On the heels of announcements by the US and the EU, the Canadian Government has significantly expanded its sanctions against Russia and the Ukraine. In addition to lists of further persons with whom it is prohibited to do business, Canada has clarified the scope of existing financial sanctions and fulfilled a promise made by the Prime Minister in the summer1 to follow the US and EU targeting of Russian oil and gas sectors. This is the first use of sector-specific sanctions by Canada.
1. Canadian amendments to Russia economic sanctions
On December 19, 2014, Canada enacted the Regulations Amending the Special Economic Measures
(Russia) Regulations(SOR/2014-316) (the "Russia
Sanctions"). These amending regulations contain new sanctions
and clarifications, including a prohibition against new
contracts for the export, sale, supply or shipment of certain
goods to Russia for use in deep-water, arctic or shale oil
exploration and production, along with a prohibition against the
provision of services related to these goods.
a. New energy sanctions for contracts entered into
after December 19, 2014
The Russia Sanctions now prohibit any person in Canada, and any
Canadian outside Canada, to export, sell, supply or ship any goods
listed on Schedule 4 of the Regulations, wherever situated, to
Russia or to any person in Russia for use in
- offshore oil exploration or production at a depth greater than 500 metres;
- oil exploration or production in the Arctic; or
- shale oil exploration or production.
The Schedule 4 list of sanctioned commodities mirrors the lists
established by the US and the EU earlier in 2014. It includes such
items as line pipe, drill pipe, casing and tubing, pumps, liquid
elevators, drilling and boring tools, and excavation
machinery.
The Russia Sanctions also prohibit the provision of financial,
technical or other services related to any good whose export, sale,
supply or shipment is prohibited. Similarly, they prohibit indirect
conduct which may cause, assist or promote any prohibited
conduct.
However, these new energy prohibitions do not apply to
goods or services if the contract for the export, sale,
supply or shipment of the good or for any related service is
entered into before December 19.
b. Clarification of debt and equity financing
prohibitions
The Russia Sanctions clarify that the new debt financing
prohibitions against Schedule 2 and 3 listed persons (i.e. persons
to whom the prohibitions against new debt financing apply) include
the following types of new debt transactions: bonds, loans,
debentures, extensions of credit, loan guarantees, letters of
credit, bank drafts, bankers' acceptances, discount notes,
treasury bills, commercial paper and other similar
instruments.
The equity financing prohibition in the Russia Sanctions has also
been amended. The original capital funding language has been
clarified and now prohibits any financing or other dealings in new
securities, including shares or any other ownership interest in
relation to the persons listed in Schedule 2.
c. Additional Russian and Ukrainian individuals
sanctioned
Eleven additional Russian separatists have been added to the
Russia Sanctions.
Canada also issued the Regulations Amending the Special Economic Measures
(Ukraine) Regulations (SOR/2014-317) (the "Ukraine
Sanctions") on December 19, 2014 to sanction an additional 9
separatist leaders in the Ukraine, all of whom have been previously
listed by the EU. These amendments to the Ukraine Sanctions do not
impose any other prohibitions.
2. United States amendments to Russian economic sanctions2
a. Clarification of oil sector prohibition
The US Office of Foreign Assets Control ("OFAC")
released new FAQs on December 11, 2014 clarifying
the oil sector prohibitions in Directive 4. The prohibitions do not
cover 1) the provision of goods, services and technology relating
to the refining of oil or other dealings involving oil that has
been extracted from a deepwater, Arctic offshore, or shale project
and transported off a field production site is not prohibited; and
2) arctic offshore projects do not include refineries which process
arctic offshore oil, but are limited to drilling operations located
above the Arctic Circle. Canada has not provided guidance as to
whether it has established a similar exemption in its Russia
Sanctions.
b. US economic embargo against Crimea and additional
blocked persons
On December 19, 2014 the United States issued a new Executive Order to tighten its economic
embargo against Crimea (which excludes the sale of agricultural
commodities, medicine, and medical supplies to Crimea pursuant to
General License 4) by prohibiting the
following types of conduct:
- new investment in the Crimea region of Ukraine by US persons;
- the importation of any goods, services, or technology from the Crimea region of Ukraine into the United States;
- the exportation, re-exportation, sale, or supply of any goods, services, or technology from the United States to the Crimea region of Ukraine; and
- any approval, financing, facilitation, or guarantee by a US person of any such transaction by a foreign person.
Canada has not imposed restrictions akin these US economic
embargo measures against the Crimea region.
The US also imposed sanctions on December 19, 2014 against 24
additional Ukrainian and Russian separatists and the militias or
entities they lead or support, including Marshall Capital Partners
(a Russian equity investment group) and Profaktor, Tov (a Ukrainian
accounting, auditing and bookkeeping firm). No extractive sector
entities were named in this round of US sanctions.
3. European Union amendments to Russia economic sanctions3
a. Economic embargo against Crimea
On December 18, 2014 the European Union issued Council Regulation No 1351/2014, effective
December 20, 2014, to broaden its economic embargo against Crimea
and issued lists of sanctioned goods (in Annex II) and Crimean
ports (in Annex III).
This new EU regulation basically prohibits all foreign investments
and related services in Crimea or Sevastopol as well as the sale,
supply, transfer or export of Annex II goods and technologies
suited for use in the following sectors in Crimea or Sevastopol:
energy; prospecting, exploration and production of oil, gas and
minerals; transport; and telecommunications. It prohibits direct or
indirect technical or financial assistance, brokering services,
provision, manufacture, maintenance, or financing of the goods and
technology listed in Annex II. Similarly it prohibits technical
assistance, brokering, construction or engineering services
directly relating to infrastructure in Crimea or Sevastopol in the
above-listed sectors. These prohibitions effectively broaden the
former export prohibition on goods and technology in the sectors of
energy and exploitation of oil, gas and minerals, transport,
telecommunications. However, these prohibitions do not apply to the
execution of an obligation until March 21, 2015 arising from
contracts concluded before December 20, 2014.
As mentioned above, Canada has not imposed measures expressly
targeting the Crimea nor Sevastopol regions.
b. Guidance on sectoral sanctions
On December 16, 2014, the EU released a 26 frequently asked
questions and answers (FAQs) regarding the sanctions it imposed on
July 31, 20144 which consist of restrictions on access
to certain sensitive technologies particularly in the oil sector,
an export ban for dual use goods for military end use and end
users, and measures aimed at limiting access to EU capital markets
for Russian state-owned financial institutions. This guidance clarifies both the financial
assistance measures and the financial service measures. For
example, FAQ 1 clarifies that the EU's prohibition on dual-use
exports to Russia for military end-users or military end-use also
applies to "payment services and issuance of letters of
guarantees/credit" linked to transactions involving these
prohibited exports. None of the oil sector prohibitions are
addressed in this guidance.
Conclusion
The US, EU and Canadian sanctions introduced on December 18-20, 2014 are extensive and came without much warning. Canada's amendments bring it into general alignment with the US and EU effort to target the oil and gas sector as a key area. Not surprisingly, Russia has indicated an intention to introduce retaliatory measures.5 Companies involved in cross-border trade of goods or services as well as investment and financing transactions will need to monitor developments in order to ensure ongoing compliance with increasingly complex and technical levels of restrictions. As noted in our previous bulletins,6 the consequence for not doing so can be severe.
Footnotes
1 Prime Minister's Office, "Statement by the Prime Minister of Canada announcing additional sanctions" (6 August 2014).
2 The general information on US sanctions is provided only in summary form as context for understanding how Canada's approach to sanctions of Russia and the Ukraine has been evolving.
3 The general information on EU sanctions is provided only in summary form as context for understanding how Canada's approach to sanctions of Russia and the Ukraine has been evolving.
4 Through the adoption of Council Regulation (EU) No. 833/2014, as amended on September 8, 2014 by Council Regulation (EU) No 960/2014 and on December 4, 2014 by Council Regulation (EU) No 1290/2014.
5 "Russia to consider possible response to US, Canada sanctions — Kremlin aide" (22 December 2014), ITAR-TASS.
6 Martin Masse and Monica Podgorny, "Canada, US and the EU Expand Their Lists of Economic Sanctions against Russia and the Ukraine" McMillan LLP (July 2014) and Martin Masse and Monica Podgorny, "Staying Out of the Crosshairs – Keeping On Top of Russia Related Economic Sanctions" McMillan LLP (November 2014).
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2014