European Union: Russian Sanctions Update – What EU Companies Need To Know

Last Updated: 24 July 2014
Article by Nigel Kushner

Current EU Sanctions On Russia

There is currently an asset freeze and travel ban on 72 individuals and an asset freeze on 2 companies.

What Does The Asst Freeze Mean?

No EU national or entity may make funds or economic resources available, directly or indirectly, to or for the benefit of a person or entity subject to an asset freeze. All funds and economic resources held by a person or entity in the EU must be frozen. Economic resources includes almost anything which may be used to obtain funds. In essence you must not provide anything of value to and nor can you hold anything of value for a person or entity subject to the asset freeze. Where you need to tread carefully is with regards to your dealings with companies which may be beneficially owned, in whole or part by a person or entity subject to the asset freeze. For example, if Roman Abramovic (Chelsea beneficial owner) or Alisher Usmanov (alleged part Arsenal beneficial owner) were subject to the asset freeze you may not be able to buy your season tickets for Chelsea or Arsenal, respectively, because this could result in a benefit to such owner.

New EU Sanctions

Following a meeting on 16th July 2014, the EU announced six new measures. They have not yet come into force, but this will most likely be achieved imminently through amending Regulation 269/2014.

The new measures are likely to comprise:

Further asset freezes on individuals and companies who materially or financially

  1. support actions undermining or threatening Ukrainian sovereignty, territorial integrity and independence of Ukraine. The EU may also target individuals and companies actively providing material or financial support to Russian decision-makers responsible for the annexation of Crimea or the destabilisation of eastern Ukraine;
  2. suspending new European Investment Bank financing operations regarding public sector projects in Russia;
  3. suspending new European Bank for Reconstruction and Development funding of public sector projects in Russia;
  4. the European Commission will re-assess bilateral EU-Russia cooperation programmes, although projects in relation to civil society and cross-border cooperation are unlikely to be suspended.
  5. restricting European investment in Crimea; and
  6. restricting financing by international financial institutions of projects that explicitly or implicitly recognise the illegal annexation of Crimea by Russia.

Impact Of MH 17 Tragedy

A number of EU Member States have called for tougher sanctions against Russia including "Tier 3" sanctions ie sectoral measures which will place restrictions on certain sectors of the Russian economy, including financial services, the arms industry and the oil and gas sector. The UK, Holland and Poland are leading this push. Others, such as Germany and Italy have concerns given their dependence on Russian gas and the French are not minded to cancel their pending delivery of warships to Russia. As a result, although we expect new sanctions to be implemented imminently, it is unlikely that they will have any meaningful impact. Indeed, they were contemplated prior to the MH 17 tragedy.

Recent US Sanctions

On July 16, 2014 the US Treasury Department issued new Ukraine-related sanctions that target the following sectors of the Russian economy: financial services, energy, and arms or related material sectors of Russia. The sanctioned entities include two major Russian financial institutions (Gazprombank OAO and VEB) and two Russian energy firms (OAO Novatek and Rosneft). Also sanctioned are eight Russian arms firms, four Russian government officials, a shipping facility in the Crimean peninsula (Feodosiya Enterprises), and the so-called "Luhansk People's Republic" and the "Donetsk People's Republic."

The sanctions against the Russian banks and energy firms prohibit US persons from transacting in, providing financing for, or otherwise dealing in debt of longer than 90 days maturity issued by the entities on or after July 16, 2014. US persons are also prohibited from dealing in new equity of the targeted Russian banks. However, the US also issued a general license which authorizes transactions involving certain related derivative products. It should be noted that the targeted Russian banks and energy firms have not been designated as Specially Designated Nationals (SDNs), and their property and interests in property have not been blocked. The other newly-targeted entities and individuals – Russian arms firms, Russian government officials, Feodosiya Enterprises, and the Luhansk and Donetsk People's Republic have been designated as SDNs.

EU / Russian Trade

Figures for 2012 demonstrate that EU/Russian trade was worth €267 Billion. During the same period EU/US trade was worth only €18 Billion. Clearly, the EU may have a greater impact on Russian trade than the US (assuming the US does not place extra territorial sanctions on Russia whereby they may punish non US persons who have certain dealings with Russia).

What Does The Future Hold?

We are already seeing an impact with a number of clients unwilling to enter into new contracts with Russia because of the fear of future sanctions. This is perhaps more powerful than the sanctions themselves. Consequently, non EU entities will be delighted to step into the shoes of Western businesses pulling out of Russia.

If Russia were to "formally" send troops into Eastern Ukraine then we consider that the EU and the US will likely have little choice but to significantly broaden sanctions against Russia in a meaningful way. It remains to be seen whether Ukraine will defeat the separatists in Donetsk and how Russia will react. This is critical.

The EU is currently suffering from too many internal divisions which is preventing any meaningful sanctions against Russia. It may be that the UK and others "go it alone" and implement unilateral sanctions against Russia although this currently appears unlikely.

The current international focus is shifting to ensuring independent access to the MH17 incident site. Sanctions are being threatened if independent access and investigation is not permitted. Rather, we would have expected that the focus would be on implementing sanctions as a result of the incident itself. It is somewhat ironic that if independent access is provided then the threatened sanctions will likely be more limited. If so, perhaps the West is sending a distorted message to Russia: we

will not punish you so much for shooting down a domestic passenger airline; rather, we will punish you for impeding the investigation. If Russia ensures independent access (of sorts) then perhaps it will have avoided the onerous sanctions which may otherwise have been implemented in relation to the incident itself.

We anticipate further EU sanctions on Russia but they will have little meaningful impact unless Russia "march in" to Eastern Ukraine. In the meantime, we will probably witness the occasional positive gesture and promises from both the Donetsk insurgents and Russia, mixed with obfuscation and lacking any meaningful follow-through. Russia will ultimately deny any direct involvement in the incident.

It will be interesting to see how the Russian crisis impacts the current negotiations with Iran. Iran are currently negotiating a significant oil for barter deal with Russia. Will Russia now seek to move closer to Iran? Will Iran be able to negotiate a "better deal" on the nuclear issue if they agree to forgo a closer relationship with Russia?

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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