As the events in Ukraine and Russia continue to unfold, the reaction by the US and the EU, including imposing sanctions, will impact individuals, businesses and entire sectors.

As a polycentric firm, with no headquarters, no dominant culture and no flag, and with partners throughout the world, including Russia, Ukraine and Central and Eastern Europe, Dentons is particularly well positioned to explain the nuances that surround every facet of these complicated developments to our clients.

This client update contains an analysis of the policy issues arising from the current situation in Ukraine.

We try to present the facts as they are known, and the potential ramifications of what might happen, without taking a position that could be perceived as political in any way. We believe this is the best way to serve our clients.

The EU published its Regulation on the further Ukrainian sanctions (833/2014 - the EU Regulation) on 31 July. The Regulation builds on the existing, and recently updated, list of Designated Persons related to the Ukraine and in relation to which financial sanctions already apply.

Financial Sanctions and Investment Ban

The UK has implemented the further financial sanctions set out in the EU Regulation. The Ukraine (European Union Finanical Sanctions) (No 3) Regulations 2014 (the UK Regulations) took effect from 3pm on 1 August and apply to all persons in the UK, all UK nationals and all bodies incorporated or constituted under the law of any part of the UK (UK persons). While the scope of the EU sanctions covers a similar range of persons EU-wide, the UK makes its own legislation in order to be able to enforce breaches of it. The UK Regulations create three offences:

  • they prohibit UK persons from purchasing, selling, providing brokering services or assistance in the issuance of, or otherwise dealing, directly or indirectly, with transferable securities and money-market instruments with a maturity exceeding 90 days of (i) any of the entities listed in the EU Regulation (Listed Persons), (ii) any legal person, entity or body established outside the EU more than 50% of the proprietary rights of which are owned by a Listed Person, or (iii) a person acting on behalf of, or at the direction of, a Listed Person. It is an offence to contravene this prohibition unless the UK Person did not know and had no reasonable cause to suspect a breach. It is also an offence for a person intentionally to participate in activities knowing that the object or effect of them is (whether directly or indirectly) to circumvent  the prohibition or to enable or facilitate any breach of the prohibition. Any senior officers of a body corporate with whose consent or connivance an offence is committed, or where the offence is attributable to their neglect, also commit an offence;
  • relevant firms authorised under the Financial Services and Markets Act 2000, passported-in EEA credit institutions and money transmitters also commit an offence if they do not inform Treasury as soon as practicable if they know, or have reasonable cause to suspect, that a person has committed an offence, and provide Treasury with all relevant information; and
  • Treasury has the power to ask any person for information, and it is an offence to fail to co-operate with any request it might make.

Treasury has two separate lists relating to the regime - one listing the five Listed Persons covered by this prohibition (Gazprombank, Rosselkhozbank, Sberbank, Vnesheconombank (VEB) and VTB Bank), who are not Designated Persons on its Consolidated List by virtue of appearing on this list and the other containing the now expanded list of Designated Persons to whom existing sanctions and asset freezes apply. As at 1 August, there were 95 individuals and 23 entities on the Consolidated List of Designated Persons.

Trade and Export Ban

The other elements of the restrictions in the EU Regulation:

  • ban, in each case directly or indirectly to any person in Russia or for use in Russia, if those items are or may be intended, wholly or partly, for military use or for a military end-user (i) the sale, supply, transfer or export of dual-use goods and technology, and (ii) the provision of technical assistance or brokering services, financing or financial assistance, including grants, loans and export credit insurance, for any sale, supply, transfer or export of such items, or for any provision of related technical assistance related to them, or related to their provision, manufacture, maintenance and use. Exporters must apply for authorisation to carry on relevant activities. Authorities will not grant an authorisation if they have reasonable grounds to believe there may be military end-use, but may do so if the export entails the execution of an obligation arising from a contract or an agreement concluded before 1 August 2014;
  • require businesses to seek prior authorisation for the sale, supply, transfer or export, directly or indirectly, of various listed technologies to any person in Russia or for use in Russia. Among the technologies included in the list are oil industry tools for use in deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia. The authorities will not grant authorisation if they have reasonable cause to believe the technologies will be used for these purposes in Russia. Again, though, they may do so if the request entails the execution of an obligation arising from a contract or an agreement concluded before 1 August 2014;
  • ban (i) the provision, directly or indirectly, of technical, financing or financial assistance (including grants, loans and export credit insurance or guarantee) related to the goods and technology listed in the Common Military List, (ii) the provision, manufacture, maintenance and use of goods included in that list, or (iii) any sale, supply, transfer or export of those goods or related technical assistance, to any person in Russia or for use in Russia.

Generally, the bans do not apply where a firm is executing an obligation arising from a contract or an agreement concluded before 1 August 2014, or to the provision of assistance necessary to the maintenance and safety of existing capabilities within the EU.

The EU Regulation also provides that none of the listed entities or any other Russian person or person acting on their behalf can bring a claim in connection with any contract or transaction, the performance of which has been affected, directly or indirectly, in whole or in part, by the Regulation, subject to the rights of those entities to judicial review.

UK Guidance

Treasury has published a notice explaining to firms the effects of the new Regulations. Meanwhile the Financial Conduct Authority (FCA) took the opportunity to remind firms of its expectations of robust systems and controls to comply with financial crime legislation and the importance of identifying when they deal with politically exposed persons. It also stated that so long as the new sanctions remain in force it does not expect (i) to admit to listing securities issued after 1 August by issuers within the scope of the EU Regulation or (ii) depositaries for GDR issuers within the scope of the EU Regulation to issue new depositary receipts.

(Source: Council Regulation 833/2014, the Ukraine (European Union Financial Sanctions) (No 3) Regulations 2014Treasury Guidance Notice and FCA Guidance Page.