The EU has updated its sanctions against Russia with effect from December 6, 2014. The updated EU legislation modifies the specific legal tests applicable in different scenarios and aligns certain definitions and concepts with the relevant U.S. legislation. The update has limited impact on the compliance procedures that companies are required to follow.
1. What does Arctic, deep water and shale oil mean?
The EU has targeted Russia’s energy sector by making transactions involving specific items subject to an authorization procedure. EU sanctions against Russia include an exhaustive list of sensitive items and it is for EU authorities (and not economic operators) to decide whether or not transactions involving these items should be prohibited because of their connection with certain energy projects.
The EU also prohibits the provision of associated services if they are connected with those projects. In other words, the end-use of the items determines whether or not transactions will be prohibited.
Both economic operators and EU authorities have struggled with the vaguely defined prohibited end-use: “deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia.” For example, questions arose as to whether Arctic projects should be interpreted to refer only to offshore projects (as in the U.S. legislation) and only to activities carried out north of the Arctic Circle. In addition, there was confusion around the EU’s reference to “deep water exploration.”
The updated legislation clarifies the meaning of Arctic, deep water and shale oil, as follows:
- oil exploration and production in waters deeper than 150 meters;
- oil exploration and production in the offshore area north of the Arctic Circle; or
- projects that have the potential to produce oil from resources located in shale formations by way of hydraulic fracturing; it does not apply to exploration and production through shale formations to locate or extract oil from non-shale reservoirs.
In addition, for the purpose of this legislation, Russia’s territory includes its Exclusive Economic Zone and Continental Shelf.
Perhaps more importantly, the list of sensitive items (previously called technologies) has been slightly modified for items falling under CN codes 8413 50, 8413 60, 8431 39 00 and 8431 49. The product scope is narrower and some products therefore fall outside of the authorization requirement.
2. Broader, but still limited, exceptions to most prohibitions
Health and safety exceptions
The EU had previously recognized that prohibitions should not apply in certain cases where they could have adverse consequences for human health and safety or the environment. However, this exception was not applied consistently, and, importantly, not at all with respect to the provision of sensitive items. The updated legislation addresses this situation and imposes additional notification requirements.
In a number of scenarios where a contract was concluded before the sanctions entered into force, economic operators were able to execute their obligations under exceptions to the EU sanctions legislation. However, these exceptions were ineffectual when ancillary contracts were needed to execute the pre-sanctions obligations. This has been revised in the updated legislation.
A related development concerns the prohibition of loans or credit with a maturity exceeding 30 days to certain persons after September 12, 2014. The new rules clarify that this prohibition does not apply to drawdowns or disbursements made under a contract concluded before that date and not since modified.