This article seeks to focus on the restrictions imposed by the European Union (the EU) on investors with economic interests in Russia and Ukraine or who are engaging in transactions involving entities with such interests. It is clear that there are issues emanating as a consequence of the current export license and sanctions regime that the EU has decided to introduce. There have been, and it is likely that there will be further, Russian measures affecting Ukraine in response to the sanctions regime imposed by the EU.
The Crimean referendum on March 16, 2014, in which the head of the referendum election commission stated that 96.8 percent of voters supported secession from Ukraine marked a key date in the deterioration of the relationship between the two countries, given that steps have now been taken in both Crimea and by the Russian government to effectively annex Crimea to enable it to become a constituent part of the Russian Federation. As a direct consequence of this decision, a series of EU Regulations have been adopted targeting trade with Crimea and Sevastopol, which is explored in greater detail below.
Travel Bans for Individuals and Asset Freezing for Certain Entities and Individuals
In response to the annexation of Crimea and Sevastopol, the EU Council adopted a series of Regulations which were targeted at senior politicians and governmental officials in Ukraine that were deemed to be responsible for the misappropriation of certain Ukrainian state funds. EU Council Regulation 284/2014 was adopted on March 21, 2014, and this expanded the list of sanctioned persons. A number of the EU Regulations that were adopted in March 2014 were focused on travel bans and asset freezes on governmental officials such as the previous president of Ukraine, Viktor Yanukovych, and his sons, and certain Russian military and governmental officials that were considered to be closely linked to the ongoing conflict in Ukraine.
Those individuals and entities that are subject to the asset freezing regime and a travel ban as applicable were named in Annex I to EU Council Regulation 269/2014, which has been supplemented incrementally by additional Regulations including EU Council Regulation 959/2014 adopted Sept. 12, 2014. As of 28 November, there were 23 entities and 119 people that were subject to the restrictions set out in Annex 1 of EU Council Regulation 269/2014. Pursuant to the EU Foreign Affairs Council meeting of 17 November, the EU announced that 13 individuals and five entities involved in separatist activities against Ukraine's territorial integrity would be designated with effect from 29 November. EU Council Regulation 1270/2014 contains the details of those individuals and entities.
The EU Regulations require the freezing of all funds and economic resources belonging to or owned, held or controlled by a sanctioned person, and they prevent EU-incorporated companies and EU citizens from "making funds or economic resources available, directly or indirectly," to or for the benefit of a sanctioned person. These Regulations therefore significantly impair the ability of EU companies and citizens to engage in business activities with those persons that are subject to the sanctions regime and individuals and corporate entities that are associated with them. The EU sanctions effectively prohibit transactions that touch upon the funds or economic resources of sanctioned persons or which permit them to be used in any way.
The above mentioned restrictive measures are directly applicable and are therefore binding on the member states of the EU. They apply within the territory of the EU to any person inside or outside the territory of the EU who is a national of a member state, to any legal entity, body or person, inside or outside the territory of the EU which is incorporated or constituted under the law of a member state, and to any legal entity, body or person in respect of any business done in whole or in part within the EU. Member states also have the ability to issue their own guidance as to the way in which the sanctions imposed by the EU are to be interpreted as well as detailing any steps that businesses are expected to undertake in order to ensure compliance with the panoply of Regulations. In the United Kingdom, Parliament enacted SI 2014/507, The Ukraine (European Union Financial Sanctions) Regulations in March 2014 to ensure the adequate enforcement of the EU sanctions.
Commentators have reported that companies and individuals that are trying to act in compliance with the EU sanctions may experience problems in terms of being able to identify whether a sanctioned person either controls or in fact owns an entity. The question as to whether a sanctioned person has a controlling interest in a business is not entirely clear cut, and member states of the EU can adopt different rules of interpretation to determine this. In the UK, guidance has been issued by HM Treasury which states that questions in respect of "control" or "ownership" of an entity will be reviewed on an individual basis. When determining this fact, companies or individuals should consider whether the sanctioned person can exercise dominant influence and they should also take into account the underlying management structure that the business is subject to. As to the question of ownership, the EU has provided helpful guidance which suggests that a sanctioned person is presumed to own a business if that person has an interest of 50 percent or greater in it.
Sector Specific Sanctions
On July 31, 2014, EU Council Regulation No. 833/2014 was adopted which set out an array of targeted, sector specific sanctions aimed at certain elements of Russian economic activity. The measures adopted by the EU on this date were groundbreaking in that they imposed sanctions for the first time in areas as diverse as oil-related technologies and the financial sector. The EU regime and that which has been adopted by the United States are similar but not entirely the same. Different banks have, for instance, been the subject of sanctions in the United States and the EU.
The increased hostilities within Eastern Ukraine during August 2014 resulted in the Council of the European Union adopting new restrictive measures targeting Russian companies and individuals, which were published in the Official Journal of the European Union on Sept. 12, 2014. They seek, amongst other things, to restrict Russia’s access to the capital markets of the EU and place a particular emphasis on finance, energy and defense activities, three key elements of the Russian economy. These measures may be strengthened, repealed or suspended at short notice. Indeed, a review of the ongoing ceasefire at the end of September 2014 by the EU adjudged that Ukraine’s current peace deal is not fully effective. Extensive press coverage of the current sanctions regime indicates that EU leaders are divided as to whether to strengthen economic sanctions against Russia. Commentators expect this issue to be discussed extensively at the next European Union summit in mid-December.
These new measures adopted in September 2014 are intended to expand and strengthen the scope of the earlier sanctions approved by the EU in late July which limit access to EU capital markets for Russian state-owned financial institutions and certain other Russian companies and their non-EU subsidiaries. EU Council Regulation 960/2014 that was adopted Sept. 8, 2014, stipulates that EU-incorporated companies and EU citizens are prohibited from purchasing, selling or otherwise dealing in bonds and other securitized debt and money-market instruments with a maturity exceeding 30 days which have been issued by Russian-controlled defense companies, Russian-controlled energy companies and Russian-controlled credit institutions. A full list of the companies that are the subject to these sanctions is set out in EU Council Regulation 960/2014. In addition, any financial services related to such transactions are prohibited.
The sanctions regime has also been expanded to prohibit EU-incorporated companies and EU citizens from having any direct or indirect involvement in the provision of loans or credit with a maturity exceeding 30 days after Sept. 12, 2014, to the companies and banks set out in EU Council Regulation 960/2014. The provision of loans that have a specific and documented objective to provide emergency funding to meet liquidity and solvency requirements for subsidiaries within the EU that are majority owned by the state-owned banks and that are expressly identified in EU Council Regulation 833/2014 are carved out from this restriction. The provision of credit or any loans that have a specific objective of providing financing for non-prohibited imports or exports of goods and non-financial services between the EU and Russia are also excluded from the scope of this new prohibition. It is important to note, however, that these new measures are crucially not targeted at gas production and export companies, which are considered critical to European energy supplies.
It is also prohibited to supply, export, transfer or sell military equipment to Russia or for use in Russia, or to purchase any such equipment from Russia, or to provide any related technical services or financial assistance. There is also a broad prohibition on the export of dual-use equipment and technologies to the Russian entities identified in EU Council Regulation 960/2014. The provision of any related financial or technical assistance in respect of dual-use equipment and technologies to any of the Russian entities set out in EU Council Regulation 960/2014 is also expressly prohibited.
Sanctions Relating to Trade with Crimea and Sevastopol
On June 25, 2014, EU Council Regulation 692/2014 came into force which prohibits the import of goods originating from Crimea or Sevastopol into the EU. The ban also extends to the direct or indirect provision of financing or financial assistance, as well as reinsurance and insurance services related to these goods. It is important to note, however, that these prohibitions do not apply to those goods originating in Crimea or Sevastopol which have been made available to the Ukrainian authorities for examination, for which compliance with the conditions conferring entitlement to preferential origin has been verified in accordance with the relevant EU Regulations, or in accordance with the EU-Ukraine Association Agreement, which was signed by EU heads of state and government and Ukrainian President Petro Poroshenko on June 27, 2014.
How Can a Business or an Individual Make a Challenge to the Sanctions Regime and are There Recent Examples of This?
A person that is named as being subject to the sanctions regime would be able to challenge any decision by the EU Council in the European Court of Justice headquartered in Luxembourg.
There are recent examples of challenges to the sanctions regime, as the large, privately-owned Iranian bank, Bank Mellat, managed to successfully challenge its status as a designated person under the EU and UK sanctions against Iran in 2013. The challenge was brought on procedural as well as substantive grounds, although the courts recognized that governments should be given a wide margin of appreciation when deciding upon whom to impose sanctions.
The Outlook in the Region
It is clear that the ongoing crisis in the region is having very far-reaching consequences, causing a great deal of commercial disruption and affecting a wide array of investment portfolios. On a practical note, prudent businesses should take steps to minimize potential commercial and political risks in order to protect their existing positions, and parties should pay particular attention to their contractual obligations and dealings with counterparties in the region to avoid unwittingly contravening the sanctions regime.