When the Special Economic Measures (Russia) Regulations were recently amended in late July, they were restructured such that there are now three groups of “designated persons.” The nature of the restructuring has implications for the Canadian financial services sector.
The Regulations initially imposed through the spring and early summer of 2014 were quite discrete, imposing an asset freeze on a small list of designated persons and entities. As of July 24, 2014, 48 Russian individuals and 26 Russian companies had been listed by the Canadian Government as “designated persons.” These designated persons, with the July restructuring, are now referred to as “Schedule 1” designated persons. Generally speaking, the Russian Regulations prohibit persons in Canada and Canadians abroad from:
- 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 related service in respect of such a dealing;
- making goods, wherever situated, available to a Schedule 1 designated person; and
- providing any financial or related service to or for the benefit of a Schedule 1 designated person.
In addition to these prohibitions applicable to Schedule 1 designated persons, the late July amendments create two additional categories of designated persons – referred to as “Schedule 2” and “Schedule 3” designated persons. Schedule 2 or 3 designated persons are entities owned or controlled by, or acting on behalf of, a person engaged in activities that directly or indirectly facilitate, support or provide funding for or contribute to a violation or an attempted violation of the sovereignty of Ukraine. Currently there are two such Schedule 2 entities, those being Gazprombank OAO and VEB, and one Schedule 3, that being Novatek.
These particular “Schedule 2” and “Schedule 3” amendments put limits, for the first time, on certain types of debt and equity financing. Specifically:
- Persons in Canada and any Canadian outside Canada are now prohibited from transacting in, providing or otherwise dealing in a loan, bond or debenture of longer than 90 days’ maturity in relation to a Schedule 2 or 3 designated person, their property, or interests or rights in their property; and
- Persons in Canada and any Canadian outside Canada are now prohibited from transacting in, providing or otherwise dealing in capital funding through the transaction of shares in exchange for an ownership interest in relation to Schedule 2 designated persons, their property or interests or rights in their property.
These new prohibitions both apply only to transactions after designated persons are added to the lists. At this point, only the three above entities have been named. However, given that these classes have now been created, it will be important for the financial sector to monitor any further additions that may be made going forward.