Recently, both the US and the EU have escalated their respective sanctions regimes against Russia.  The purpose of this article is to outline the extent of the latest set of EU sanctions targeted against Russia, Crimea and Sevastapol and to provide some general guidance to TMT companies doing business in Russia. This is clearly a sensitive area given the importance of the Russian market to many international TMT businesses in the future but the latest sanctions are limited in effect for such businesses. 

What?

On 31 July 2014, the Council of the European Union adopted Regulation (EU) No.833/2014 (the “Regulation”). The Regulation focuses on sanctioning specific sectors of the Russian economy, namely the financial, energy and dual-use/military sectors.  These sector-specific sanctions are commonly called “Tier III” sanctions.

Who do the sanctions apply to?

Under Article 13 of the Regulation the sanctions apply:

“(a) within the territory of the Union;

(b) on board any aircraft or vessel under the jurisdiction of a Member State;

(c) to any person inside or outside the territory of the Union who is a national of a Member State;

(d) to any legal person, entity or body, inside or outside the territory of the Union, which is incorporated or constituted under the law of a member state; and

(e) any legal person, entity or body in respect of any business done in whole or in part within the Union.”

Article 13 is deliberately wide ranging and can even extend to non-EU group companies.

What entities / sectors are affected?

Broadly speaking, the Regulation targets:

  • the provision or financing (directly or indirectly) of arms and related equipment (including “dual-use” equipment and technology destined for the Russian military or military use within Russia) or the provision of technical assistance thereto;
  • the sale, supply, export or transfer of specific technology relating to the Oil & Gas industry; and
  • five Russian banks (including both their majority owned subsidiaries and their agents, although there are some exceptions to this).

How will sanctions impact the TMT sector?

TMT companies are likely to be particularly affected by restrictions on “dual-use” equipment, which can encompass a wide variety of products (the list may be found here).  The export of dual-use items is subject to governmental control and it is only where the items "are or may be intended for military use or for a military end user" that the sanctions will be deemed to apply and, in such situations no governmental approval will be forthcoming.  Where the sale is made to a non-military end user or where the intention is clearly for non-military use then the EU sanctions will not apply.

In respect of the types of technology which may fall foul of the EU Dual-Use Regulation (the “Dual-Use Regulation), it is likely that manufacturers in the following areas may be impacted and would be advised to scrutinise the Dual-Use Regulation carefully:

  • Electronics
  • Computers
  • Software
  • Telecommunications
  • Information security
  • Sensors and lasers
  • Navigation
  • Avionics
  • Aerospace and propulsion

How do the sanctions affect existing contractual arrangements?

The new sanctions permit Member States to authorise transactions which concern the execution of an obligation arising from a contract or an agreement concluded before 1 August 2014. The Department for Business, Innovation and Skills has made it clear that licence applicants wishing to rely on these exemptions must provide a copy of the relevant contract or agreement in support of their licence application. Furthermore, the existence of a relevant contract does not guarantee that a licence will be granted.

How should companies ensure that any new contracts comply with the current sanctions?

The regulations governing the products and services that are caught by the current EU sanctions regime are complex.

Given the severity of the penalties that may be imposed for breach of sanctions, and the associated reputational damage that a successful prosecution might bring, companies are advised to seek specific legal advice in relation to current or proposed transactions involving any of the sanctioned entities or sectors.

As a general rule, those companies with a European nexus are advised to place enhanced focus on compliance, exercise increased caution when doing business with Russia and Ukraine and ensure that their contracts are sufficiently robust as to enable them to terminate or suspend obligations should concerns arise.

What are the potential consequences of non-compliance?

If companies are found to be in breach of EU sanctions, penalties are imposed at a Member State level. In the UK, breach of the Regulation is a criminal offence, punishable by:

  1. for an individual, imprisonment for a term not exceeding 2 years, or a fine, or both; and
  2. for a company, a fine. Directors or officers of a company (or in the case of partnership, a partner) who consented or connived in the breach (or to whose neglect the breach is attributable) may also be subject to individual prosecution.

So what?

It is clearly therefore in the interest of TMT companies to ensure that they have adequate systems in place to prevent any breach of EU sanctions.  Given President Putin’s recent retaliatory sanctions against certain Western countries and the perceived success of US and EU sanctions against Russia, it is likely that further Tier III sanctions will be imposed in due course.  As ignorance of sanctions is no defence, companies are advised to keep a close eye on developments and, where appropriate, seek legal advice.