Sanctions continue to be a hot topic, driven by the terrible events in Ukraine, but also by signs of progress in discussions with Iran.
The scale and nature of the EU and US restrictions imposed in relation to Ukraine have significantly increased since the middle of July, reflecting the ongoing crisis there. Any business which trades with counterparties in Russia or has interests in Russia needs to keep a close eye on these developments and consider (ideally in advance) how it may be affected by new restrictions.
At the same time, it appears that discussions with Iran over its nuclear programme are moving in the right direction (albeit slowly). As a result, the suspension of certain EU and US restrictions against Iran, which was due to expire on 20 July, has been extended to 24 November 2014.
EU sanctions related to Ukraine
The EU continues to ramp up the asset freezing measures imposed in response to events in Ukraine (the so-called "phase 2" or "tier 2" restrictions), but it appears that political pressures within the EU, and competing interests of Member States, mean that wider restrictions against the Russian economy (so-called "phase 3" or "tier 3" restrictions) are not yet on the cards.
On 18 July 2014, the EU widened the grounds for listing individuals or entities under the Ukraine-related sanctions. As well as allowing companies in Crimea and Sevastopol, whose ownership has been transferred contrary to Ukranian law, to be listed, the EU can now list companies on the basis that they are "supporting, materially or financially, actions which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine".
This is a broad category and may indicate that the EU intends to make significant further listings of Russian individuals and entities in the future.
There has also been speculation about whether the EU will mirror some of the high profile US listings of individuals and entities closely connected with Mr Putin and, on 24 July, the EU agreed to designate further individuals and entities, although the new listings are not expected to be published until 25 or 26July. Companies trading with Russia will need to look closely at the list of additional individuals and entities when it is published to see whether their business is affected.
It appears that Phase 3 restrictions, which would target wider sectors of the Russian economy, are still being discussed and may well be adopted in due course. There has been speculation in recent days about the terms of a possible arms embargo, restrictions on exports to Russia of sensitive technologies for parts of the Russian energy sector, and measures which would restrict the ability of Russian state-owned banks to access EU capital markets.
Companies with significant interests in Russia will need to continue to monitor the situation (and their own contractual arrangements) to assess their exposure, in the event that wider restrictions are imposed.
US sanctions related to Ukraine
Two sets of US measures were announced by the US Office of Foreign Assets Control (OFAC) on 16 July 2014. We summarise our understanding of the US measures below, to indicate where detailed US legal advice might be required.
The first measure involved designating eight entities, all of which are said to operate in the arms or related material sector in the Russian Federation. The entities are JSC Concern Almaz-Antey, Federal State Unitary Enterprise State Research and Production Enterprise Bazalt, JSC Concern Sozvezdie, JSC MIC NPO Mashinostroyenia, Kalashnikov Concern, KBP Instrument Design Bureau, JSC Concern Radio-Electronic Technologies and Uralvagonzavod.
The effect of the designation is that any assets of these entities that are within US jurisdiction must be frozen and, in addition, transactions by US persons or within the US involving these entities are generally prohibited. It is important to note that the restrictions apply not only to the listed entities, but also to any entity in which they own, directly or indirectly, a 50% or greater interest.
The second measure involved imposing so-called sectoral sanctions against four Russian entities. While an earlier Executive Order issued by President Obama in March 2014 gives authority to impose such sanctions, this is the first time they have been imposed.
VEB, Gazprombank OAO, Rosneft and OAO Novatek have all been added to the US Sectoral Sanctions Identifications List - VEB and Gazprombank on the basis that they are entities operating in the Russian finance sector and Rosneft and Novatek on the basis that they are entities operating in the Russian energy sector.
It is important to stress that the measures against these four entities are not blocking measures in the way that the measures mentioned above in respect of the eight Russian defence companies are.
Instead, the measures seek to restrict the ability of the four named entities to access the US debt and equity markets, by making it prohibited for US entities or persons within the US to transact in, provide financing for, or otherwise deal in new debt of longer than 90 days maturity or new equity for VEB or Gazprombank OAO. In the case of OAO Novatek and Rosneft, only the restrictions relating to new debt apply.
It is worth highlighting two points in particular, as these show the breadth of the restrictions. Firstly, as with the blocking measures, the restrictions apply not only to the listed entities, but also to any entity in which they own, directly or indirectly, a 50% or greater interest. Second, the Frequently Asked Questions published by OFAC make clear that the prohibitions apply to all transactions involving new debt with a maturity of longer than 90 days and any dealing in, including provision of services in support of, such new debt.
Iran – Joint Plan of Action
On 23 November 2013, the P5+1 (as it was then known, comprising the UK, US, Russia, China, France and Germany) and Iran agreed to suspend some of the restrictions against Iran for a six month period from 20 January to 20 July 2014, pursuant to an agreed Joint Plan of Action (the JPOA).
The specific suspensions, and issues arising, were considered in detail in our January 2014 sanctions Briefing (Suspension of Iran sanctions - a golden opportunity?)
The group, now known as the E3+3 (still comprising the UK, US, Russia, China, France and Germany), and Iran have agreed to extend the period of the suspensions to 24 November 2014.
Whilst the terms of the suspension are unchanged, meaning that only those restrictions which were suspended pursuant to the original JPOA are currently suspended, there has been one notable practical change: the US authorities have now confirmed, in guidance which they have published to coincide with the extension of the JPOA period, that "Insurance payments for claims arising from incidents that occur during the JPOA Period and/or the Extended JPOA Period may be paid after November 24, 2014, so long as the underlying transactions and activities conform to all others aspects of the sanctions remaining in place and the terms of the sanctions relief provided by the JPOA". This is, of course, a welcome development and will give increased certainty and comfort to insurers.
That said, any businesses seeking to rely on the extension of the JPOA should look carefully at the specific suspensions which have been agreed to ensure that the intended activities are lawful and that they do not stray beyond the specific suspensions and trespass into the terrain of sanctionable conduct.