On July 24, 2014, following the downing of Malaysian Airlines Flight MH17 and continued turmoil in eastern Ukraine, the Government of Canada expanded its economic sanctions against Russia by adding individuals and entities to its lists of “designated persons” and creating new categories of designated persons that are subject to restrictions on debt and equity transactions. Persons in Canada and Canadians outside Canada are prohibited from engaging in a range of activities that involve designated persons.
These sanctions target Russia’s financial, energy and defence sectors and aim to limit their ability to gain access to financing.
Restrictions on New Debt and Equity Transactions
The Special Economic Measures (Russia) Regulations (Russia Regulations) have been amended (see http://www.international.gc.ca/sanctions/russia_developments-developpements_russie10.aspx?lang=eng) such that there are now three categories of designated persons:
- Schedule 1: There are broad prohibitions against dealing in the property of these designated persons, facilitating such dealings, providing or acquiring financial services to or for their benefit and making goods available to them. Up until now, this has been the only list for designating Russian individuals and firms.
- Schedule 2: There are new restrictions on debt and equity transactions involving these persons designated under this schedule.
- Schedule 3: There are new restrictions on debt transactions involving these designated persons.
The Russia Regulations provide that an entity may be listed as a designated person on either of the new schedules, Schedule 2 or Schedule 3, if there are reasonable grounds to believe that they are owned or controlled by or acting on behalf of persons listed under Schedule 1 that are:
- persons engaged in activities that directly or indirectly facilitate, support, provide funding for or contribute to a violation or attempted violation of the sovereignty or territorial integrity of Ukraine, or
- former or current senior officials of the Government of Russia.
Under the debt financing restrictions, any person in Canada and any Canadian outside Canada is prohibited from transacting in, providing or otherwise dealing in a loan, bond or debenture of longer than 90 days’ maturity in relation to the designated persons listed on Schedules 2 and 3, their property or any interests or rights in their property. This prohibition applies only to loans, bonds or debentures issued after the person was listed.
It is also prohibited for any person in Canada or any Canadian outside of Canada to transact in, provide or otherwise deal in capital funding through the transaction of shares in exchange for an ownership interest in relation to designated persons listed in Schedule 2, their property or the interests or rights in their property. This prohibition applies only to capital funding that occurredafter the designated person was listed in Schedule 2.
Targeted Russian Firms
The Canadian government has designated a range of Russian firms in the financial, energy and defence sectors under the schedules to the Russia Regulations.
The following firms have been added to the list under Schedule 1 and, along with the 19 other Russian firms already listed, are subject to the broad prohibitions described above:
- Federal State Unitary Enterprise State Research and Production Enterprise Bazalt
- JSC Concern Radio-Electronic Technologies
- JSC Concern Sozvezdie
- JSC MIC NPO Mashinostroyenia
- Kalashnikov Concern
- KBP Instrument Design Bureau
The following firms appear in Schedule 2 and are subject to both the debt and equity transaction restrictions described above:
- Gazprombank OAO
Novatek is the only firm designated under Schedule 3 and is subject only to the debt transaction restrictions described above.
Comparison to U.S. Measures
It should be noted that these new measures are similar to those implemented by the United States on July 16, 2014, including its new Sectoral Sanctions Identifications List (SSIL). There are however, some notable differences. For example, Canada has not listed Rosneft, which appears on the U.S. SSIL.
The Canadian government also added two entities — Donetsk People’s Republic and Luhansk People’s Republic — and eight individuals to its list of designated persons under the Special Economic Measures (Ukraine) Regulations. The amending regulations for these changes can be found here: http://www.international.gc.ca/sanctions/ukraine_developments-developpements_ukraine9.aspx?lang=eng.
All persons in Canada and all Canadians outside Canada should continue to screen their transactions and conduct due diligence regarding these and over 2,000 other entities and individuals listed under Canada’s economic sanctions legislation. Subject to certain limited exceptions, it is prohibited to engage in any dealings involving the property of these persons, to provide financial or other related services to them or to make goods available to them.
There are also reporting obligations for persons in Canada and Canadians outside of Canada who have in their possession or control property they believe is owned or controlled, directly or indirectly, by a designated person. This reporting obligation extends to information about transactions or proposed transactions in respect of such property.