European Union: EU Clarifies Russian Sanctions

This alert follows our  previous alerts on the Russia/Ukraine sanctions.

On 5 December 2014, the European Commission published Regulation 1290/2014 (the Amending Regulation) with effect from 6 December 2014. This further amends Regulation 833/2014, which imposed sanctions against Russia in view of its actions in Ukraine. Several of the amendments appear to be aimed at clarifying the scope and application of the sanctions. Although not explicitly stated, this may be a result of various issues of interpretation and application which arose after the publication of Regulation 833/2014.

This alert summarises the key changes made by this latest Regulation.

Scope of the Regulation Where previously the execution of obligations arising from contracts or agreements entered into prior to specified dates was permitted, this has been extended to cover ancillary contracts necessary for the execution of those main contracts.

Where previously certain articles referred to, for example, projects "in Russia", or natural or legal persons, entities or bodies "in Russia", these references have been amended to read "in Russia, including its Exclusive Economic Zone and Continental Shelf". This applies, for example, to the location of parties to whom Annex II goods are supplied, or where Annex II goods are to be used, in order for the authorisation requirements to apply.

Annex II goods and authorisation requirements Annex II to Regulation 833/2014 lists the goods in respect of which authorisation requirements apply. The Annex itself has been amended. The descriptions for the items listed for goods with CN codes 8413 50, 8413 60, ex 8431 39 00, ex 8431 43 00 and ex 8431 49 have been replaced with new definitions.

Article 3 has been amended to clarify the nature of certain of the items which shall be included in Annex II (which are now referred to as "items" as opposed to "technologies"), and in respect of which licences shall not be granted:

a. Where previously it referred to "technologies suited to the oil industry for use in deep water oil exploration", Article 3 now refers to "items suited to oil exploration and production in waters deeper than 150 metres".

b. Where previously it referred to "technologies suited to Arctic oil exploration and production", Article 3 now refers to "items suited to oil exploration and production in the offshore area north of the Arctic Circle".

c. Where previously it referred to "shale oil projects", Article 3 now refers to "projects that have the potential to produce oil from resources located in shale formations by way of hydraulic fracturing; it does not apply to exploration and production through shale formations to locate or extract oil from non-shale reservoirs".

The same amendments are made to Article 3a, which contains a prohibition on the provision of certain services. The services covered remain the same (i.e. drilling, well testing, locking and completion services, and the supply of specialised floating vessels).

After publication of Regulation 833/2014, issues were raised as to the definition of terms such as "deep water" and "Arctic". These amendments provide some clarification. They also bring the EU measures more explicitly in line with those of the U.S., which define "deep water" as "greater than 500 feet" (500 feet being 152.4 metres).

Article 3(5) has been amended to include additional circumstances in which either the competent authorities may grant authorisation for the sale, supply, transfer or export of listed items, or in which no authorisation is required:

a. The authorities may grant an authorisation where the sale, supply, transfer or export is necessary for the "urgent prevention or mitigation of an event likely to have a serious and significant impact on human health, safety or the environment".

b. In "duly justified cases of emergency", no prior authorisation is required, provided the competent authority is notified within five working days after the sale, supply, transfer or export has taken place, providing details of the relevant justification.

Similarly, under Article 4(3), technical assistance, brokering services, financing or financial assistance in respect of Annex II goods may be provided without prior authorisation, in duly justified cases of emergency, on condition that the competent authority is notified within five working days after the provision of the services.

Financial services Article 5(3) of Regulation 960/2014 prohibits, directly or indirectly, making or being part of any arrangement to make new loans or credit with a maturity exceeding 30 days to any legal person, entity or body listed in Articles 5(1) and 5(2) (the Article 5(3) Prohibition).

Regulation 960/2014 provides the following two exceptions to the Article 5(3) Prohibition:

i. Loans or credit that have a specific and documented objective to provide financing for non-prohibited imports or exports of goods and non-financial services between the Union and Russia.

ii. Loans that have a specific and documented objective to provide emergency funding to meet solvency and liquidity criteria for legal persons established in the Union, whose proprietary rights are owned for more than 50% by any entity listed in Articles 5(1) and 5(2).

The Amending Regulation amends exception (i) as above, such that the Article 5(3) Prohibition does not apply to loans or credit that have a specific and documented objective to provide financing for non-prohibited imports or exports of goods and non-financial services between the Union and "any third State, including the expenditure for goods and services from another third State that is necessary for executing the export or import contracts".

Under Regulation 960/2014, the Article 5(3) Prohibition relates only to "new loans or credit" after 12 September 2014.

A new Article 5(4) is added by the Amending Regulation which states that the Article 5(3) Prohibition shall not apply to "drawdown or disbursements made under a contract concluded before 12 September 2014 provided that the following conditions are met:

a. All the terms and conditions of such drawdown or disbursements:

i. (i) Were agreed before 12 September 2014; and

ii. (ii) Have not been modified on or after that date; and

b. Before 12 September 2014 a contractual maturity date has been fixed for the repayment in full of all funds made available and for the cancellation of all the commitments, rights and obligations under the contract."

Article 5(4) also states that "the terms and conditions of drawdowns and disbursements referred to in point (a) include provisions concerning the length of the repayment period for each drawdown or disbursement, the interest rate applied or the interest rate calculation method, and the maximum amount".

The Amending Regulation deletes the previous statement at Recital (6) of Regulation 960/2014: "Loans are only to be considered new loans if they are drawn after 12 September 2014". This clarifies that new or further draw downs may be made under pre-existing loan agreements entered into before 12 September provided that the conditions set out at new Article 5(4) are met.

There has been no change to the persons subject to the restrictions in Article 5.

On 5 December 2014, HM Treasury also published a notice that draws attention to the amended financial restrictions related to the provision of loans under the Article 5(3) Prohibition. The notice states that "the European Union is separately publishing advice on the application of sanctions under Regulation 833" and that this advice "will be published in due course".

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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