As the events in Ukraine and Russia continue to unfold, the reaction by the US and the EU, including imposing sanctions, will impact individuals, businesses, and entire sectors.
As a polycentric firm, with no headquarters, no dominant culture and no flag, and with partners throughout the world, including Russia, Ukraine and Central and Eastern Europe, Dentons is particularly well positioned to explain the nuances that surround every facet of these complicated developments to our clients.
This client update contains an analysis of the policy issues arising from the current situation in Ukraine.
We try to present the facts as they are known, and the potential ramifications of what might happen, without taking a position that could be perceived as political in any way. We believe this is the best way to serve our clients.
On September 12, 2014, the United States and the European Union each adopted a set of new sanctions against Russia in response to the ongoing events in Ukraine. Most significantly, these new sanctions curtail certain Russian banks and Russian energy companies' access to US and EU capital markets, and specified Russian energy companies' access to vital goods, services and technology for the country's future petroleum production.
The US adopted new Ukraine-related sanctions on September 12, 2014. These new sanctions build on the existing sanctions regime, namely the blocking of persons and their property and interests in property pursuant to their designation as Special Designated Nationals (SDNs), and the targeting of certain sectors of the Russian economy, and entities operating within them, via the Sectoral Sanctions Identification list (SSI list). US citizens and permanent residents, entities organized under US laws (including foreign branches) or any person in the US (US Persons) are subject to compliance with these Ukraine-related sanctions.
The US added five Russian state-owned defense technology firms to the SDN list: OAO ‘Dolgoprudny Research Production Enterprise,’ Mytishchinski Mashinostroitelny Zavod OAO, Kalinin Machine Plant JSC, Almaz-Antey GSKB, and JSC NIIP. As a result, these firms are effectively cut off from the US market.
The US also revised the sanctions under the SSI list. The SSI list now includes three sectors: finance and energy, added July 29, 2014; and defense, added September 12, 2014. In the new category, defense, the US has named just one firm, Rostec, a major Russian state-owned conglomerate. US Persons are now prohibited from transacting in, providing financing for, or otherwise dealing in new debt of greater than 30 days issued by Rostec.
Targeting the Russian finance sector, the US added Sberbank, the largest Russian bank, to the SSI list. In addition, the US expanded the severity of the SSI list sanctions by narrowing a key exception to them, the carve-out for debt from 90 days maturity or less, so that now, the only exception is for debt with 30 days maturity or less. Accordingly, it is now prohibited to transact in, provide financing for, or otherwise deal in new equity or debt of greater than 30 days maturity, which is issued by any of the following six Russian banks: Bank of Moscow, Gazprombank, Rosselkhozbank (Russian Agricultural Bank), Sberbank, Vnesheconombank (VEB), and VTB Bank.
In the energy sector, the US added Gazprom Neft and Transneft to the SSI List. The US did not, however, extend the more restrictive SSI list “30-day” prohibition to these companies, and therefore Gazprom Neft and Transneft –along with the other energy companies on the SSI list – remain under the “90-day” prohibition. This means that US Persons are prohibited from transacting in, providing financing for, or otherwise dealing in new debt of greater than 90 days maturity. In total, the SSI list for Russia's energy sector now contains four companies: Rosneft, Novatek, Gazprom Neft and Transneft.
Finally, the US has now prohibited the exportation of goods, services (not including financial services), or technology in support of exploration or production for Russian deepwater, Arctic offshore, or shale projects that have the potential to produce oil in Russia or which are located in maritime area claimed by Russia, if such projects involve any of five Russian energy companies – Gazprom, Gazprom Neft, Lukoil, Surgutneftegas, and Rosneft.
This is a major expansion of the Ukraine-related sanctions, as deepwater, offshore, and shale projects are considered the key to Russia’s future petroleum exploration and production. US energy companies have moreover been engaged with the SSI listed companies to develop these new deepwater, offshore, and shale projects. US Persons, who are subject to compliance with US sanctions, have until September 26, 2014 to wind down any existing transactions which are prohibited under the new export ban.1
On the same date, September 12, 2014, the European Council published new sanctions targeting Russia's financial, energy, and defense sectors. The most significant of these sanctions are set out in Council Regulation 960/2014 ("Regulation 960"). EU citizens, entities organized in the EU (and their foreign branches) and persons actually in the EU (EU Persons) are subject to compliance with the EU's Ukraine sanctions.
Under Regulation 960, the EU has adopted its own “30-day” debt and equity prohibition for EU-listed banks, which are Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB) and Rosselkhozbank (Russian Agricultural Bank). EU Persons are prohibited from dealing in bonds, equity, or similar financial instruments with a maturity of greater than 30 days. EU Persons are also prohibited from providing investment services for or assistance in the issuance of such debt or equity. Regulation 960 contains two important exceptions. The first is for the financing of (non-prohibited) imports or exports of goods and non-financial services between the EU and Russia. The second exception is for emergency loans provided to meet solvency and liquidity criteria for EU entities, whose "proprietary rights" are owned more than 50% by any of the listed banks.2
The EU also targeted Russia's defense sector. Regulation 960 imposes the same debt and equity prohibition applicable to the finance sector (i.e., no dealing in bonds, equity, or similar financial instruments with a maturity of greater than 30 days) to major Russian defense companies - Oboronprom, United Aircraft Corporation and Uralvagonzavod. Regulation 960 also expands the scope of the EU's ban on exporting dual-use goods and technology for military use in Russia. Whereas previously the dual-use ban was limited to instances where such dual-use goods were intended for military use or to a military end-user, the EU has now added a specific list of companies to which it is prohibited outright to export or re-export such dual-use goods. Nine companies are presently on this list,3 including the small-arms manufacturer Kalashnikov.4
The EU's new dual-use sanctions are not retroactive, however. Regulation 960 grandfathers in contracts or agreements for such dual-use goods concluded before September 12, 2014. Moreover, the EU's new dual-use sanctions have two important exceptions. The first is for contracts or agreements for the provision of assistance necessary to the maintenance and safety of existing capabilities within the EU.5The second is for the sale, supply, transfer or export of dual-use goods and technology which are intended for non military use or a non-military end user for (i) the aeronautics and space industry, or the related provision of technical and financial assistance, or (ii) the maintenance and safety of existing civil nuclear capabilities within the EU.6
The prohibition in dealing in bonds, equity, or similar financial instruments with a maturity of greater than 30 days was also extended to three major energy companies: Rosneft, Transneft and Gazprom Neft.
In addition to restricting the Russian energy sector's access to EU capital markets, Regulation 960 tracks the US's Ukraine-related sanctions by banning the export of any goods, services, or technology for deep water oil exploration and production, Arctic oil exploration or production and shale oil projects in Russia. Regulation 960 specifically includes drilling, well testing, logging and completion services and the supply of floating vessels.7 As with the EU's new dual-use goods sanctions, Regulation 960's export ban has a grandfather clause. The ban is "without prejudice" to the "execution of an obligation arising from a contract or a framework agreement" which was concluded before 12 September 2014, as well as any ancillary contracts necessary for the execution of such contract or framework agreement.8
Regulation 960's carve-outs in the defense and energy sectors do not necessarily provide precise boundaries, leaving it to EU companies and others subject to these sanctions to determine the risks of transgressing these new restrictions. For example, an EU manufacturer of deepwater drilling equipment will need to determine whether its export of prohibited technology to Russia could qualify as being pursuant to a contract or framework agreement concluded prior to September 12, 2014, or ancillary agreement. Moreover, each EU Member State is individually responsible for the enforcement of these sanctions, and will likely vary in their interpretation of these sanctions.
Finally, the EU expanded the criteria on which it may add individuals and entities to its designated parties list to include those conducting transactions with separatist groups in the Donbass region. At the same time, the EU added 24 people to this list, imposing an asset freeze and travel ban on these individuals. These 24 people including a separatist leader in Donetsk, longtime leader of the Russian nationalist party Vladimir Zhirinovsky, and Sergey Chemezov, CEO of Rostec. Together with prior EU sanctions designations, a total of 119 individuals and 23 entities are now designated parties.
These latest sanctions further tighten access to EU and US capital markets by narrowing permissible debt financing with SSI-listed or EU-listed Russian entities from 90 days to 30 days (or less). By targeting Russia's access to the US and EU goods, services, and technology for future petroleum production, moreover, these sanctions represent a significant expansion in the scope of US and EU restrictions. In restricting sales of vital goods, services, and technology to Lukoil and Surgutneftegas, the US departed from past practice and imposed targeted sanctions against companies which are not State-owned.
These sanctions are still far from an outright trade ban with Russia, as the US and EU have continued to take an incremental, sector-specific approach with each new round of sanctions. Nevertheless, further expansions or reductions to sanctions may rapidly track events in Ukraine and shifting attitudes to those events among key political actors, and therefore US and EU-based entities doing business in Russia will need to be vigilant to ensure they are in compliance.