014, President Obama signed a bill, H.R. 5859, requiring sanctions to be imposed on certain entities in Russia’s defense sector and authorizing, for the first time, sanctions on foreign entities that engage in certain oil related transactions with Russia’s energy sector. The overall impact of the new legislation is expected, at least for the time being, to be limited as the Administration has stated it does not presently plan to implement the discretionary aspects of the new sanctions.

New Executive Order

The new Executive Order prohibits the following:

  • new investment in the Crimea region of Ukraine by a United States person, wherever located;
  • the importation into the United States, directly or indirectly, of any goods, services, or technology from the Crimea region of Ukraine;
  • the 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; and
  • any 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.

“New investment” is left undefined in the Executive Order but would likely be interpreted to include investing in companies in Crimea or providing them financing. The “Crimea region of Ukraine” is defined to include “the land territory in that region as well as any maritime area over which sovereignty, sovereign rights, or jurisdiction is claimed based on purported sovereignty over that land territory.”

The Executive Order also blocks all property and interests in property that are in the United States or that come within US person possession or control of any person determined by the Secretary of the 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.

General License No. 4

General License No. 4 authorizes the exportation or reexportation from the United States or by a US person of certain agricultural commodities, medicine, medical supplies, and associated replacement parts to Crimea, or to persons in third countries purchasing specifically for resale to Crimea. It also authorizes the conduct of certain related transactions, including the making of shipping and cargo inspection arrangements, the obtaining of insurance, the arrangement of financing and payment, shipping of the goods, receipt of payment, and the entry into contracts (including executory contracts).

The General License does not authorize the export or reexport of any non-EAR99 items or any items, including covered agricultural or medical commodities, to military or law enforcement purchasers or importers. The General License also excludes certain agricultural and medical commodities from being authorized. Excluded agricultural products include 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, and all fertilizers. Excluded medical products include non-NSAID analgesics, cholinergics, anticholinergics, opioids, narcotics, benzodiazapenes, and bioactive peptides.

With respect to replacement parts, only one replacement part can be exported or reexported to replace a broken or non-operational component. Specific licenses may be issued on a case-by-case basis to authorize the export or reexport of medical devices that are not medical supplies (and therefore not authorized pursuant to this General License) to Crimea, or to persons in third countries purchasing specifically for resale to Crimea.

New Sanctions Legislation

H.R. 5859, the Ukraine Freedom Support Act of 2014 (the Act), contains several measures, including provisions requiring additional sanctions with respect to Russia’s defense sector and authorizing additional sanctions on Russia’s energy sector. The Act also authorizes additional sanctions on foreign financial institutions that facilitate sanctionable activities with respect to Russia’s defense or energy sectors or on behalf of any Specially Designated Nationals (SDNs) in Russia.

Russian defense sector

The Act directs the President to impose at least three specified sanctions against:

  • Rosoboronexport;
  • an entity owned by the government of the Russian Federation or controlled by its nationals that transfers or brokers the transfer to, or knowingly manufactures or sells defense articles transferred to, Syria or into the territory of a specified country without its government’s consent; or,
  • a person (individual or entity) that knowingly sponsors or provides financial, material, or technological support for, or goods or services to or in support of, such an entity.

“Specified country” is defined as Ukraine, Georgia, Moldova, or any other country of significant concern for purposes of this Act, such as Poland, Lithuania, Latvia, Estonia, and the Central Asia republics.

Russian energy sector

The Act authorizes, but does not require, the President to impose at least three specified sanctions against a foreign person that knowingly makes a significant investment in a “special Russian crude oil project.” Special Russian crude oil project is defined as a project intended to extract crude oil from (A) the exclusive economic zone of the Russian Federation in waters more than 500 feet deep; (B) Russian Arctic offshore locations; or (C) shale formations located in the Russian Federation. These potential sanctions are significant in that they authorize, for the first time, sanctions on foreign persons that engage in these types of prohibited activities. The Ukraine-related sanctions impose similar restrictions on US persons. The overall impact of these sanctions on Russia’s energy sector is, at least for the time being, anticipated to be minimal because the Administration has indicated that it does not intend to pursue such sanctions at this time.

The Act also authorizes the President of the US, through OFAC or the US Department of Commerce, Bureau of Industry and Security to impose additional licensing requirements or other restrictions on the export of items for Russia’s energy sector, including equipment used for tertiary oil recovery. The Act further requires the President to prohibit equity or debt investment in, and impose at least one additional sanction on Gazprom if it is determined to be withholding significant natural gas supplies from North Atlantic Treaty Organization (NATO) member countries or from countries such as Ukraine, Georgia, or Moldova.

Russian and other foreign financial institutions

The Act authorizes the President to impose a prohibition on the opening, and a prohibition or the imposition of strict conditions on the maintaining, in the United States of a correspondent account or a payable-through account by a foreign financial institution that he determines has facilitated sanctionable activities with respect to Russia’s defense or energy sectors or on behalf of any SDNs in Russia.

List of sanctions

The Act sets forth a range of sanctions which may be imposed against a foreign person, including executive officers of an entity. The available menu of sanctions is similar to that provided for in the Iran Sanctions Act and includes, for example, restrictions on: (1) Ex-Im Bank assistance; (2) US Government procurement contracts; (3) obtaining US-origin defense articles; (4) obtaining US-origin dual use goods; and (5) access to the US financial system.

Additional measures

The Act contains certain measures related to the provision of assistance for Ukraine, including a provision authorizing the President to provide Ukraine with defense articles, services, and training in order to counter offensive weapons and reestablish its sovereignty and territorial integrity. The Act also grants the President significant discretion to waive both the industry-wide sanctions and specific transactions on national security grounds. Finally, there are also a number of significant exceptions in the Act that may impact whether sanctions would be available in any given scenario.

Additional OFAC Designations

OFAC has designated 24 individuals and 7 entities as SDNs under pre-existing Ukraine-related Executive Order 13660.

Any assets of the designated entities, as well as any entity that is 50% or more owned by a designated entity (or entities), that are within US jurisdiction must be frozen and transactions by US persons or within the United States involving these entities are generally prohibited

Canada

The Canadian government has taken further action against Russia by adding designated persons to theSpecial Economic Measures (Russia) Regulations. The Canadian government has also added restrictions on debt and equity financing, as well as in relation to certain goods used for oil exploration and production. There are also two sets of sanctions against individuals in Ukraine that have been enacted as part of the Canadian government’s response to the situation in Ukraine, and against members of the former Ukrainian government.

Special Economic Measures (Russia) Regulations

The Canadian government enacted the Special Economic Measures (Russia) Regulations, SOR/2014-58, on March 17, 2014 and has since amended the regulations several times, most recently on December 19, 2014(SEMA Russia Regulations). The SEMA Russia Regulations contain three schedules of designated persons, and there are different prohibited activities in relation to each schedule.

There are 77 designated individuals and 32 designated entities listed under Schedule 1, which freeze the assets of, and prohibit the following actions by any person in Canada, or by any Canadian outside of Canada:

  • dealing in any property, wherever situated, of a Schedule 1 designated person;
  • entering into or facilitating, directly or indirectly, any financial transaction related to a dealing with any property of a Schedule 1 designated person;
  • providing financial or other services related to a dealing with any property of a Schedule 1 designated person;
  • making any goods, wherever situated, available to a Schedule 1 designated person; or
  • providing financial or other related services to or for the benefit of a Schedule 1 designated person.

There are certain exceptions to the prohibited actions, where the transaction involves a payment due under a contract that was entered into before the person became a designated person, a loan repayment made to a person in Canada or a Canadian outside Canada of a loan entered into before the designated person was listed, a transaction to an international organization with diplomatic status, etc.

The SEMA Russia Regulations were amended on July 24, 2014 to add two new schedules (“Schedule 2” and “Schedule 3”) with specific, additional prohibitions. With this and subsequent amendments, there are six designated persons listed under Schedule 2 and one designated person listed under Schedule 3. It is prohibited to provide financing for new debt, including loans, bonds, or debentures, of longer than 30 days’ maturity in relation to a Schedule 2 person or longer than 90 days’ maturity in relation to a Schedule 3 person, and more specifically in relation to:

  • a listed designated person;
  • the property of a listed designated person; or
  • the interests or rights in property of a listed designated person.

These prohibitions do not apply in respect of a loan that was made or a bond or debenture that was issued before the designated person was listed in Schedule 2 or 3. Additionally, it is prohibited to deal in equity financing through the transaction of new securities and the like in relation to:

  • a designated person listed under Schedule 2;
  • the property of a designated person listed under Schedule 2; or
  • the interests or rights in property of a designated person listed under Schedule 2.

These prohibitions not apply to equity financing that occurred before the designated person was listed in Schedule 2.

Further amendments were made on December 19, 2014 to include export restrictions on technologies used in Russia’s oil exploration and extractive sector. The amendments added new provisions prohibiting any person in Canada and any Canadian outside Canada from exporting, selling, supplying or shipping any of the 19 goods listed in Schedule 4 to Russia or any person in Russia, for use in

  • offshore oil exploration or production at a depth greater than 500 m;
  • oil exploration or production in the Arctic; or
  • shale oil exploration or production.

The amendments also include a prohibition on any financial, technical or other services in relation to any good prohibited in Schedule 4. The anti-circumvention provisions in the SEMA Russia Regulations has also been amended to encompass these new prohibitions.

The SEMA Russia Regulations include an obligation to disclose to the Commissioner of the Royal Canadian Mounted Police any property, or information about a transaction in relation to property, that is believed to be the property of a designated person.

Special Economic Measures (Ukraine) Regulations

There are two sets of sanctions against individuals in Ukraine that have been enacted as part of the Canadian government’s response to the gravity of the situation in Ukraine, and against members of the former Ukrainian government. The Special Economic Measures (Ukraine) Regulations, SOR/2014-60, came into force on March 17, 2014, and were amended several times most recently on December 19, 2014 (SEMA Ukraine Regulations). The SEMA Ukraine Regulations list 63 designated individuals and 20 designated entities. The SEMA Ukraine Regulations act to freeze the assets of the listed persons by prohibiting the following actions by any person in Canada, or by any Canadian outside of Canada:

  • dealing in any property, wherever situated, of a designated person;
  • entering into or facilitating, directly or indirectly, any financial transaction related to a dealing with any property of a designated person;
  • providing financial or other services related to a dealing with any property of a designated person;
  • making any goods, wherever situated, available to a designated person; or
  • providing financial or other related services to or for the benefit of a designated person.

The Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations, SOR/2014-44 came into effect on March 5, 2014. These regulations provide for the freezing of funds and economic resources of former President Viktor Yanukovych and 17 other prominent former government ministers, senior officials and businessmen. The regulations freeze the assets of the 18 individuals by prohibiting the following actions by any person in Canada, or by any Canadian outside of Canada:

  • dealing, directly or indirectly, in any property, wherever situated, of a politically exposed foreign person;
  • entering into or facilitating, directly or indirectly, any financial transaction related to a dealing with any property of a politically exposed foreign person; or
  • providing financial or other related services in respect of any property of a politically exposed foreign person.

The SEMA Ukraine Regulations and the Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations include an obligation to disclose to the Commissioner of the Royal Canadian Mounted Police any property, or information about a transaction in relation to property, that is believed to be the property of a politically exposed foreign person.

The Minister of Foreign Affairs may issue a permit to carry out an activity or transaction that would otherwise be prohibited under the SEMA Ukraine Regulations or the Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations.

The Canadian regulations will continue to apply until they are amended or repealed, and additional individuals can be added to the list of politically exposed foreign persons.