With the entry into force of Council Regulation (EU) No. 833/2014 (the Regulation) on 1 August 2014, the European Union has for the first time imposed so-called “sectoral” sanctions against Russia.
In this article, we provide an overview of these new sectoral sanctions, the impact they have on the (re)insurance sector in particular, and the issues (re) insurers should consider when assessing Russian-related risks.
The new sectoral sanctions Restrictions on trade
The new sectoral sanctions target the sale, supply, transfer or export to Russia, whether directly or indirectly, of:
- Dual use goods and technology for use in Russia or by any entity in Russia, where these items are intended in whole or in part for military use
- Certain technologies for the oil industry, as set out in Annex II of the Regulation
There are some limited concessions available. The provision of dual use goods and technology to Russia is generally prohibited, but may be authorised where the export concerns a contract or agreement entered into prior to 1 August 2014.
The provision of specific technologies for the oil industry is permitted provided that prior authorisation is sought. Permission will not be granted where the authorities have reasonable grounds to determine that the technology in question is to be used for deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia.
Restrictions on access to financial markets
Targeted for the first time is the access of major Russian financial institutions (Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB) and Rosselkhozbank, as listed in Annex III of the Regulation) to the long term funding available in EU capital markets.
The Regulation prevents the provision or sale to these institutions of transferable securities and money-market instruments with a maturity exceeding 90 days, the provision of brokering or assistance in the issuance of such instruments, and otherwise dealing with them, after 1 August 2014.
The institutions targeted by the sanctions include those entities outside the EU owned 50% or more by those entities listed in Annex III, and any legal persons, entities or bodies acting on their behalf or at their direction.
While funding agreed prior to 1 August 2014 in excess of 90 days maturity is permitted, it is likely that any extensions in excess of 90 days or any additional funding in excess of 90 days provided under existing facilities would be not be considered exempt from this prohibition.
Specific (re)insurance measures
The Regulation also contains restrictions on the provision of financial assistance, including the provision of (re)insurance, with export credit insurance specifically mentioned. The restrictions include:
- A prohibition on the provision of financial assistance (including grants, loans and export credit insurance) for the sale, supply or transfer to Russian persons or to Russia of goods and technology on the Common Military List of the European Union, and dual use goods and technology with a military end use. The prohibition does not extend to the execution of obligations arising from contracts or agreements concluded before 1 August 2014
- A requirement to obtain authorisation to provide financial assistance (including grants, loans and export credit insurance) related to the technologies for the oil industry as listed in Annex II
What does this mean for (re)insurers in practice?
As mentioned above, there are restrictions on the provision of (re)insurance for two trade activities (the sale/supply/export/transfer of dual use military goods and items on the Common Military List; and certain technologies for the oil industry). While export credit insurance is explicitly mentioned in the list of types of financial assistance that are restricted, it is likely that any form of (re)insurance that would enable these trades would also be impacted by the Regulation. For example, cargo cover for these restricted items, or hull cover for any vessel or aircraft transporting these goods, are likely to also be caught as “financial assistance” for the particular trade. (Re)insurers should therefore proceed with caution where a transaction concerns any of the goods or technology outlined above, while bearing in mind that it may be possible for a transaction to proceed if the relevant authorisations are obtained.
When considering whether to provide (re)insurance for Russian related risks, (re) insurers should also be mindful of the beneficial ownership and/or control of the entities they provide cover for. Designated entities may choose to dispose of shareholdings in subsidiary companies to give the appearance that they are no longer the owner, but may still be the controlling entity.
(Re)insurers should therefore look at all available information, including the composition of the board of directors, and nature of the transactions entered into by a (re)insured (for example, do they appear to be acting on behalf of or at the direction of a minority shareholder who is also a designated entity?).
These additional sanctions, while increasing the restrictions on trade between the EU and Russia, are still not fully aligned with those imposed by the US Department of the Treasury’s Office of Foreign Assets Control (OFAC). There is some overlap between the regimes, but differences remain.
It is important to bear in mind that (re)insurance can still be provided for many activities involving and connected with Russia and Russian entities. The restrictions on dealing with Russian financial institutions are limited in scope: the majority of transactions (for example, standard payments) can still go ahead without the need for authorisation. The sanctions that have been imposed are by no means as broad as those imposed against Iran, or even Syria.
The Council of the European Union has noted that the measures will be kept under review, and may be suspended, withdrawn, or supplemented by other restrictive measures in light of developments on the ground. The new sectoral sanctions mean that it is more important than ever for (re)insurers to understand their Russian exposure, and for compliance and teams in higher risk classes of business (such as trade credit) to work together to mitigate the risk of exposure to sanctions.