EU steps up sanctions against Russia

On 15 July 2014 and 6 August 2014 we reported on the economic and trade restrictions adopted by the EU in relation to the ongoing crisis in Ukraine. On 8 September 2014, the European Council formally adopted further measures against Russia that both enhance and extend the existing sanctions. Following a slight delay while the Member State governments considered the impact of the ceasefire agreement reached on 5 September 2014, the new sanctions have now been published and implemented.

Capital Markets and Financial Services

The existing sanctions, implemented in July 2014, prohibited five major Russian financial institutions from dealing with bonds, equity or similar financial instruments with a maturity exceeding 90 days, if issued after 1 August 2014. This prohibition has now been extended to cover all financial instruments with a maturity exceeding 30 days. In addition, the prohibition has been extended to three Russian defence companies and three Russian energy companies. The prohibition on providing investment services related to the issuing of such financial instruments has also been retained in the new measures.

The new measures also prohibit directly or indirectly making or being part of any arrangement to make new loans or provide credit with a maturity exceeding 30 days to any of the financial institutions and defence and energy companies covered by the measures, subject to certain exceptions relating to non-prohibited goods and non-financial services and emergency funding.

Dual use goods and technology

The existing prohibition on the direct or indirect sale, supply, transfer or export of dual use goods and technology has also been strengthened. A prohibition has been imposed on any national of a Member State or from a territory of a Member State (or using their flag vessels or aircraft) on making exports of dual use goods or technology to nine named Russian defence companies. There is also a prohibition on providing those companies with technical assistance, brokering services, financing or financial assistance or other services related to goods and technology.

The July 2014 sanctions package prohibited the provision of financing or financial assistance related to the sale, supply, transfer or export of goods and technology listed in the Common Military List, which details military technology and equipment. This provision has now been amended to include insurance and re-insurance among the prohibited forms of financing or financial assistance.

Oil exploration and production

In July 2014, EU legislation imposed a requirement that the direct or indirect sale, supply, transfer or export of certain technologies suited to deep water oil exploration and production, arctic oil exploration and production, or shale oil productions in Russia be subject to prior authorisation by the authorities of the exporting Member State. This requirement remains in force and has been supplemented in the new sanctions package by a prohibition on the direct or indirect provision of associated services necessary for these oil industry activities, including drilling, well testing, logging and completion services and the supply of specialist floating vessels, subject to certain exceptions.

Travel bans and asset freezes

In March 2014, the EU imposed measures against 21 individuals and entities identified “as being responsible for actions which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine”. Further individuals and entities were added to the list over the following months. These ‘designated persons’ are restricted from entering the EU and have had their funds and economic resources frozen. An additional 24 individuals have now been added to the list and are accordingly now subject to travel bans and asset freezes. This addition brings the total number of individuals and entities subject to the Russian sanctions regime to 119 and 23 respectively. The restrictive measures have also now been extended to prohibit individuals, entities and bodies from conducting transactions with the separatist groups in the Donbass region of Ukraine. These measures will apply until 15 March 2015.

What do the new sanctions mean?

The EU’s new Regulations focus on the same areas covered by the previous measures, namely access to capital markets, energy, defence, dual use goods, and sensitive technologies, but have considerably strengthened and extended the existing measures. Financial institutions and the energy sector stand to be the most significantly impacted.

Companies should carry out enhanced due diligence to ensure that they do not become involved in loan or credit arrangements with a maturity exceeding 30 days with the named Russian banks and energy and defence companies - and any non-EU subsidiaries in which those entities hold a majority shareholding. Care must also be taken to ensure that any exports of goods or services to Russia do not place companies in breach of the sanctions rules. In particular, energy companies must ensure that their contracts for services do not infringe the new ban in relation to oil exploration and production and shale oil projects.

It is an offence both to deal with the funds or economic resources of a designated person or entity and also to make any funds or economic resources available, both directly or indirectly, to or for the benefit of a designated person/entity. The definition of ‘funds’ includes financial assets and benefits of every kind and ‘economic resources’ includes assets of every kind, whether tangible, intangible, moveable or immovable which may be used to obtain funds, goods or services. The extremely broad scope of the definitions means that particular care must be taken to ensure that transactions with third parties are not caught by the sanctions rules.

What you should do

To the extent that you undertake activities in Russia, or have dealings with Russian individuals and entities, it is important that you take steps to ensure compliance. Such steps should include:

• auditing your activities in Russia or your dealings with Russian entities and individuals to determine whether they are impacted by the new measures;
• assessing whether any ongoing transactions have a direct or indirect link to a sanctioned individual or entity, which should include an assessment of whether a sanctioned individual is a shareholder in a company with which you have commercial dealings;
• checking whether you maintain any accounts or hold any funds or economic resources for the individuals or entities set out in the Annexes to the various Regulations;
• freezing such accounts, and other funds or assets;
• refraining from dealing with the funds or assets or making them available to such persons unless licensed by the Treasury.

For certain tightly drawn permitted exceptions from the sanctions regime a licence can be obtained from HM Treasury providing written authorisation of the activity which would otherwise be prohibited. European legislation sets out the circumstances in which it is possible to deal with the funds and assets of sanctioned individuals under licence, such as in circumstances where the funds are necessary to satisfy the basic needs of the individual, are intended for the payment of reasonable professional legal fees, or where the payment is due under a contract concluded prior to the date of the sanctions provided that the payment is being made by that sanctioned individual or entity and does not breach the general prohibitions by resulting in funds or economic resources being made available to or for the benefit of any individuals/entities listed in the Regulations.

Future measures?

The EU has consistently emphasised the ‘reversibility and scalability’ of its sanctions against Russia and these measures will be kept under review as the situation in Ukraine develops. A review of the implementation of the recent ceasefire will be carried out at the end of September, in the light of which the Commission and the European External Action Service (EEAS) will put forward proposals to amend, suspend or repeal the sanctions in force, in all or in part.

The new measures are available here.