On 9 February 2015, the EU Foreign Affairs Council imposed new sanctions - asset freezes and travel bans - against 19 Russian and Ukrainian individuals and 9 entities that have been added to the 'black list' of sanctioned persons and entities under the EU Council Regulation No 269/2014. This Council decision was adopted as the reaction of the EU to the escalation of military activities in Eastern Ukraine in January 2015.

However, the implementation and entry into force of the new asset freeze and travel ban, as well as the publication of new list of the persons and entities targeted by these sanctions, has been postponed until 16 February 2015.

As stated by High EU Representative for Foreign Affairs and Security Policy Federica Mogherini in her statement after the Foreign Affairs Council meeting, the implementation of the new sanctions was postponed "in order to give space" for the "diplomatic efforts" - referring to the negotiations recently by Presidents of Germany, France, Russia and Ukraine aiming at finding a peaceful solution for the situation in Ukraine. Germany - Europe's biggest economy with significant interests in Russia - is now leading the international peace efforts. Diplomats in Brussels are rather pessimistic about the prospects of a sustainable diplomatic peaceful settlement of the dispute.

What do the new sanctions mean for European businesses?

Once the new sanctions enter into force and the list of the sanctions targets is published in the EU Official Journal, EU-incorporated companies and citizens, as well as non-EU persons in their activities in the territory of the EU, will be prohibited from making any funds or economic resources available to the blacklisted persons and entities, as well as persons, entities or bodies controlled by them.

All funds and assets owned or controlled by the blacklisted persons and entities in the EU as well as their funds and assets held by EU citizens or EU-incorporated companies outside the EU will have to be frozen.

The prohibition to make funds and economic resources is very broad in scope and restricts practically any business transactions with the blacklisted persons and entities and with persons and entities controlled by them. Significant administrative and criminal penalties are envisaged in the national legislation of EU Members States for violations or circumvention of this prohibition.

Publication of the list of targets and entry into force

The publication of the list of the new sanctions targets and entry into force of the new asset freeze, currently expected on 16 February 2015, will depend on the situation on the ground in Ukraine and the progress of the political negotiations between the Presidents of Russia, Ukraine, France and Germany.

In terms of the process, if next week the EU decides not to implement the newly-adopted asset freeze (which could happen only if the EU sees a significant progress and efforts by Russia in stabilising the situation in Ukraine), a new unanimous decision of EU Member States would be needed to cancel these sanctions. Otherwise, the asset freeze will come into force and the list of targets will be published on 16/17 February 2015.

A meeting between the Presidents of Russia, Germany, France and Ukraine is expected to take place on Wednesday, 11 February 2015, and the next day, on Thursday, 12 February 2015, the EU Heads of State and Government will discuss the situation in Ukraine at the summit in Brussels. The implementation of the new sanctions will largely depend on these two meetings.

An overview of the existing EU sanctions against Russia

Between March 2014 and February 2015, the EU has imposed significant restrictive measures against Russia in relation to annexation of Crimea and the situation in Eastern Ukraine. The sanctions imposed to date include:

  1. An asset freeze for certain individuals and entities and a travel ban for certain individuals (Regulation 269/2014, as amended by several subsequent regulation).
  2. Sectoral sanctions imposed by EU Council Decision 2014/512 and EU Council Regulation No 833/2014 of 31 July 2014. These sanctions were further extended by EU Regulation 960/2014 that entered into force on 12 September.

The sectoral sanctions target Russia's oil industry, financial sector and the military/arms industry and include the following restrictions:

  • Restrictions on financing certain Russian government-owned companies - banks, oil companies and companies and entities engaged production, conception, sales or export of military equipment or services. This restriction includes a prohibition to deal in transferrable securities (eg shares and bonds) and money market instruments, issued by the companies mentioned above, with a maturity above 30 days, and to provide, directly or indirectly, loans or credit to such companies with a maturity exceeding 30 days.
  • Restrictions on export of military and dual-use items to Russia and for use in Russia.
  • Restrictions on the exports and supply of certain oil-related goods and technologies to Russia and for use in Russia and restrictions on the provision of the so-called "associated services" services necessary for deep-water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia.
  1. Sanctions targeting trade with Crimea and Sevastopol. These sanctions, initially imposed by EU Council Decision 2014/386/CFSP and EU Regulations No 692/2014 (June 2014) and No 825/2014 (July 2014) were significantly extended by the EU Regulation No 1351/2014 in December 2014, which restricts practically any trade with and investment in Crimea and Sevastopol.

In addition to the prohibition to import into the EU any goods originating in Crimea and Sevastopol, these restrictions prohibit any new investments in the region, including acquiring shares in companies based in Crimea and Sevastopol or establishing new companies or joint ventures there and providing loans or other financing to Crimea or Sevastopol-based entities. The restrictions also include a ban on exports to Crimea and Sevastopol or for use in the region of an extensive list of goods and technologies listed in Annex II to Regulation 692/2014 (as amended by Regulation 1351/2014).

Impact of the EU sanctions against Russia

The EU sanctions imposed against Russia resulted in significant cuts of business activities between European companies and Russia. Due to the sanctions in place and the risk of the new restrictive measures, European companies often had to revise the existing agreements with their Russian partners and reconsider their planned transactions involving companies in Russia, Crimea and Sevastopol. Overall, businesses trading with Russia, Crimea and Sevastopol are now subject to increased due diligence requirements and are required to perform self-assessments of their planned transactions with the region in order to avoid potential violation of EU sanctions.

According to various assessments, the EU sanctions had a significant negative impact on the economy of Russia - according to an estimate of the European Commission presented at the end of 2014, the sanctions are expected to reduce Russia's growth rate by 1.1 % in 2015. In addition, the sanctions allegedly contributed to the significant fall of the course of the rouble and capital outflows from Russia - which according to the estimation of the Russian Central Bank could be as high as $130 billion in 2014).

However, the EU sanctions against Russia and the Russian countermeasures have hurt also the economy of Europe, although to a lesser extent. Although there has been no conclusive estimation of the cost of the sanctions for Europe, according to an estimate by the European Commission, the sanctions reduced the EU's growth by 0.2-0.3 % in 2014 and 2015, and according to some other estimates have resulted in more than 60 % reduction of EU exports to Russia.

Political background and next steps

The EU's approach to imposing sanctions against Russia is very much driven by the situation on the ground in Eastern Ukraine and the steps taken by the leadership of Russia together with the Western partners in order to stabilise the situation.

Following the period of relative calm after the ceasefire agreement in September 2014, in January 2015 some discussions started at the EU level about the possibility to lift the sanctions against Russia. However, following the new escalation of the conflict in Eastern Ukraine in recent weeks, the political mood was reversed and EU Member States came back to discussing sanctions. In addition, the Member States agreed to extend, at least until September 2015, the validity of the asset freeze imposed by EU Regulation 269/2014, which was due to expire in March 2015.

The approach of individual EU Member States to the EU sanctions varies, with some of the Member States being more sceptical about the appropriateness of sanctions. This makes the imposition of new sanctions more difficult at the EU level, since unanimous support of the Member States is required to adopt a decision on sanctions. However, the Member States become more united and decisive in their approach, when the conflict in Ukraine escalates.

The next steps will depend on the success of the political negotiations launched in February 2015 between the Presidents of Germany, France, Russia and Ukraine, as well as on the military activity on the ground in Eastern Ukraine.

Should the negotiations fail and further escalation of the conflict continue, new sanctions against Russia could be expected, which would most likely extend the existing sectoral restrictions against Russia's financial sector, oil sector and arms industry and perhaps target additional sectors of the Russian economy as well as new companies, entities and individuals.

A significant milestone will be the end of July 2015, when the sectoral sanctions against Russia, imposed by EU Regulation 833/2014, are due to expire. In order to extend the validity of these sanctions, unanimous support by 28 EU Member States would be needed.