In the wake of the ongoing political crisis in Ukraine there has been a growth in the implementation of international sanctions regimes throughout the course of 2014. However, Ukraine had no mechanism in place to target businesses or officials assisting, facilitating or involved in the annexation of Crimea and/or the hostilities in Donbass. On 14 August 2014, the Ukrainian parliament adopted a regime to impose sanctions on companies and individuals supporting and financing terrorist activities in Ukraine (the “Sanctions Law”). The Sanctions Law is yet to be signed into law by the President.
Overview of sanctions
Sanctions are defined as targeted restrictions put in place on those who support and/or sponsor terrorist activities in Ukraine, i.e. foreign states, foreign state owned entities (whereby the foreign state owns (directly or indirectly) at least 10 per cent of the entity), a company or individual(s), and Ukrainian companies and individuals supporting and financing terrorist activities in Ukraine (the “Sanctions”).
The Sanctions generally take the form of financial restrictions, travel bans and import/export prohibitions or constraints and have a direct impact on importers and exporters in international trade, including the energy industry, public procurement and TMT. The imposition of the restrictive measures by the Sanctions Law will have a significant impact on trade and commercial dealings with Russia, Crimea and Sevastopol, particularly if such commercial arrangements are in the sectors mentioned above. However any such impositions would need a decision by the Ukraine's National Security and Defence Council implemented by a Presidential Ordinance.
Restrictions in the financial services sector
The Sanctions introduced by the Sanctions Law have a direct effect on the financial services market in Ukraine as they impose restrictions on certain financial instruments in relation to sanctioned foreign financial institutions, companies and individuals. The Sanctions that affect the financial sector include:
- Full or partial prohibition of transactions relating to securities issued by companies or individuals subject to the Sanctions under the Sanctions Law;
- Suspension of performance of economic and financial obligations;
- Prohibition of movement of financial assets outside Ukraine and freezing of assets or temporary restriction of the assets’ use by a sanctioned company and/or individual;
- Prohibition on the National Bank of Ukraine from authorising investments in sanctioned foreign countries and placement of monetary values on accounts and deposits in a sanctioned foreign country;
- Termination of licenses, permits and other authorisations allowing import or export of currency values from or into Ukraine and limiting cash advances on payment cards issued by residents of a sanctioned foreign country;
- Prohibition on registration of an international payment system participant by the National Bank of Ukraine if its clearing organisation is a resident of a sanctioned foreign country;
- Prohibition on increasing the authorised capital of Ukrainian commercial companies in which 10 percent or more of the share capital is owned by a sanctioned foreign individual, legal entity or state or where a sanctioned foreign individual, legal entity or state have a direct impact on the management of the company or its activities in Ukraine.
Restrictions in the energy sector
The Sanctions implemented by the Sanctions Law affect the energy industry in a number of ways. In a broad sense, the Sanctions may take the form of:
- Restrictions on trade activities;
- Restrictions to transit resources, operate flights and land transports via the territory of Ukraine;
- Direct restrictions which annul or suspend licences and other permits and authorisations for certain types of activities, including annulment or suspension of special permits for subsoil use; and
- The introduction of additional restrictive measures in the environmental, sanitary, phytosanitary and veterinary control.
Restrictions in the TMT sector
The Sanctions implemented by the Sanctions Law directly affect the TMT sector in the following ways:
- Restrictions or suspension on postal services;
- Prohibition or restrictions on the retransmission of certain television and radio channels;
- Prohibition on the use of the radio frequency resource of Ukraine;
- Restrictions or termination of mass media, including on the Internet;
- Restrictions on or prohibition of the production or distribution of printed and other informational materials; and
- Restrictions or termination of telecommunications services and use of public telecommunication networks.
Restrictions in the public procurement sector
- Prohibition on public procurement of goods, works and services in sanctioned foreign state-owned companies and companies with a foreign shareholding as well as public procurement in other entities, engaged in the sale of goods, works and services, originating from a sanctioned foreign country.
The Sanctions apply restrictive measures much more broadly across industries and general trade. These include:
- Termination of trade agreements, joint projects and industrial programmes in certain areas, particularly in the area of security and defence;
- Prohibition on the transfer of technology and intellectual property rights;
- Termination of cultural exchanges, scientific cooperation, education and sports contacts and entertainment programmes with sanctioned foreign countries and legal entities;
- Denial of visa applications by residents of sanctioned foreign countries and the use of other prohibitions to enter the territory of Ukraine;
- Denunciation of treaties previously ratified by the Verkhovna Rada (Parliament) of Ukraine;
- Prohibition on participation in privatisation and lease of public property by companies or individuals of sanctioned foreign countries; and
- Cancellation of official visits, meetings and negotiations for the purposes of concluding contracts or agreements.
Therefore, foreign companies and individuals operating in Ukraine must be aware of these newly implemented Sanctions and the impact they have upon their commercial arrangements. They must also be aware that other jurisdictions, notably the EU, the US, Japan and Australia, also have sanctions regimes in place affecting trade with Russia. In Particular, the EU measures restricting trade with Russia will apply until 31 July 2015. However, these measures are due to be reviewed by 31 October 2014 at the latest, taking into account their effect on Member States. For more information see our previous Law-Now article.
In all cases, the precise impact of the Sanctions on any individual case will always be fact-specific. Therefore, should the Sanctions be of particular concern, specialist advice should be sought.
The draft Law of Ukraine “On Sanctions” N 4453a adopted 14 August 2014 (awaiting the President’s signature)