The EU’s latest round of sanctions against Russia is a significant “ramping up” of those imposed on Russian state entities restricting access to capital markets back in August 2014.

This briefing:

  • summarises key provisions of Council Regulation 833/2014 of 1 August 2014 (the Regulation) and Council Regulation 960/2014 of 8 September 2014 amending the Regulation (the Amendment) with effect from 12 September 2014;
  • examines key Article 5 provisions of the Regulation restricting dealing with certain transferable securities issued by or relating to state-owned Russian credit and other institutions;
  • identifies material differences in scope between the latest EU and US sanctions and
  • provides guidance to businesses engaging with Russian counterparties.

EU “Stage III” sanctions

The EU’s Council of Ministers adopted Council Regulation (EU) 833/2014 on 31 July 2014.1 The Regulation follows the loss of Malaysian Airlines flight MH17 over eastern Ukraine on 17 July 2014 and marks escalation to so-called “Stage III” sanctions, under which the EU will target strategic sectors of the Russian economy.  The Regulation entered into force on 1 August 2014 and was followed days later by Russian import restrictions on EU-origin agricultural products in retaliation.  The Regulation broadly restricts the trade in dual-use goods, oil exploration and production technology, the trade in military equipment and medium and long-term financing for Russian state-owned banks. In relation to capital markets, the Amendment has introduced even tighter restrictions on Russia’s access to financing and also expanded the list of named entities subject to these restrictions to include major Russian defence and energy companies.

Read more in our general client briefing on the EU, US and Canadian sanctions against Russia.

To whom do the sanctions apply?

The Regulation applies:

  • To nationals of EU Member States (wherever located).
  • To any legal person, entity or body, established in an EU Member State or otherwise constituted under the law of a Member State (including the subsidiaries of non-EU persons, entities or bodies).
  • To any legal person, entity or body in respect of any business done in whole or in part within the EU (including the branches of non-EU persons, entities or bodies).
  • Within the territory of the EU (including airspace) and on board any aircraft or vessel under the jurisdiction of a Member State.

How do these sanctions affect your industry sector?

Capital markets are a main target of this round of EU sanctions.

Specifically, the amended article 5 of the Regulation imposes a ban on buying or selling (directly or indirectly) and generally providing investment services and dealing with transferable securities and money-market instruments with a maturity exceeding 30 days, issued after 12 September 20142, by:

  • Russian state-owned credit- or other institutions that “have an explicit mandate to promote competitiveness of the Russian economy, its diversification and encouragement of investment ...”.
  • Russian entities whose major activities include the “conception, production, sale or export of military equipment or services, as listed in Annex V, except … [those] active in the space or the nuclear energy sectors”.
  • Russian state-owned/-controlled institutions with estimated total assets exceeding 1 trillion Russian Roubles, “whose estimated revenues originate … [mainly] from the sale or transportation of crude oil or petroleum products, as listed in Annex VI.

The definition of “Transferable securities” for the purposes of the Regulation has also been amended, which effectively limits the classes of securities to company shares (and other securities equivalent to shares in companies, partnerships or other entites), bonds and other forms of securitised debt (including depositary receipts in respect of such securities), and any other securities giving the right to acquire or sell any such transferable securities. The other key amendment to the definition is retaining “any other securities giving the right to acquire or sell any such transferrable securities” and excluding the words “or giving rise to a cash settlement”. No guidance has been issued explaining this change, although it appears that the intention is to provide an exhaustive list of securities. “Money-market instruments” include treasury bills, commercial papers and certificates of deposit.

Instruments of payment are excluded from the definitions of transferable securities and money-market instruments. The EU Council Decision (2014/512CFSP) of 31 July 2014 had specifically confirmed that such prohibitions will not affect the granting of loans to or by the Listed Institutions referred to below. However, the Amendment now bans any arrangement to make new loans or credit with a maturity exceeding 30 days to the Listed Institutions, unless it is a loan for a specified and permitted purpose or to maintain the liquidity/prevent isolvency of subsidiaries based in the EU.

The ban applies to the following institutions listed in Annexes III, V and VI of the amended Regulation:

Annex III

  • Sberbank (Russia’s largest bank and third largest bank in Europe);
  • VTB Bank (a leading universal bank in Russia, which together with its subsidiaries form the Russian financial group – VTB Group);
  • Gazprom Bank (Russia’s third largest bank and a subsidiary of OAO Gazprom);
  • Vnesheconombank (VEB) (Russia’s “Bank for Development and Foreign Economic Affairs” used to manage Russian state debts and pension funds);
  • Rosselkhozbank (a special state agricultural Agrobank, wholly owned by the Russian government and based in Moscow);

Annex V

  • OPK Oboronprom (a Russian holding company whose subsidiaries produce helicopter engines, engines for gas compression stations and power plants, air-defenсe systems and radio-electronic systems);
  • United Aircraft Corporation (majority state-owned open joint stock company engaged in the design, manufacture, and sale of civilian and military aircraft);
  • Uralvagonzavod (Russian manufacturer of battle tanks and other non-military vehicles and equipment);

Annex VI

  • Rosneft (largest publicly traded oil company, majority owned by Russian government, with a 19.75% stake held by BP);
  • AK Transneft (Russian state-owned oil pipeline company);
  • Gazprom Neft (the oil arm of the Russian state gas company Gazprom (its parent)),

In addition to the entities listed in Annexes III, V and VI of the amended Regulation, the ban extends to:

  • any entity that is established outside the EU and owned (directly or indirectly) more than 50% by an institution listed in Annex III, V or VI of the amended Regulation; and
  • any entity acting on behalf or at the direction of such an institution or an institution listed in Annex III, V or VI of the Regulation).

(collectively Listed Institutions)

The restriction will not generally apply to transferable securities issued by the subsidiary of a Listed Institution where that subsidiary is established or otherwise constituted in an EU Member State. However, we caution clients as to the application of the provisions of Article 5 of the amended Regulation, as these will apply to non-EU legal persons majority-owned (directly or indirectly) by Listed Institutions or by any legal persons acting on behalf of or at the direction of such non-EU legal persons.

While the Regulation does not amount to a blanket ban on financing activity with these Russian entities, it materially limits financing that may be provided by EU persons to the Listed Institutions and the recent Amendment has limited this even further. We remind clients that the Regulation is only one of a series of sanctions that the EU has imposed against Russian natural and legal persons following the recent events in eastern Ukraine:

  • Regulation (EU) No 692/2014 imposes a ban on all financing or financial assistance related to the import of the goods originating in Crimea or Sevastopol;
  • Regulation (EU) No 825/2014 (amending Regulation (EU) No 692/2014) bans the granting of any financial loan or credit specifically relating to the creation, acquisition or development of infrastructure in the areas of transport, telecommunications or energy in Crimea or Sevastopol; and
  • Individuals and entities listed and referred to in Regulation (EU) No 269/2014 (as amended) and Regulation (EU) No. 208/2014 (as amended) are subject to an asset freeze and visa ban for their involvement in supporting or benefiting from the destabilisation of Eastern Ukraine and the annexation of Crimea.

EU and US financial sanctions – key differences

This briefing is an analysis of EU sanctions. In the context of all sanctions issues, the United States’ framework is extremely significant and should be considered at the earliest opportunity. We work closely with our colleagues in Washington, DC who have significant experience of advising global corporates and financial institutions in connection with the impact of US economic and trade sanctions.

The restrictions set out in the Regulation are broadly similar to the latest US financial sanctions against Russian persons (further detail can be found here). There are however key differences in terms of scope and targets:

  • A significant difference between these recent EU and US sanctions is the scope of the prohibition. The US sanctions prohibit transacting in, providing financing for, or other dealings in new debt of longer than 30 or 90 days maturity (depending on the Directive) or, with respect to the financial sector, new equity of individuals or entities designated on the Sectoral Sanctions Identification List, their property, or their interests in property. “Debt”, for the purposes of the US sanctions, includes loans, loan guarantees, extensions of credit and letters of credit. By contrast, under the EU sanction, loans, for example, are permitted in certain circumstances. Loans that (a) have a specific and documented objective for the non-prohibited import/export of goods and non-financial services between the EU and Russia or (b) are to provide emergency funding for the solvency and liquidity of EU entities owned by one of the listed Russian credit institutions, are carved out by the amended Regulation. The US sanctions therefore would appear to impose a wider ban on future dealings with the listed Russian banks relating to equity and any form of debt for those entities that has a maturity of more than 30 or 90 days, as applicable. Other dealings, likely to be limited, with these Russian banks are not affected.
  • A further difference is the approach to certain derivative contracts. The amendment to Regulation No 833/2014 would appear to narrow the application of the restriction on dealing in certain transferable securities of Annex III entities. Some cash-settled derivative contracts may be excluded from the restriction. However, the restriction will still apply to derivative contracts where the underlying is a transferable security of a listed institution meeting the maturity and issuance criteria and the contract may be physically settled. No Member State competent authority has issued guidance as to the application of the restriction on derivative contracts and none is expected in the near term. In contrast, the US Office of Asset Control (OFAC) has issued a general license that authorizes all transactions by US persons, wherever they are located, and transactions within the US involving derivative products whose value is linked to an underlying asset that constitutes debt or equity for the designated individual or entity. The general license does not, however, authorize the holding, purchasing, or selling of the underlying assets. Any other aspect of a derivative transaction that could be construed as providing new debt or equity to a designated individual or entity remains prohibited. More information.
  • The current list of Russian banks affected mirrors the EU list (as of 9 September 2014 the US list now also includes Sberbank) but also includes Bank of Moscow (which is a subsidiary of VTB, so is caught by the EU sanctioned entities list).
  • Another difference between the latest round of EU and US sanctions, is that while both have targeted the same Russian credit institutions to restrict access to capital markets, the US has imposed its financial sanctions differently on its targets in the Russian energy and defence sectors.
    • The relevant US energy sector sanction, prohibits US persons from engaging in all transactions in, providing financing for, and dealings in new debt with a maturity exceeding 90 days of AK Transneft, Gazprom Neft, Rosneft and Novatek. In contrast, the energy sector targeted sanctions under the EU Regulation sets the maturity at 30 days and also does not list Novatek as a Listed Institution.
    • The US’s defence sector sanction prohibits US persons from engaging in all transaction, providing financing and other debt dealings with a maturity exceeding 30 days with Rostec (the weapons manufacturer). Rostec is not a Listed Institution in the amended EU Regulation. (More information on US sanctions)

Appropriate precautions

The provisions of the Regulation are broadly drafted, and enforcement may vary across Member States. Businesses are advised to:

  • Re-screen all Russian counterparties and counterparties with relevant business or investments in Russia and Ukraine.
  • Include appropriate sanctions clauses in all new agreements with Russian counterparties and counterparties with relevant business or investments in Russia and Ukraine.
  • Review scope and restrictions of recent Australian, Canadian and US sanctions, which may apply to Russian and other persons not within scope of the Regulation.

Consequences of breaching sanctions

Although EU Regulations are directly applicable in all Member States, it is for each Member State to legislate what the penalties are for breach of the sanctions. In the UK, it is a criminal offence to breach the Article 5 restriction on dealing with transferable securities and money-market instruments. The penalties for breaching the restriction include a possible jail term of up to 2 years and/or a fine (Section 6 of The Ukraine (European Union Financial Sanctions) (No.3) Regulations 2014). These penalties are the same as those imposed for breaching the asset freeze on specified individuals and entities (Section 12).


EU sanctions are drafted in wide and sometimes imprecise terms with limited associated guidance. This means that there is often uncertainty as to how European courts will interpret the restrictions set out in the EU sanctions legislation. The president of the European Council has in a statement released on 11 September 2014 stressed the reversibility and scalability of these EU sanctions, suggesting that changes in the political climate could lead to amendments or suspensions of the current sanctions in force.

Financial institutions operating in the UK must also be mindful of their broader regulatory obligations with respect to sanctions, including systems and controls which seeks to detect, limit and prevent breaches of sanctions, reporting requirements, and senior management responsibilities, which are enforced by the Financial Conduct Authority.