On December 19, 2014, Canada significantly expanded its economic sanctions against Russia by imposing restrictions on the supply of certain goods and related technical, financial and other services for use in offshore, Arctic or shale oil exploration or production.
This represents a major escalation in economic sanctions as it is the first time that Canada has targeted a range of economic activities in Russia rather than just imposing sanctions against listed entities and individuals. It follows the Harper government’s announcement on August 6, 2014, that it would impose export restrictions on technologies used in Russia’s oil exploration and extraction sector in parallel with Canada’s allies.
These latest amendments also add 20 Russian and Ukrainian individuals to the lists of designated persons with whom most transactions are prohibited. Amendments have also been made to the existing debt and equity financing restrictions against certain listed entities, clarifying the scope of those measures.
New Sanctions Measures
With the intention of complementing existing energy sector restrictions imposed by the United States and the European Union, Canada has amended its Special Economic Measures (Russia) Regulations (Russia Regulations) to prohibit a range of transactions involving Russian oil exploration and production.
New section 3.3 of the Russia Regulations now prohibits persons in Canada and any Canadian outside Canada from exporting, selling, supplying or shipping any listed goods, wherever situated, to Russia or to any person in Russia for use in any of the following activities:
- offshore oil exploration or production at a depth greater than 500 metres;
- oil exploration or production in the Arctic; or
- shale oil exploration or production.
The new measures also prohibit the provision to Russia or to any person in Russia of any financial, technical or other services related to such prohibited goods.
A new Schedule 4 has been added to the Russia Regulations which identifies the goods subject to this new ban along with their Harmonized System code (as published by the World Customs Organization). The goods fall within various codes under Chapters 73, 82, 84, 87 and 89.
Prohibited goods include certain line pipe, drill pipe, tubing, casing, rock-drilling and earth-boring tools; pumps, liquid elevators, boring and sinking machinery, mobile drilling derricks, floating or submersible drilling or production platforms, fire-floats, lightships and floating docks or cranes.
Also listed in Schedule 4 are parts for a wide range of equipment and machinery that could be used for the three activities identified above, including parts for the following: lifting, handling, loading or unloading machinery; derricks, cranes, mobile lifting frames and other lifting machinery; self-propelled bulldozers, scrapers, graders, levellers, shovel loaders and tamping machines; other moving, grading, scraping, levelling, excavating and extracting machinery; and hydraulic or self-propelled boring or sinking machinery.
The new oil exploration and production measures also contain a grandfathering provision. The prohibitions do not apply if a contract for the export, sale, supply or shipment of the good or for any related service was entered into before the day on which the measure came into force: December 19, 2014.
It is important to note that these measures have been implemented under Canada’s economic sanctions regime rather than its export controls regime. Accordingly, the restrictions apply not just to the supply of the goods, services and technology from Canada but also to their supply from anywhere in the world.
Changes to Debt and Equity Financing Prohibitions
Canada has also amended the debt and equity financing restrictions applicable to certain designated persons listed in Schedules 2 and 3 of the Russia Regulations. Schedule 2 currently lists the following:
- Gazprombank OAO
- VTB Bank OAO
- Bank of Moscow
- Russian Agricultural Bank (Rosselkhozbank)
OAO Novatek is presently the only person listed in Schedule 3.
Prohibited Debt Financing Activity
The debt financing restrictions, initially brought into force on July 24, 2014, prohibited any person in Canada and any Canadian outside Canada from transacting in, providing or otherwise dealing in a loan, bond or debenture in relation to the Schedule 2 or 3 listed persons or their property. These have been amended to provide a more detailed description of the prohibited activities.
Now the measure prohibits transacting in, providing financing for or otherwise dealing in “new debt including bonds, loans, debentures, extensions of credit, loan guarantees, letters of credit, bank drafts, bankers’ acceptances, discount notes, treasury bills, commercial paper and other similar instruments.” The restrictions continue to apply to debt of more than 30 days’ maturity for Schedule 2 entities and more than 90 days’ maturity for Schedule 3 entities.
The amendments also confirm that the debt financing prohibitions do not apply if the above-described activities were undertaken before the designated person was listed in Schedule 2 or 3.
Prohibited Equity Financing Activity
The equity financing restrictions, also imposed on July 24, 2014, originally prohibited any person in Canada and any Canadian outside Canada from transacting in, providing or otherwise dealing in capital funding through the transaction of shares in exchange for an ownership interest in relation to the Schedule 2 designated persons or their property.
The amended provision now prohibits transacting in, providing financing for or otherwise dealing in “new securities, including shares or any other ownership interest,” in relation to the Schedule 2 designated persons or their property.
Further, there is a grandfathering exception similar to the one provided for the debt financing restrictions: i.e., for activities that were undertaken before the designated person was listed in Schedule 2.
New Designated Persons
Persons in Canada and Canadians outside Canada are prohibited from engaging in a broad range of activities involving individuals and entities listed in Schedule 1 of the Russia Regulations. This includes prohibitions against the following:
- dealing in any property, wherever situated, held by or on behalf of a Schedule 1 designated person;
- entering into or facilitating, directly or indirectly, any transaction related to such a dealing;
- providing any financial or other related service in respect of such a dealing;
- making any goods, wherever situated, available to a Schedule 1 designated person; or
- providing any financial or related service to or for the benefit of a Schedule 1 designated person.
Further, all persons in Canada and Canadians outside Canada are required to immediately report to the Royal Canadian Mounted Police if they are in possession or control of property they have reason to believe is owned or controlled, directly or indirectly, by a designated person or by an entity owned or controlled by a designated person or if they have any information about a transaction or proposed transaction in respect of such property.
Federally and provincially regulated financial institutions and financial services companies are required to determine on a continuing basis whether they are in possession or control of listed persons’ property. For federally regulated financial institutions, the Office of the Superintendent of Financial Institutions has noted that it expects customer records to be searched at least on a weekly basis and more often if necessary.
The December 19, 2014, amendments add 11 Russian individuals to the Schedule 1 list under the Russia Regulations. The Special Economic Measures (Ukraine) Regulations contain similar prohibitions and have also been amended to include an additional 9 Ukrainian individuals as designated persons.
Impact on Canadians Doing Business Abroad
Canadian firms operating in or doing business with the oil exploration and production sectors should be especially vigilant and ensure effective internal controls are in place to address compliance with these broad economic sanctions measures. These include specific procedures for conducting due diligence on transactions which have or could have a connection to Russia or to offshore, Arctic or shale oil exploration or production.
Further, all Canadians doing business abroad in any sector and in any country should ensure that their compliance measures are fully up to date to reflect these latest changes in the lists of individuals and entities with whom they are prohibited from engaging in various activities. There are now 219 such designated persons under Canada’s Russia- and Ukraine-related sanctions measures. Presently, Canada has blacklisted well over 2,000 individuals, entities and associations across all of its economic sanctions programs.