Summary

Our Ukraine/ Russia Sanctions Response Group continues to follow closely events in Ukraine and the actions taken in response by the United States, and by the EU and its member states.

On March 17, 2014, the EU and US imposed limited economic sanctions on a number of Russian and Ukrainian individuals in response to some of these events. The EU and US indicate that the sanctions are in response to their stated view that Russia has violated Ukraine’s sovereignty and territorial integrity.

Background

As we noted in our recent update, available here, on March 6, 2014, the EU and Canada separately imposed limited economic sanctions freezing the assets of Viktor Yanukovych and 17 other Ukrainian individuals. A few European countries have frozen the assets of other officials of the former Ukrainian government, including Switzerland and Austria. The EU and US have taken certain steps to curtail diplomatic contacts with Russia.

On March 6, President Barack Obama signed an Executive Order under which Russian or Ukrainian persons could be sanctioned if the US government determined them to be involved in certain activities relating to Ukraine. While the Ukraine Order was widely reported in the press, no sanctions were imposed under it, until March 17.

On March 17, President Obama signed a second Executive Order relating to Ukraine and imposed sanctions on several Russian and Crimean officials under this new order. This Order allows the imposition of sanctions on any Russian official.

Additional persons may be sanctioned under the Ukraine Orders. The persons that can be sanctioned are any official of the Russian government or of a Russian state-owned enterprise, and any other person the US government determines: 

  • has undermined democratic processes or institutions in Ukraine, or threatened the peace, security, stability or territorial integrity of Ukraine;
  • has misappropriated the state assets of Ukraine or of a significant Ukrainian company;
  • has asserted governmental authority over any part of Ukraine without its government’s authorization;
  • leads an entity that has engaged in any such activity, or materially supports any such activity;
  • operates in the Russian arms (weapons) sector; or
  • is owned or controlled by, is acting for, or provides material support to, any senior official of the Russian government (or of a Russian state-owned enterprise).  

Sanctions imposed on Russian and Ukrainian individuals

The sanctions imposed March 17 by the EU and US are still limited in scope, targeting approximately two dozen Russian government officials and former Ukrainian government officials that the EU and US believe to have been directly involved in recent events in Ukraine. These include Sergey Valeryevich Aksyonov, the elected “Prime Minister of Crimea”, and other Crimean officials. The EU sanctions, adopted in a Decision (Council Decision 2014/145/CFSP) and implementing Regulation (Council Regulation (EU) No 269/2014) were published in the EU Official Journal on March 17 and therefore have become effective. They have imposed travel bans and asset freezes on 21 designated Russian and Crimean politicians and military officials. The full list is set out in the Decision, available here. The US sanctions adopted apply to a shorter list of 11 individuals, consisting of Viktor Yanukovych and 10 Russian or Crimean officials. Five of the individuals targeted by US sanctions have also been targeted under EU sanctions. Unlike the EU, the US has included on its list Dmitry Rogozin, the Russian Deputy Prime Minister.

The US sanctions are effective as of 12:01am on March 17. All of these persons have been added to the primary US list of sanctioned persons, the list of Specially Designated Nationals and Blocked Persons (“SDN List”). As is typically the case, the US sanctions differ from the EU sanctions in not allowing for any grace periods to complete transactions already begun or to perform contracts already signed.

EU persons are generally prohibited to “make funds or economic resources directly or indirectly available” to any of the designated persons. The term “funds” means financial assets and benefits of every kind and “economic resources” includes any assets (whether tangible or intangible) other than funds that have value or are exchangeable for something of value. The concept of making funds or economic resources indirectly available to a designated person raises a number of compliance considerations that we touch on below.

The Ukraine Orders similarly require that US persons block (freeze) any funds or other assets within their possession or control, in which any listed person has any interest. The Orders also generally prohibit any transaction or dealing by US persons with the listed persons.

Impact of the sanctions - issues to consider

Our Russia/ Ukraine Sanctions Response Group is already advising a number of clients on issues related to the limited economic sanctions imposed on Ukrainian and Russian persons to date, and the potential for broader sanctions in future. In recent years we have assisted our clients in working through numerous issues arising from the imposition of new sanctions on particular countries, including the following: 

  • Monitoring global sanctions developments to advise on the potential impact of sanctions on a client’s business
  • Advising on any pre-emptive action that can be taken to reduce the adverse impact of anticipated sanctions
  • Assisting with a detailed review of a client's business to mitigate the impact of sanctions imposed, including:
    • contract reviews, including advice on seeking to avoid breaches of contract, by invoking force majeure or otherwise, and the most effective resolution of any disputes arising
    • reviewing all relevant corporate structure and governance arrangements to ascertain and mitigate the impact of sanctions, if any
    • advising on interactions with impacted or concerned stakeholders (including regulators, shareholders, lenders, auditors and joint venture partners), and mitigation techniques
  • Assisting with preparing internal policies and procedures, and providing training, to assist businesses in avoiding any breaches of sanctions
  • Advising on negotiating and drafting sanctions-related contractual provisions, particularly in financial and commercial contracts
  • Interfacing with relevant regulators to obtain licences and clearances to enable a sanctions-impacted business/operation to continue or be disposed of
  • Assisting, including (where necessary) by coordinating with relevant regulators, to repatriate funds that are adversely affected by sanctions
  • Advising on disclosure obligations of listed companies

We advise that you carefully consider the following areas of potential concern:

Dealings with sanctioned persons

  • Can you confirm that none of your customers, business counterparts and other persons with which you are doing business are named in the relevant sanctions lists?
  • Do you have contractual commitments from agents, distributors and other business counterparties to avoid involving you in indirect dealings with sanctioned persons?

Dealings with companies associated with sanctioned persons

  • Are those familiar with your Russia / Ukraine business aware whether any of the sanctioned persons are officers, directors or major shareholders of any companies with which you do business? This information may be available through public reporting or other readily available sources of information.
  • If so, will there be any interaction with the sanctioned person, or anything of value provided to or received from the sanctioned person by virtue of dealing with companies associated with them?

Public company considerations

  • What level of diligence regarding Russia / Ukraine business is appropriate to achieve a reasonable level of assurance that the business is not involved and does not become involved in impermissible contacts with sanctioned persons?
  • Are any of the shareholders or directors in the company known to be sanctioned persons? To what extent is it practicable to search the shareholder register for sanctioned persons, particularly where there is little transparency due to nominee structures?
  • If sanctioned Russian or Ukrainian shareholders are identified, what special steps should be taken, such as blocking further trading and holding dividends in escrow? What level of control do sanctioned shareholders have?

Additional EU and US sanctions appear likely

The EU and US have expressed concern over certain other recent events in and around Ukraine, and have warned that they may follow March 17th’s actions with broader sanctions on Russian persons as early as this week. The EU and US have indicated that in considering further sanctions, they are focused in particular on:

  • the apparent presence of a large number of Russian troops close to Ukraine’s Eastern border;
  • their concern that Russian statements regarding risks to the safety of the Russian-speaking population of Eastern Ukraine may form the basis for the Russian military to enter those areas; and
  • reports that a number of Russian troops occupied a gas transfer station outside of Crimea.

The EU and US are concerned that each of these matters could further escalate and destabilize the situation.

It should be noted that Russia strongly disputes the EU and US perception and interpretation of these and other events in the Ukraine and denies that its forces have entered Ukraine (other than those already stationed there in accordance with pre-existing agreements).

Conclusion

Our Ukraine/ Russia Sanctions Response Group will continue to monitor the situation closely and will provide additional updates on any particularly significant further developments relating to sanctions or trade matters.