Mirroring the escalation of tensions in and around Ukraine, the EU, US, Canada and other countries have very significantly broadened economic sanctions targeting Russia and certain Russian and Ukrainian persons. In recent days the EU and each of the other countries adopted separate but coordinated packages of further sanctions. Taken together these measures, and particularly the broad new EU measures, are likely to significantly impact a broad range of cross-border transactions with Russia and Russian companies. The effects are likely to be felt most intensely in capital markets, investments and other corporate transactions, and in cross-border transactions involving the Russian financial, oil and gas and defense sectors.
Mirroring the escalation of tensions in and around Ukraine, the EU, US, Canada and other countries have very significantly broadened economic sanctions targeting Russia and certain Russian and Ukrainian persons. In recent days the EU and each of the other countries adopted separate but coordinated packages of further sanctions.
Taken together these measures, and particularly the broad new EU measures, are likely to significantly impact a broad range of cross-border transactions with Russia and Russian companies. The effects are likely to be felt most intensely in capital markets, investments and other corporate transactions, and in cross-border transactions involving the Russian financial, oil and gas and defense sectors.
EU sectoral sanctions on Russia
On 31 July the EU Council agreed to impose the additional sanctions measures which are summarized below, and which will come into force on 1 August 2014 pursuant to an EU Regulation issued on 31 July:
- With a view to restricting Russia's access to EU capital markets, EU nationals and companies may no longer buy or sell, provide brokering or assistance in the issuance of, or otherwise deal with transferable securities (such as equities, bonds and some related options) and money-market instruments (such as treasury bills, certificates of deposit and commercial paper) with a maturity exceeding 90 days, issued after 1 August by Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB) or Rosselkhozbank. These prohibitions also apply to subsidiaries established outside the EU in which any of these banks have a greater than 50% ownership interest and those acting on their behalf or at their direction. Services related to the issuing of such financial instruments, e.g. brokering, are also prohibited.
- A prohibition on exports of dual use goods and technology for military use in Russia or to Russian military end-users, including all items in the EU dual use list (annex to regulation 428/2009). Authorization may be granted where the export concerns the execution of an agreement concluded before 1 August.
- Exports of certain energy-related equipment and technology listed in an annex to the Regulation (i) to entities in Russia or (ii) to entities in any other country if such equipment is for use in Russia will require prior authorization, which will be denied if reasonable grounds exist to determine that such equipment/technology is destined for deep water oil exploration and production, arctic oil exploration or production and shale oil projects in Russia. Authorization may be granted where the export concerns the execution of an agreement concluded before 1 August. Authorization shall also be required for the provision of technical assistance, brokering services, or financial assistance relating to the export of such items.
- It is also prohibited to provide, to any person in Russia or for use in Russia, technical assistance, financing or financial assistance related to military goods or technologies, or technical assistance, brokering services, financing or financial assistance related to dual use goods or technologies for military use or a military end-user. Authorization may be granted where the export concerns the execution of an agreement concluded before 1 August.
The related EU Council Decision also called upon EU member states to prohibit the export and import of arms and related materiel to and from Russia, subject to grandfathering of contracts concluded before 1 August.
In addition to these sectoral measures, on 30 July the EU issued Regulations:
- banning new 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. The export of key equipment (listed in an annex to the Regulation) for the same six sectors to Crimea and Sevastopol was also banned, together with the provision of technical assistance, brokering services and other financial assistance related to such transactions. A grace period was granted until 28 October 2014 for the execution of transactions relating to the items listed in the annex under contracts concluded before 30 July 2014, subject to notification; and
- freezing the assets of a further eight individuals and three entities in response to the ongoing crisis. The measures target individuals linked to the self-declared republics in southern and eastern Ukraine, and individuals with a close connection to President Putin who are seen to be encouraging or profiting from the unrest. Three companies were also added: Almaz-Antey (a defense company associated with anti-aircraft weapons), Dobrolet (a subsidiary of Aeroflot), and Russian National Commercial Bank.
Also, as we reported in our 17 July briefing, on 16 July the EU requested the European Investment Bank to suspend new financing in Russia, called on EU Member States to cause the European Bank of Reconstruction and Development to also suspend new financing, and the European Commission is reassessing bilateral EU-Russia cooperation programs with a view to their suspension.
Expanded US sectoral sanctions
In our 17 July briefing we summarized the initial US sectoral sanctions adopted on 16 July, prohibiting US persons from buying, selling, providing financing for or otherwise dealing in “new debt” or “new equity” issued by or provided to four major Russian companies. The prohibition, which generally applies to electronic payments involving US dollars (due to the involvement of a US clearing bank), applies to:
- “new equity” issued by or for either of two major Russian banks, Gazprombank and Vnesheconombank (“VEB”), or for any entity in which either has a direct or indirect 50% or greater ownership interest; and
- “new debt of longer than 90 days maturity” issued by or provided to either of these banks, or either of two major Russian oil and gas companies, Rosneft or Novatek, or for any entity in which any of them has a direct or indirect 50% or greater ownership interest.
On 29 July, the US government imposed sectoral sanctions on three more of the largest banks in Russia – VTB Bank, Bank of Moscow and Russian Agricultural Bank – identical to those imposed on Gazprombank and VEB. Potentially the most significant of these is VTB Bank which, as the US Treasury Department noted in a press release, owns “more than 30 banks in 23 countries across Europe, Asia, and Africa.”
There remain some key questions as to how the sectoral sanctions measures should be interpreted and applied. For example, it appears that financing agreements or facilities that are fully negotiated and agreed in writing prior to the effective date of the sectoral sanctions generally will not be viewed as “new debt”. It appears this will remain true even if, after the effective date, there are new borrowings or disbursements, or if there are automatic and non-discretionary changes in the terms, such as the automatic reset of a variable interest rate according to an agreed formula. On the other hand, such pre-effective date debt will be considered “new debt” if there are any negotiated or discretionary changes after the effective date in the interest rate, maturity, credit limit or any other contractual provisions of the relevant financing agreement or facility.
OFAC has addressed this issue in updated guidance on its website, issued on 28 July. We have been engaging in discussions with OFAC of these and other practical implications of the sectoral sanctions and would be pleased to discuss these issues with you.
Separately, on 29 July the US government added an eighth major Russian defense sector firm, United Shipbuilding Corporation, to the primary US sanctions list, the list of Specially Designated Nationals and Blocked Persons (the “SDN list”). US persons are prohibited from essentially any transactions or dealings with this firm, and must block (freeze) and funds or other property within their possession or control in which United Shipbuilding Corporation has an interest. As with most other listed Russian companies, United Shipbuilding Corporation was also placed on the US Entity List. Both US and non-US persons are prohibited, under US law, from a broad range of transactions relating to companies on the Entity List involving goods, equipment or technology of US origin or containing US origin content.
In addition the United States has followed the EU in suspending US export credit and development finance to companies and projects in Russia, and will as of early next week prohibit exports of a broad range of US origin equipment and technology for use in Russia or offshore Russia in oil exploration or production from deepwater, Arctic offshore, or shale resources. According to the US Commerce Department, these export restrictions are intended to “make it difficult for Russia to develop long-term, technically challenging future projects.” We understand they will be implemented in a manner broadly in line with the EU energy sector export restrictions described above. Other US export restrictions have been in place for several months on items and technologies that “could be or are being deployed against Ukraine” and "high-technology" items or services that could contribute to Russia's military capabilities.
Expanded Canadian sanctions
On 25 July Canada greatly expanded its sanctions to mirror many of the US sectoral sanctions and other US listings of Russian and Ukrainian persons imposed on 16 July, summarized in our 17 July briefing. Canada has:
- imposed sectoral sanctions on three of the major Russian companies targeted under US sectoral sanctions, prohibiting Canadian person involvement in new debt or equity financing for Gazprombank or VEB, or in new debt financing for Novatek; and
- added to the Canadian sanctions list seven of the entities the US had added to its primary sanctions list (the SDN list) on 16 July.
The new Canadian measures add to the sanctions Canada has expanded on several occasions since March, targeting numerous Russian and Ukrainian persons also targeted by US or EU sanctions.
New Japanese sanctions
On 28 July, Japan announced its decision to impose the following additional sanctions on Russia:
- to freeze assets in Japan of the individuals and organizations considered to have been directly involved in the annexation of Crimea and the destabilization of Eastern Ukraine;
- to take coordinated action in line with the EU’s recently-announced decision to freeze funding from the European Bank for Reconstruction and Development for new projects in Russia; and
- to introduce restrictive measures with regard to imports from Crimea and Sevastopol based on Japan’s nonrecognition of Russia’s annexation of Crimea.
The additional sanctions will take effect after they are endorsed by the Cabinet, which is expected later this week. Japan will then release a list of individuals and groups that are subject to the sanctions.
Japan earlier imposed very limited sanctions on Russia, including suspending the issuance of entry visas to 23 individuals, but excluding asset freezes.
Russian responsive measures
In response to the sanctions targeting Russia and Russian persons, Russia has adopted certain limited responsive measures. These include a policy to deny visas to visit Russia for nine senior US government officials that have been publicly listed by Russia, and for other US government officials on a non-public list.
The Russian parliament is currently considering a bill which, if adopted in its current wording, would authorize the federal government to designate certain countries as “aggressor nations” and, once so designated, ban all nationals of such countries (including companies registered there and their affiliates) from carrying out certain business activities in Russia (including audit, legal and consultancy services). It is currently unclear whether the bill will be adopted in its current wording, if at all.