Canada: Canada Expands Russia Sanctions

On December 19, the Canadian government announced expanded economic sanctions against Russia, primarily directed at the Russian energy industry (the "Expanded Russia Sanctions").

As we recently discussed, the Expanded Russia Sanctions were imposed by way of an amendment to the pre-existing sanctions under the Special Economic Measures (Russia) Regulations. In addition to adding new designated persons to the existing Regulations against Russia (and also adding new designated persons to the Special Economic Measures (Ukraine) Regulations) the Expanded Russia Sanctions now prohibit any person in Canada and any Canadian outside Canada from exporting, selling, supplying or shipping any specified good, wherever situated, to Russia or to any person in Russia for use in any of (i) offshore oil exploration or production at a depth greater than 500 meters, (ii) oil exploration or production in the Arctic or (iii) shale oil exploration or production (the "Specified Activities"). Activities relating to gas exploration are not specifically covered in the Expanded Russia Sanctions.

The specified goods covered by the Expanded Russia Sanctions are as follows:

  • Seamless stainless steel line pipe of a kind used for oil or gas pipelines;
  • Seamless iron or steel line pipe of a kind used for oil or gas pipelines, other than line pipe made of stainless steel or cast iron;
  • Seamless iron or steel drill pipe of a kind used in drilling for oil or gas, other than drill pipe made of cast iron;
  • Seamless iron or steel tubing of a kind used in drilling for oil or gas, other than tubing made of cast iron;
  • Iron or steel line pipe of a kind used for oil or gas pipelines that has circular cross-sections and an external diameter exceeding 406.4 mm;
  • Iron or steel casing of a kind used in drilling for oil or gas that has circular cross-sections and an external diameter exceeding 406.4 mm;
  • Welded iron or steel line pipe of a kind used for oil or gas pipelines that has an external diameter not exceeding 406.4 mm, other than line pipe made of cast iron;
  • Welded casing and tubing of a kind used in drilling for oil or gas that has an external diameter not exceeding 406.4 mm and is made of flat-rolled steel or iron products, other than casing and tubing made of cast iron;
  • Interchangeable rock-drilling or earth-boring tools that have working parts made of sintered metal carbides, cermets, diamond or agglomerated diamond;
  • Power-driven reciprocating positive displacement pumps for liquids, other than pumps with measuring devices, concrete pumps and fuel, lubricating or cooling medium pumps for internal combustion piston engines;
  • Power-driven rotary positive displacement pumps for liquids, other than pumps with measuring devices and fuel, lubricating or cooling medium pumps for internal combustion piston engines;
  • Liquid elevators and their parts, other than pumps;
  • Non-hydraulic or non-self-propelled boring or sinking machinery, and their parts, for boring earth or extracting minerals or ores, other than tunnelling machinery and hand-operated tools;
  • Parts for lifting, handling, loading or unloading machinery;
  • Parts for:

    • derricks, cranes, mobile lifting frames and other lifting machinery;
    • self-propelled bulldozers, scrapers, graders, levellers, shovel loaders and tamping machines; and
    • other moving, grading, scraping, levelling, excavating and extracting machinery;
  • Parts for hydraulic or self-propelled boring or sinking machinery;
  • Mobile drilling derricks;
  • Floating or submersible drilling or production platforms;
  • Fire-floats, lightships and floating docks or cranes, other than dredgers.

Businesses will have to determine whether any goods in the above categories are "for use" in any of the Specified Activities. In practice, this will often be difficult to do. It is also likely that there will be a myriad of other issues for parties who are subject to the Expanded Russia Sanctions and want to ship specified goods or services to Russia. For instance, one thorny issue that has arisen with respect to the U.S. sanctions against Russia is whether the prohibition in relation to shale oil exploration and production includes drilling through shale to a resource that is not in a shale formation. Similar questions will likely arise with respect to the Expanded Russia Sanctions.

The Expanded Russia Sanctions also prohibit any person in Canada and any Canadians outside Canada from providing to Russia or to any person in Russia any financial, technical or other services related to any of the specified goods.

In addition, the existing restrictions on new debt financing have been expanded. Previously there were only restrictions on dealing with certain loans, bonds or debentures with designated persons, their property and their rights and interests in property. The new Expanded Russia Sanctions cover most new debt with respect to designated persons and their property, and now specifically include extensions of credit, loan guarantees, letters of credit, bank drafts, bankers' acceptances, discount notes, treasury bills, commercial paper and other similar instruments. Provisions dealing with new equity financings were also expanded.

It should be noted that the Expanded Russia Sanctions do not apply to goods or services if a contract for the export, sale, supply or shipment of the good or for any related service was entered into before December 19, 2014 (the day on which the Expanded Russia Sanctions came into force).

The intent behind the Expanded Russia Sanctions is apparently to apply more pressure to Russia in relation to its activities in the Ukraine by limiting its ability to explore for future resources and to maintain production. The effect on overall Russian production is not likely to be immediate. Further, in light of the current collapse of global oil prices, it could well be that Russian oil companies would have been reducing exploration activities in any event, much as oil producers around the world are already doing. That said, the expanded provisions on debt and equity financing for designated persons may have a larger impact, as a number of Russian banks are designated persons and they will find it more difficult to raise money in global markets.

Regardless of the impact of the Expanded Russia Sanctions on Russia, it is clear that these sanctions will have a negative impact on any Canadian oil field service companies which are looking to provide services in Russia. As the Canadian sanctions against Russia continue to expand, companies with activities in Russia, especially relating to oil exploration, and debt and equity financing with Russian companies, should make sure they continue to monitor these regulations in order ensure that their activities continue to remain legal under Canada's sanction regime.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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