Handling the new EU and UK sanctions against Russia
The developments in the EU Since 2014, the EU has progressively imposed sanctions on Russia in response to the crisis in Ukraine. Following the latest events, EU member states have agreed to impose new sanctions in several steps on 21, 22 and 25 February, which are summarized below. Overview of the new measures of 21, 22 and 25 February 1. Designation of additional individuals and entities The EU has newly designated several hundred persons (including Vladimir Putin and Sergey Lavrov) and entities which according to the EU actively support actions and implement policies that undermine or threaten the territorial integrity, sovereignty and independence of Ukraine.The EU also designated the Internet Research Agency and three Russian banks, namelyBank Rossiya,Promsvyazbank andVEB.RF.These individuals and entities are now subject to asset freezes, which include prohibitions on making funds available to them, and travel bans, which prevent them from entering or transiting through the EU.For EU persons and companies this means they may no longer:receive or otherwise deal with the frozen funds or economic resources, belonging to or owned, held or directly or indirectly controlled by a designated person; andmake funds or economic resources of any kind, directly or indirectly, to or for the benefit of a designated person.With regard to the three banks, exemptions may be granted where this is necessary for the termination by 24 August 2022, of operations, contracts, or other agreements, concluded with those entities before 23 February 2022.In practice, this essentially means that EU companies may no longer deal with designated persons or entities and the entities controlled by them. 2. Restriction of Russia's access to the EU's capital and financial markets The EU has newly introduced sectoral prohibitions to finance the Russian Federation, its government, and the Central Bank of Russia:prohibiting dealing with transferable securities and money-market instruments issued after 9 March 2022 byRussia and its governmentThe Russian Central Bank (or any person acting on their behalf or at their direction)prohibiting making loans or credits after 23 February 2022 toRussia and its government,the Russian Central Bank(or any person acting in their behalf or at their direction)An exemption is available for loans or credits that have a specific and documented objective to provide financing for non-prohibited imports or exports of goods. Further, drawdown or disbursements made under a contract concluded before 23 February 2022 can be exempt from the prohibition.The EU has also expanded the financial restrictions existing under Regulation (EU) 833/2014, in particular those on access by certain Russian entities to the capital markets. It also prohibits the listing and provision of services in relation to shares of Russian state-owned entities on Union trading venues.In addition, it has introduced new measures which significantly limit the financial inflows from Russia to the Union by prohibiting the acceptance of deposits exceeding EUR 100,000 from Russian nationals or residents, the holding of accounts of Russian clients by the Union central securities depositories as well as, after 12 April 2022, the selling of euro-denominated securities to Russian clients.The EU has newly prohibited public financing or financial assistance for trade with, or investment in, Russia. The prohibition does not apply to financing agreed prior to 26 February 2022, for certain projects of EU SMEs and for trade in food or for agricultural, medical or humanitarian purposes. 3. Further restrictions on export of dual-use goods The EU already prohibited, in Regulation (EU) 833/2014 the sale, supply, transfer or export of dual-use goods and technology to any person, entity or body in Russia or for use in Russia, if those items are for military use or for military end-users.The EU has now essentially prohibited any sale, supply, transfer or export of dual-use goods to any person, entity or body in Russia or for use in Russia, unless the goods are for non-military use and for a non-military end user and intended for a limited list of purposes (e.g. humanitarian purposes, medical purposes, software updates, certain consumer IT devices or personal use).Exemptions are available for contracts concluded before 26 February 2022, or ancillary contracts necessary for the execution of such a contract, provided that the authorisation is requested before 1 May 2022.Further exemptions are available, also depending on the intended use (e.g. maintenance of civil nuclear facilities, civilian telecommunications or maritime safety). 4. Export ban on certain high-tech goods The EU has newly prohibited the sale, supply, transfer or export, directly or indirectly, of goods and technology which might contribute to Russia’s military and technological enhancement, or the development of the defence and security sector, as listed in Annex VII to Regulation (EU) 833/2014, whether or not originating in the Union, to any natural or legal person, entity or body in Russia or for use in Russia. The EU equally prohibits the provision of financing or financial assistance, or of technical assistance or brokering services relating to these goods.The prohibitions do not apply if the goods are intended for certain activities (as above for dual use goods).As for dual use goods, exemptions are available for contracts concluded before 26 February 2022, or ancillary contracts necessary for the execution of such a contract, provided that the authorisation is requested before 1 May 2022.Further exemptions are available, depending on the intended use (e.g. maintenance of civil nuclear facilities, civilian telecommunications or maritime safety). 5. Restrictions on public financing or financial assistance for trade with, or investment in, Russia The EU has newly prohibited public financing or financial assistance for trade with, or investment in, Russia. The prohibition does not apply to financing agreed prior to 26 February 2022, for certain projects of EU SMEs and for trade in food, and for agricultural, medical or humanitarian purposes. 6. Restriction on certain goods for use in oil refining The EU has newly prohibited the sale, supply, transfer or export to Russia of specific goods and technologies for use in oil refining as listed in Annex X to Regulation 833/2014, together with restrictions on the provision of related services.The prohibitions do not apply to the execution until 27 May 2022 of contracts concluded before 26 February 2022, or ancillary contracts necessary for the execution of such contracts. Exemptions are available in individual cases. 7. Export ban on certain aviation goods The EU has newly introduced an export ban covering goods and technology suited for use in aviation and the space industry, as listed in Annex XI to Regulation 833/2014, and has prohibited the provision of insurance and reinsurance and maintenance services in relation to those goods and technology.It has also prohibited the provision of technical assistance and other related services as well as financing and financial assistance in relation to the goods and technology subject to this prohibition.The prohibitions do not apply to the execution until 28 March 2022 of contracts concluded before 26 February 2022, or ancillary contracts necessary for the execution of such contracts. 8. Restriction of trade with the regions of Donetsk and Luhansk The EU has imposed restrictions on dealing with the non-government controlled areas of Donetsk and Luhansk. The restrictions are much alike to the restrictions the EU has already imposed on Crimea and Sevastopol since 2014:The EU has imposed a general import ban on any goods originating in regions of Donetsk and Luhansk. Financing or financial support, insurance or reinsurance relating to the import of such goods is equally prohibited.The EU has imposed an export ban of certain listed goods from the sectors transport, telecommunications, energy or the prospecting, exploration and production of oil, gas and mineral resources to the regions of Donetsk and Luhansk. Technical assistance, brokering or financing or financial assistance regarding these goods are equally prohibited.The EU has imposed certain investment prohibitions, e.g. regarding the acquisition of real estate, (shares of) companies or regarding the creation of joint ventures in the regions of Donetsk and Luhansk.The EU has imposed a prohibition to provide services directly related to tourism activities in the regions of Donetsk and Luhansk.Exemptions are available under certain circumstances. The developments in the UK The UK has announced a wide-ranging package in response to the Ukraine situation, many of which are not yet in place at the date of writing. The fully-implemented UK and EU packages are eventually likely to look similar in many respects, albeit that the UK is making particular fresh efforts to constrain the activities of certain Russian individuals in the UK. 1. UK sanctions measures announced On 24 February the UK Prime Minister, Boris Johnson, announced what he termed “the largest and most severe package of economic sanctions that Russia has ever seen”. Further detail was then provided by UK Foreign Secretary Liz Truss. Many of these measures are expected to be implemented in the week commencing 28 February and are stated to include: Asset freezes against all Russian financial institutionsProhibiting Russian banks from accessing Sterling and clearance payments through the UK. Banks subject to these measures will not be able to process any payments through the UK or access to UK financial marketsPreventing Russian companies from borrowing from UK marketsA £50,000 limit on the amount that Russian nationals may deposit in UK bank accountsAeroflot to be banned from UK airspace (already implemented)New trade restrictions and stringent export controlsThe banning of the export of all dual-use items to Russia including high-end and critical technological equipment and components in sectors including electronics, telecommunications and aerospace.Enhanced measures targeting corrupt Russian individuals in the UKAn increase in the use of Unexplained Wealth Orders – which permit the confiscation of funds and assets if a legitimate origin cannot be explainedReforms of UK company legislation and a register of overseas property ownershipA ‘Kleptocracy Cell’ is to be established by the UK’s National Crime Agency to target sanctions evasion and corrupt Russian assets hidden in the UK. 2. On-going designation of additional individuals and entities subject to asset freezes UK legislation provide for the freezing of funds and economic resources of certain persons, entities or bodies involved in destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine, or obtaining a benefit from or supporting the Government of Russia.The UK has introduced asset freezes to additional individuals and entities several times within the last few days, bringing the current consolidated number of Russian individuals under financial sanctions to 190 and the total number of Russian entities under financial sanctions to 59. At least a further 80-90 individuals and entities are expected to be added over the next few days. The UK has also stated publicly that it intends to add to the list those members of the Russian Duma and Federal Council who voted to recognize the independence of Donetsk and Luhansk.The most recent additions to the UK’s consolidated list include:25 February:Individuals: Vladimir Putin and Sergei Lavrov24 February:Individuals: Denis Bortnikov, Peter Fradkov, Elena Georgeiva, Kirill Shamlov, Yury SlyusarEntities: United Aircraft Corporation, United Shipbuilding Corporation, Uralvagonzavod, VTB Bank, Rostec, Tactical Missiles Corporation22 February:Individuals: Gennadiy Timchenko, Boris Rotenberg, Igor RotenbergEntities: Bank Rossiya, Promsvyazbank, Black Sea Bank for Development and Reconstruction, IS Bank, GenbankThese individuals and entities are now subject to asset freezes, which include prohibitions on making funds available to them, and travel bans, which prevent them from entering or transiting through the UK.For UK persons and companies this means that (unless permitted by a specific licence issued by the UK Government) they may no longer:receive or otherwise deal with the frozen funds or economic resources, belonging to or owned, held or directly or indirectly controlled by a designated person; ormake funds or economic resources of any kind, directly or indirectly, to or for the benefit of a designated person.‘Economic resources’ is defined to include “any asset that can be used to obtain funds, goods or services” which for example means that in practice it is not possible to buy or sell property from individuals or entities on the list.With regard to the designated banks, the UK is likely to issue General Licences which allow a person or relevant institution to wind down any transactions to which it is party, involving the sanctioned entity or its UK subsidiaries, including the closing out of any positions. Any activity reasonably necessary to effect this can be carried out. A first General Licence has been issued with respect to VTB Bank but is only of short duration, taking effect on 25 February 2022 and expiring on 27 March 2022.In practice, this means that UK individuals and companies may no longer deal with designated persons or entities and the entities controlled by them unless the transaction is permitted by a General Licence or any specific licence which may be granted to an individual applicant. 3. Restriction of Russia's access to the UK’s capital and financial markets Based on public statements by the UK Prime Minister and UK Foreign Secretary, it is likely that measures on access to markets by the Russian state will be put in place by the UK which are equivalent to those from the EU. These measures are likely to be activated quickly and as soon as the week commencing 28 February. 4. Restriction of trade with the regions of Donetsk and Luhansk In alignment with the EU, the UK has announced that it will impose restrictions on dealing with the parts of Donetsk and Luhansk regions which are not controlled by the Ukrainian Government on the same basis as those which it has already imposed on Crimea and Sevastopol since 2014. Based on the existing provisions in place with respect to Crimea these restrictions appear likely to include:A prohibition on certain investments:directly or indirectly acquiring, extending a participation, or acquiring any ownership interest in land located in the regions of Donetsk and Luhanskdirectly or indirectly acquiring, extending a participation, or acquiring any ownership interest in an entity which has a place of business located in the regions of Donetsk and Luhansk (“Relevant Entity”)directly or indirectly granting any loan or credit, entering into any arrangement to grant a loan or credit or otherwise provide funds, including equity capital, to a relevant entity or for the purpose of financing the Relevant Entitydirectly or indirectly establishing any joint venture in the regions of Donetsk and Luhansk or with a Relevant Entityproviding investment services directly related to any of these activitiesA general import ban on any goods originating (ie even if not importing directly) in the regions of Donetsk and Luhansk. Financing or financial support, insurance or reinsurance relating to the import of such goods is also likely to be prohibited.An export ban of certain goods and all dual-use items including high-end and critical technological equipment and components in sectors including electronics, telecommunications and aerospace both directly to the Territories or sold for use in the regions of Donetsk and Luhansk (ie prohibiting indirect exports)a prohibition on providing services relating to certain infrastructure sectors in the regions of Donetsk and Luhansk or a person connected to them.a prohibition to provide services directly related to tourism activities in the regions of Donetsk and Luhansk.A prohibition on the direct or indirect provision of financial services or funds to persons connected with the regions of Donetsk and Luhansk.Exemptions by way of licence are likely to be available under certain circumstances. Germany halts Nord Stream 2 The gas pipeline Nord Stream 2 project is not targeted by EU sanctions. However, the German government decided to freeze the project. By withdrawing a report still issued by the previous government, Germany effectively stopped the required authorisation process. Any authorisation would now require a new report confirming Russia's reliability as an energy provider. Reactions worldwide – further measures prepared The Ukraine crisis also prompted new sanctions from other countries including the US, Japan and Australia. The sanctions imposed by these countries differ from those imposed by the EU, so companies with economic links to these countries will have to assess to what extent their business may also be affected by other sanction regimes.Most importantly, the US, UK, Canada and several EU countries have decided to remove those Russian banks which are already subject to international sanctions, most notably the Russian Central Bank, from the SWIFT system.For more information on how sanctions against Russia could affect your business, contact your CMS client partner or local CMS experts.