UK: EU Further Tightens Sanctions Imposed In The Context Of The Current Ukrainian Crisis

Last Updated: 1 September 2014
Article by Laurent Ruessmann, Jochen Beck and Gerard McElwee

As the political relationship between the EU and Russia worsens over the latter's involvement in the current crisis in Eastern Ukraine and the annexation of Crimea and Sevastopol, the EU has significantly broadened the scope of its sanctions.  The widened sanctions will have significant effects on European stakeholders' business interests in Russia and the pro-Russia part of Ukraine.

In July the EU intensified sanctions against Russian stakeholders in response to Russia's interference in Eastern Ukraine and the annexation of Crimea and Sevastopol.  The increasing scope and complexity of the sanctions will have increasingly broader effects on business relationships and investment decisions of EU companies. 

This article provides an overview and clarification of the scope of the current sanctions, which essentially consist of three parts:

  • restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine 1;
  • restrictive measures in response to the illegal annexation of Crimea and Sevastopol 2; and most recently
  • restrictive measures in view of Russia's actions destabilising the situation in the Ukraine.3

Restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine

Regulation 269/2014 imposed financial sanctions on specific individuals and entities listed in its Annex I.  The sanctions were first imposed on 17 March 2014 and the Annex I has been updated several times since. 

On 18 and 25 July 2014, Regulations 783/2014 4 and 811/2014 5 respectively replaced and significantly broadened the previous versions of Article 3(1) of Regulation 269/2014, which describes the scope of persons and entities the Council can make subject to sanctions. 

The initial version of Article 3 allowed the imposition of sanctions "only" against "persons responsible for actions which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine, and natural or legal persons, entities or bodies associated with them". 

In May 2014, Regulation 476/2014 6 broadened the scope of Article 3 a first time, allowing the Council to impose sanctions also against parties that "obstruct the work of international organisations in Ukraine, and natural or legal persons, entities or bodies associated with them, or legal persons, entities or bodies in Crimea or Sevastopol whose ownership has been transferred contrary to Ukrainian law, or legal persons, entities or bodies which have benefited from such a transfer".

Regulations 783/2014 and 811/2014 expanded the scope of Article 3 even further to include:

  • "legal persons, entities or bodies supporting, materially or financially, actions which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine"; and
  • "natural or legal persons entities or bodies who actively provide material or financial support to, or are benefiting from, Russian decision-makers responsible for the annexation of Crimea and Sevastopol or the destabilising of the Eastern-Ukraine".  [emphases added]

Similar step-by-step expansions of the scope of restrictions under the Syrian embargo, for example, led to a significant increase in the number of Syrian businessmen and "national champions" included on the sanctions list. 

Likewise, Articles 3(b) and (d) make it even easier for the EU to impose restrictions at short notice on a wide range of Russian and pro-Russian actors in the industry, finance, and business sectors who are themselves not directly responsible for any war crimes or actions violating Ukrainian sovereignty.  

The EU's adoption of Regulations 810/2014 7 and 826/2014 8 demonstrate the use of these new provisions, adding 23 individuals and 21 entities to Annex I of Regulation 269/2014, including Dobrolet Airlines, which allegedly benefitted from exclusively operated flights between Moscow and Crimea, and "long-time acquaintances" of President Putin who have allegedly benefitted from his regime, such as Messrs Rotenberg, Kovalchuk and Shamalov.

The EU sanctions against individuals and companies comprise most importantly (i) the freezing of their funds and economic resources, and (ii) a general prohibition to make funds and economic resources available to those parties. 

The wide scope of the latter provision makes virtually any business activity with sanctioned parties illegal, and the violation of those provisions is actionable through, for example, fines and in the worst case, the listing of the violating entity itself.  Generally, fines need not be imposed at astronomic levels, such as the recent €6.6 billion record fine the US authorities imposed on BNP for alleged violations of the Iran embargo, 9 to have a major impact on a company's business.  Even lower financial penalties, combined with the loss of export privileges and damage to a company's reputation, can hurt a company and significantly impact its business activities. 

In recent years, EU operators have therefore become increasingly reluctant even to engage in allowed business with sanctioned parties.  Listed persons and entities find themselves quickly in a state of political and economic isolation, which can remain difficult to shake even if the listing has been successfully challenged before the European Courts in Luxembourg.

Restrictive measures in response to the illegal annexation of Crimea and Sevastopol

Regulation 692/2014 imposed most importantly a total import ban (subject to certain exceptions) on good originating in Crimea and Sevastopol, and prohibits the provision of related financing and insurance services. 

Regulation 825/2014 10 extended these measures by adding:

  • prohibitions of financial investments, participation and financial assistance (as well as of related technical assistance and brokering services) in Crimea and Sevastopol concerning (i) the creation, acquisition or development of infrastructure in the sectors of transport, telecommunications, and energy, and (ii) the exploitation of oil, gas or mineral resources (listed in Annex II); and,
  • an export ban on key equipment and technology (listed in Annex III, pipes and drilling equipment) related to those sectors.

Similar investment-related prohibitions are also included in the EU Iran and Syria embargoes and have significantly affected EU investments in those countries.

Restrictive measures in view of Russia's actions destabilising the situation in the Ukraine

Most recently, Regulation 833/2014 has expanded the previously imposed sanctions by targeting Russia directly.  These sanctions comprise:

  • - a military and dual-use goods embargo, prohibiting the sale, supply or export to persons in Russia or for use in Russia of (i) military items listed on the EU military list  and (ii) dual-use items listed in Annex I to the EU Dual-Use Regulation 428/2009  (if intended in whole or part for a military end-use(r)) as well as related technical and financial assistance and brokering services (if the end-user/procurer is the Russian military there is a presumption of a military use);
  • subject to a grandfathering provision for contracts prior to 1 August 2014, a prior authorisation requirement for the sale, supply or export to persons in Russia or for use in Russia of technologies suited for the oil industry for use in deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia (as listed in Annex II), as well as for related technical and financial assistance and brokering services;
  • a prohibition on directly or indirectly purchasing, selling, providing brokering or assisting in the issuance of, or otherwise dealing with transferable securities and money market instruments with a maturity exceeding 90 days, issued after 1 August 2014 by various Russian banks listed in Annex III, and majority-owned subsidiaries and legal persons acting on behalf or at the discretion of those subsidiaries.  The banks currently listed in Annex III are Sberbank, VTB Bank, Gazprombank, Vnesheconombank and Rosselkhozbank.

Prudent business planning

The adoption of Regulation 833/2014 and the extension of the scope of Regulation 269/2014 represent a turning point in the EU's relationship with Russia.  By not shying away from also targeting key Russian banks and industries as well as persons close to Putin, the EU has taken a firm stand to "punish" Russia for its deemed support of separatists in East Ukraine and the annexation of Crimea and Sevastopol.

The EU has made clear that, contrary to previous assumptions that it would not impose firm sanctions so as not to endanger its own interests, e.g. in Russian gas supplies, it is willing to tighten the sanctions further if Russia does not show real signs of compromise.

EU stakeholders are therefore well-advised to place enhanced focus on compliance and to exercise increased caution when doing business with Russia and Ukraine, especially with regard to East Ukraine.  In particular, it is advisable not to carry out business without enhanced due diligence checks.  It is also common in such a situation to seek the inclusion of specific liability and termination clauses in contracts.

Footnotes

1. Council Decision 2014/145/CFSP of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ 2014 L78/16 and Council Regulation (EU) No 269/2014 of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ 2014 L78/6.

2. Council Decision 2014/386/CFSP of 23 June 2014 concerning restrictions on goods originating in Crimea or Sevastopol, in response to the illegal annexation of Crimea and Sevastopol, OJ 2014 L183/70 and Council Regulation (EU) No 692/2014 of 23 June 2014 concerning restrictions on the import into the Union of goods originating in Crimea or Sevastopol, in response to the illegal annexation of Crimea and Sevastopol, OJ 2014 L183/9.

3. Council Decision 2014/512/CFSP of 31 July 2014 concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine, OJ 2014 L229/13 and Council Regulation (EU) No 833/2014 of 31 July 2014 concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine, OJ 2014 L229/1.

4. Council Regulation (EU) No 783/2014 of 18 July 2014 amending Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ 2014 L214/2.  In addition to the amendment of the wording in Regulation 269/2014, the corresponding wording in Decision 2014/145/CFSP has also been amended in the same way.

5. Council Regulation (EU) No 811/2014 of 25 July 2014 amending Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ 2014 L221/11.

6. Council Regulation (EU) No 476/2014 of 12 May 2014 amending Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ 2014 L137/1.  In addition to the amendment of the wording in Regulation 269/2014, the corresponding wording in Decision 2014/145/CFSP has also been amended in the same way.

7. See Council Implementing Regulation (EU) No 810/2014 of 25 July 2014 implementing Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ 2014 L221/1.

8. Council Implementing Regulation (EU) No 826/2014 of 30 July 2014 implementing Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ 2014 L226/16.

9. See e.g. Bloomberg "BNP to Pay Almost $9 Billion in U.S. Sanctions Plea Deal"of 01 July 2014.

10. Council Regulation (EU) No 825/2014 of 30 July 2014 amending Regulation (EU) No 692/2014 concerning restrictions on the import into the Union of goods originating in Crimea or Sevastopol, in response to the illegal annexation of Crimea and Sevastopol,  OJ 2014 L226/2.

11. Common Military List of the European Union, OJ 2014 C107/1.

12. Council Regulation (EC) No 428/2009 of 5 May 2009 setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items, OJ 2014 L134/1.

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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