Following the ongoing crisis in Ukraine and in the wake of the 16 March referendum in which the Ukrainian region of Crimea voted to secede from Ukraine, the European Union ("EU") and the United States ("US") have issued sanctions targeting persons responsible for actions which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine. A brief overview of these measures follows.

These measures come into force on top of the EU and the US sanctions against Ukrainian individuals described in our client alert of 7 March 2014 available here. As events on the ground unfold, particularly in light of Russian President Vladimir Putin's announcement on 18 March 2014 that the Russian Federation has officially annexed the Crimea, additional sanctions may be imposed.

EU sanctions

On 17 March 2014, the EU brought into force Council Regulation (EU) No 269/2014 designating 21 individuals whose assets within EU jurisdiction will be frozen and with whom further dealings are restricted.  The individuals are also subject to travel bans. The designated individuals include Crimean and Russian politicians and three Russian military chiefs.

These controls, effective as from 17 March, have the following key consequences:

  • all funds and economic resources belonging to, owned, held or controlled by the designated persons must be frozen;
  • no funds or economic resources shall be made available, directly or indirectly, to or for the benefit of the designated persons; and
  • participation, knowingly and intentionally, in activities the object or effect of which is to circumvent the above measures is prohibited.

Very limited exemptions and licensing provisions are available with respect to the above prohibitions.

consolidated list of all EU and UK designated persons is published by HM Treasury (but note that designations are subject to changes in light of new political developments).

Certain EU Member States are also considering supplementary trade restrictions going beyond the EU measures. For example, the UK has announced that it is suspending certain military export licences to Russia, which could have a sizeable impact on the defence sector.

US sanctions

Also on 17 March 2014, the US Treasury Department designated four individuals as Specially Designated Nationals ("SDNs") for violating Ukrainian sovereignty. The designations, which were made pursuant to Executive Order 13660 (6 March 2014), included former Ukrainian president Viktor Yanukovych.

On the same day, the US President signed a new Executive Orderexpanding on the authority of Executive Order 13660 to designate officials of the Government of the Russian Federation, individuals or entities that operate in the arms or related materiel sector of the Russian Federation, and individuals or entities owned or controlled by or that provide support to the foregoing. The US Treasury Department designated seven individuals as SDNs under the new Executive Order.

US persons are generally prohibited from dealing with these new SDNs.  Additionally, any assets of these individuals that are within US jurisdiction must be frozen. These individuals are also subject to a US travel ban. The complete SDN List is available here.

Potential for additional sanctions

President Putin's announcement that the Russian Federation has officially integrated the Crimea into the Russian Federation increases the likelihood for additional US and EU sanctions. It is possible that the EU may make additional designations as early as Thursday 20 March when the next EU Foreign Affairs Council meeting is due to take place. Notably, the 21 individuals designated by the EU are reported to have been selected from a list of 120-130 names, indicating that others have been or are being considered for designation.

There is a strong possibility that Russia will introduce its own sanctions to mirror those imposed by the US and EU. The decision whether to impose sanctions and their likely targets will be taken by President Putin and his close advisers. It is difficult to predict whether any Russian sanctions will match the US and EU approach, or follow a different possibly wider scope. The first round of US and EU sanctions did not target the highest level of President Putin's political advisors. It is possible that any Russian sanctions will be "tit-for-tat" and so we may see a similar level US and EU officials sanctioned by Russia. There may also be a Russian reaction to the signature of the EU-Ukraine Association Agreement by the EU and Ukraine scheduled for Friday 21 March. 

Recommended Actions

Companies should exercise diligence when conducting transactions involving Ukraine and Russia, including by taking the following steps:

  • screen (and regularly re-screen) counterparties, end-users, banks and other third parties potentially benefiting from the transaction to verify that they are not a designated person (and are not owned or controlled by a designated person);
  • assess the impact of positive hits against the designated persons lists and if there is a need to terminate a relationship because of US and/or EU sanctions compliance, then assess what exposure this could lead to (e.g., damages actions); and
  • exercise caution in the negotiation of contracts with parties that could be the target of any US and/or EU sanctions against Russia (including the State-owned financial and energy sectors). Supplementary contractual language addressing sanctions risks and export control compliance may be appropriate.

The UK's HM Treasury has issued guidance on how to comply with the EU sanctions for companies falling within the UK's jurisdiction. 

The foregoing is intended only to provide a general overview of the new sanctions imposed against Russia and Ukraine. Please do not hesitate to contact us if you have any questions about how these changes might affect your company or if you require advice on any specific transactions or plans.