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Crimea under Russian occupation: legal challenges

08/04/2014

This is a rapid response paper which outlines the major legal risks that businesses operating in the Autonomous Republic of Crimea and the city of Sevastopol (“Crimea”) may face as a result of the contested annexation of Crimea by the Russian Federation in March 2014.

1. The Legal Vacuum

The Russian Federation is set to introduce Russian law and Russian law-enforcement structures in Crimea. Allegedly, Ukrainian courts in Crimea have been suspended, as it is not clear whether they are in a position to deliver justice, given that judges in the region were appointed and sworn in by Ukraine.

Furthermore, according to some news reports, nineteen Ukrainian judges have requested to be transferred to other regions of Ukraine. However, news agencies are also reporting that courts in Crimea, along with prosecutors, police and bailiffs, are already using Russian law. The practical effect of this is that even if, theoretically, Russian law is applicable in Crimea, there are not enough Russian qualified law-enforcement staff in the region. Moreover, court rulings and other acts of Crimean authorities made under Russian law will be void under Ukrainian law. These and other legal problems render the whole legal environment completely inoperable.

Moreover, the Ukrainian parliament is considering a bill concerning the legal status of Crimea under Russian occupation. That bill envisages a comprehensive ban on economic activities in Crimea where such activities, including the development of natural resources, require some regulatory action by state bodies. Should it materialise, we shall produce analysis of this bill.

2. Business Registration and Regulation

In terms of registration of business entities and private entrepreneurs, as well as other ancillary registrations, the situation remains extremely uncertain.

Currently, no corporate information regarding companies registered in Crimea may be supplemented or amended. According to officials of the Registration Service at the Head Department of the Ministry of Justice in Crimea (http://www.drsu.gov.ua/show/5991), access to the electronic Unified State Registry of Legal Entities and Private Entrepreneurs of Ukraine from Crimea is blocked. Simultaneously, the software required to ensure access to the analogous registries maintained in the Russian Federation has not yet been installed.

As a result, registering a business in any form with all relevant authorities (e.g. the State Registration Service, Departments of Ministry of Statistics of Ukraine, the tax authorities and the Pension Fund Department) is temporarily suspended. From a practical perspective, the effect of such suspension extends to both new investors planning to set up businesses in Crimea and, as it is also not possible to register any amendments to the constituent documents of existing legal entities, current businesses.

Therefore, business entities’ routine corporate actions, including an increase or decrease of charter capital, changing the composition of management and officers with signature rights, as well as amending business entities’ addresses and contact information, cannot be procured at the moment. The same applies to transactions for the sale and purchase of corporate rights and shares in business entities, where such transactions require registration of changes in the composition of shareholders in target companies’ constituent documents.

Furthermore, this applies to registration of title to land and notarised contracts and deeds. In particular, Crimean notaries currently have no access to Ukrainian registries of powers-of-attorney and cannot certify powers-of-attorney, which are a fundamental instrument under Ukrainian law.

3. Banking Industry

On 21 March 2014, the Head of the National Bank published a press-release stating that assets of Ukrainian banks operating in Crimea amounted to approximately 22bln UAH. In addition, there is a large amount of collateral located in Crimea, securing obligations owed to banks (including their branches) operating in both Crimea and mainland Ukraine. Currently, there are no specific legal restrictions on Ukrainian banks operating in Crimea, other than those generally imposed on Ukrainian banks by the National Bank of Ukraine. Although it may appear that the Crimean banking system is operating as before (taking into consideration the stress in the market), all Ukrainian banks present in [Crimea] have already restricted their operations in the region, such restrictions varying from complete closure of all offices located in Crimea (PrivatBank Ukraine), to suspension of cash operations, to limiting money withdrawals, to early termination of deposits.

Long-term, if Russian occupation persists, all Ukrainian banks registered with the National Bank of Ukraine and operating in accordance with Ukrainian law may, in order to continue to conduct their businesses in Crimea, be required to register with the Central Bank of Russia. According to information that is available from public sources, Ukrainian banks may be granted a nine month grace period (until 31 December 2014) to decide whether to apply for a banking licence from the Central Bank of Russia.

Although Ukrainian authorities, in particular, the National Bank of Ukraine, according to its press release on 21 March 2014, de facto acknowledged the possible nationalisation of Ukrainian banks by [Russia], or their transfer to Russian jurisdiction, it is still unclear what the consequences of failing to obtain a Russian licence will be for Ukrainian banks.

Given the above, and that there are more questions than answers relating to the functioning of the “Crimean Ukrainian” banking system in the near future, the general credibility of the Crimean banking system has been significantly affected. Therefore, caution is recommended when considering activities involving banks in Crimea (including making payments through Crimean branches of Ukrainian banks).

4. Currency Control Restrictions

The National Bank of Ukraine started imposing restrictions and limitations on Ukrainian banks and their clients prior to the Crimean crisis. These restrictions and limitations are aimed at protecting the Ukrainian banking system and, in particular, preventing complete capital outflow. Please visit http://www.lawnow.com/law-now/2014/foreigncurrencyrestriction.htm to view our previous publication on such restrictions and limitations. No additional or specific rules have been imposed as a result of the Crimean crisis.

5. Cross-Border Loans

Recent events in Ukraine have resulted in a great number of questions raised by lenders of cross-border loans into Ukraine. The possible implications of the Crimean crisis on English law loans are discussed on our website http://www.law-now.com/law-now/2014/englawcrsbrdrloansukraine.htm.

6. Mineral Resources and Energy Sector

Crimea mainly produces limestone and iron ore on-shore, yet the main focus has always been on fossil fuels, such as oil and gas, within the continental shelf and Ukrainian territorial waters in the Black Sea. 

Over the last few years, the interest in hydrocarbon resources has increased, as the Ukrainian 

Government has opened a number of investment opportunities in this area and even instigated a couple of ambitious projects.

Shortly after the Crimean referendum the unrecognised “Chairman” of the Crimean Parliament announced that key strategic state enterprises of the oil and gas industry, such as National JSC “Chornomornaftohaz” Naftohaz”, which manages the Ukrainian gas pipeline system) will be nationalised by the newly self-proclaimed independent Republic of Crimea.

Although nothing was said in respect of private oil and gas investments in Crimea, it is evident that all existing arrangements, such as production sharing agreements, with Ukrainian State and state-owned companies will be postponed for an indefinite period. At the same time, the Ukrainian Government has never shown any intention of withdrawing from its oil and gas projects with private investors in Crimea and one would expect the [Ukrainian] Government to renew all subsoil licences [once/if] it regains control of Crimea.

On the other hand, Russia may declare that the sea-bed is under its jurisdiction and refuse to recognize off-shore licences issued by the Ukrainian Government. Russian companies will not be able to develop new oil and gas fields in the Black Sea until Russia achieves an acceptable level of stability in the Crimean peninsula. Even then, there is significant doubt that Russian companies alone will be able to manage deep-sea oil and gas projects in the region, as Crimea’s uncertain legal status represents very high investment and reputational risks for any foreign oil and gas contractors.

The destiny of Crimean hydrocarbons is not the only open question. Since Crimea is mainly powered from the mainland, over the last couple of years the Government has supported development of the renewable energy sector on the peninsula, which is now home to many solar power plants. These could now be subject to nationalisation by the Russian Government, in which case investors may challenge the nationalisations in Russian or international courts (such as the investment arbitration tribunals under the Energy Charter Treaty).

7. Real Estate

The real estate market in Crimea is currently on hold. The reason for this is that access to state / local municipal authorities and notaries’ access to the Ukrainian electronic real estate registries is blocked. Therefore, it is currently impossible to: 

(i) perform any basic real estate transactions, such as sell and purchase, or lease; 

(ii) register any encumbrances or limitations (such as mortgages, bans on alienation, servitude, etc.) over buildings, structures or land plots; 

(iii) receive any information (including in the form of extracts from the State Register of Proprietary Rights to Immovable Property and State Land Cadastre) regarding any title, encumbrances or limitations over the property in Crimea; and

(iv) allocate into lease or ownership any land plot on the territory of Crimea.

A draft bill passed by the Ukrainian parliament in first reading last week concerning Crimea, which is defined in the bill as a “temporarily occupied territory”, declares: “Any legal transaction regarding real estate that is made in violation of the requirements of Ukrainian legislation is considered invalid from the moment of its signing.” This bill, once passed in full and enacted into law, may shed light onto further regulation and development of the real estate market in Crimea.

Authors: 
Olexander Martinenko, Senior Partner, CMS Cameron McKenna, [email protected] 
Sergiy Gryshko, Senior Associate, CMS Cameron McKenna, [email protected] 
Victoria Kaplan, Senior Associate, CMS Cameron McKenna, [email protected]m 
Natalia Kushniruk, Senior Associate, CMS Cameron McKenna, [email protected]m 
Ruslan Ostapenko, Associate, CMS Cameron McKenna, [email protected]

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Authors

Picture of Nataliya Kushniruk
Natalia Kushniruk
Partner
Kyiv (CMS CMNO)
Olexander Martinenko