European Union: Sanctions Update - 2017 Roundup

Last Updated: 11 January 2018
Article by James Willn

Introduction

To say that 2017 has been an eventful year in the political sphere would be something of an understatement. We are still experiencing the aftershock resulting from several changes in 2016 including the unexpected UK Brexit vote and the US election of President Trump. Naturally, the changes above play a huge role in foreign policy, which ultimately dictates the role of sanctions in the current climate. Sanctions tend to be economical, highly political and are underpinned legally. We set out the most recent developments with regards to US, EU and UN sanctions against Russia and Iran respectively and provide an end of year update for 2017.

Russian Sanctions

Sanctions have been imposed on Russia by the US and EU since 2014 in response to Russia’s actions in the illegal annexation of Crimea and the destabilisation of Ukraine. The sanctions take a number of forms including visa bans and asset freezes on named parties, prohibitions targeted at Russian trade within Crimea and the provision of financing and assistance to the Russian financial, defence and energy sectors.

Whilst the EU and US regimes follow the same course and have the same aims, they are not 100% aligned and due consideration should always be made separately for each regime. We provide below the position as at the end of 2017.

US Regime

Earlier in September 2017, President Trump signed a bill passed by Congress imposing fresh sanctions on Russia, among other countries, named the "Countering America's Adversaries Through Sanctions Act". The bill provides sanctions for activities/entities concerning: (1) cyber security; (2) crude oil projects; (3) financial institutions; (4) corruption; (5) human rights abuses; (6) evasion of sanctions; (7) transactions with Russian defence or intelligence sectors; (8) export pipelines; (9) privatization of state-owned assets by government officials; and (10) arms transfers to Syria.

The bill in respect of these further US sanctions was passed in response to the conclusions drawn by US state intelligence departments that Russian President, Vladimir Putin, ordered an influence campaign in 2016 targeting the US presidential elections.

How these sanctions will be implemented in terms of executive orders from President Trump is yet to be seen.

EU Regime

The EU sanctions regime is mainly set out in Council Regulation (EU) No 269/2014 which continues to apply. Under article 17, the sanctions apply:

  • anywhere within the territory of the Member States'; 
  • on board an aircraft or vessel under the jurisdiction of a Member State;
  • to any national of a Member State whether inside or outside the territory of the Member States';
  • to any legal person/entity incorporated in a Member State; and
  • to any legal person/entity in respect of any business carried out within the territory of the Member States'.

In 2017, there has been no substantial update regarding EU sanctions, but it remains to be seen as to how the EU responds to changes in US policy towards Russia.

Specifically, the EU regime, as they stand currently, still apply the following restrictions:

  • Restrictions on engaging in transactions with individuals and entities appearing on a list initially set out in Council Regulation (EU) No 269/2014 as amended from time to time;
  • Restrictions targeting Russian activity in Crimea/Sevastopol. This includes bans on imports of goods from Crimea unless they have Ukrainian certificates, prohibition on investing in Crimean real estate and infrastructure, bans on exportation of goods/technologies used by the energy industry in Crimea, and bans on the provision of services in relation to infrastructure projects (Council Regulation (EU) No 692/2014); and
  • Restrictions on Russian entities in key financial, defence and energy industries, including (Council Regulation (EU) No 833/2014):

    • A prohibition on buying or selling new bonds, equity or similar financial instruments with a maturity exceeding 30 days and assisting in issuing such financial instruments and providing loans with a maturity exceeding 30 days. These restrictions apply in relation to five major state owned Russian banks, three major Russian energy companies, three major Russian defence companies and any subsidiaries of those entities outside the EU or those acting on behalf of or at the direction of those entities;
    • An embargo on the import and export of arms and dual use or related material from/to Russia and a prohibition on exports of dual use goods and technology for military use in Russia or to military end users; and
    • A prohibition on the provision of certain energy related equipment and technology to Russia without prior authorisation. Services for drilling, well testing, logging and completion services and supply of specialised floating vessels may not be supplied.

Where there is an EU element and the above provisions do come into play, it may be possible to apply for a license in respect of the potential project. Such a license would be applied for from the competent authority of the relevant Member State, where in our experience, the more sophisticated Member State authorities are generally quite cooperative, understanding of commercial issues and open to a discussion on licence requirements for projects and standalone contracts.

Considerations for Companies intending to carry out work in Russia

The impact of US sanctions on companies remains unclear in terms of application in the absence of executive regulations.

The EU sanctions apply to prevent persons (set out in Council Regulation (EU) No 692/2014) from dealing with specific Russian persons and carrying out specific activities. EU considerations, if any, for companies intending to carry out work with Russia involve various factors, including:

  • EU ownership of any entity contracting with a Russian counterparty;
  • EU nationals or passport holders at management level or otherwise employed; and
  • EU investors in the company.

If there is an EU element to a project / contract on the part of a company, generally, that element will have to be restricted and ring-fenced from participation in the project.

Other practical considerations

Even where a company is not subject to the sanctions regimes but intends to use EU and/or US banks in relation to a Russian transaction, the bank itself may continue to raise issues.

In particular, the use of Euros and Dollars which must be cleared by the EU or US banking system may prove difficult as the banks are themselves subject to sanctions on dealing with funds from listed Russian entities and individuals. This is the case even where the project is not itself subject to sanctions due to the lack of an EU element.

The EU domiciled banks use sophisticated software to identify sanctioned transactions and if detected are required to hold the funds pending investigation which can, in our experience, take a number of months to release if approved.

Iranian sanctions

Moving to Iran, the tough campaign language of President Trump, in particular against the 2015 Joint Comprehensive Plan of Action (JCPOA) entered into by the US, Iran, the EU and others, increased uncertainty over the viability of foreign investment into Iran in 2017. Whilst the JCPOA (the "nuclear deal") remains intact for now, President Trump's decision to decertify the agreement in October and the passing of a fresh round of congressional sanctions illustrates a more hawkish American policy towards Iran.

US Regime

The JCPOA was implemented on 16 January 2016 lifting the majority of US and EU sanctions in return for Iranian concessions regarding its nuclear program. The Nuclear Agreement Review Act of 2015 (INARA) required the President to certify Iran's compliance with the JCPOA every 90 days which was carried out until the Trump administration's decision to decertify the JCPOA in October this year. This is despite the fact that the UN International Atomic Energy Agency has continued to report that Iran is in compliance with the JCPOA. However, decertification did not void the agreement and despite the provisions of INARA, Congress missed (no doubt on purpose) the deadline of 12 December this year to propose an amended agreement and recommendation to President Trump on whether or not the US should reinstate sanctions, essentially pushing the decision back to President Trump.

With the next deadline for President Trump to certify the JCPOA being 15 January 2018, we will need to see if the JCPOA is decertified again and whether the Trump administration decides to impose sanctions through executive orders and/or discontinuing waivers of existing sanctions legislation.

It is worth remembering, that throughout all of this, the actions of the US (alone) will not bring about the dismantling of the JCPOA, where all remaining parties to it are firmly of the belief that Iran is complying with its obligations under the agreement.

Whilst there have been no direct nuclear-related sanctions, there has been a strew of legislation in response to Iran's purported ballistic missile programme which set out increased obligations and powers for the President to impose sanctions. The Countering America's Adversaries Through Sanctions Act and Iran Ballistic Missiles and Internationals Sanctions Enforcement Act passed by Congress this year set out various secondary sanctions against various groups including:

  • Any person or entity who knowingly contributes to ballistic missile development;
  • Foreign entities that import, export, or re-export prohibited material or facilitates the financing of such material;
  • Foreign entities that transfer goods or technology that assists Iran in developing ballistic missiles and other conventional weapons; and
  • Any person involved in activity that violates human rights.

The sanctions are, in our view, largely symbolic with no new major economic sectors being affected within Iran but it does indicate the direction that US policy is heading which is another consideration for commercial parties with interests in Iran.

EU and UN Regime

There have been no new EU sanctions on Iran with the exception of the European Council's decision in April 2017 to extend restrictive measures against persons and equipment involved in "serious human rights violations" for a further year. Similarly, there have been no new UN resolutions or attempts to pass a UN resolution imposing sanctions on Iran. The ratification of UN Security Council resolution 2231 in 2016 which endorsed the JCPOA lifted previous UN sanctions and remains intact.

The EU's opposition to discontinuing the JCPOA may prove telling for any future sanctions envisaged by the US. The EU's response to President Trump's decertification, was both unified and emphatic:

"We, the Leaders of France, Germany and the United Kingdom take note of President Trump’s decision not to recertify Iran’s compliance with the Joint Comprehensive Plan of Action to Congress and are concerned by the possible implications.

We stand committed to the JCPOA and its full implementation by all sides. Preserving the JCPOA is in our shared national security interest. The nuclear deal was the culmination of 13 years of diplomacy and was a major step towards ensuring that Iran’s nuclear programme is not diverted for military purposes. The JCPOA was unanimously endorsed by the UN Security Council in Resolution 2231. The International Atomic Energy Agency has repeatedly confirmed Iran’s compliance with the JCPOA through its long-term verification and monitoring programme. Therefore, we encourage the US Administration and Congress to consider the implications to the security of the US and its allies before taking any steps that might undermine the JCPOA, such as re-imposing sanctions on Iran lifted under the agreement.

Our governments are committed to ensuring the JCPOA is maintained…"

Commercial impact

Despite the uncertainty over new sanctions on Iran, 2017 has ushered in investment into Iran from Western companies with the energy sector being particularly prominent. In July 2017, the French company Total SA announced a $1 billion investment into an Iranian gas field whilst in September 2017, the UK company Quercus announced £600 million investment in an Iranian solar plant. The Iranian government have announced negotiations with various international oil companies including Shell and the Russian owned Rosneft which is predicted to lead to further energy contracts worth more than $20 billion in 2018. Since the implementation of the JCPOA, Iran already doubled its oil exports to 2.4m barrels per day in 2016 with a further increase expected for 2017 once the statistics are finalised.

2016 had the most significant transactions arising from the JCPOA in the aviation sector but this may well be disrupted by the change in US policy in 2017. Boeing's sale of 80 aircrafts worth a total of $16 billion to Aseman Air and the sale of 30 aircrafts to Iran Air, with the option to purchase a further 30 aircrafts for $6 billion was heralded as a marker of increased foreign investor confidence in Iran. The combined $22 billion sales were already approved by the US Treasury Department and export licences were provided in 2016. This is in addition to contracts made by Airbus to sell 100 aircrafts to various Iranian airlines in 2016 and 2017 which, despite Airbus not being an American company, required OFAC approval from the US Treasury department due to Airbus using American aircraft components. However, the Trump administration has already stated that they would review the aircraft export licences with concerns relating to the use of commercial aircrafts to supply terrorist groups and the Syrian government with equipment and personnel. More worrying is the draft Strengthening Oversight of Iran's Access to Finance Act introduced in November this year and being debated by the US Congress currently. If passed, the Act would require the Treasury Department to report on the authorised transactions related to the export and/or re-export of aircraft to Iran and whether the transactions will involve aircraft that may be used for activities currently sanctioned. This Act could potentially increase the risk of the Treasury department revoking existing licences granted to Airbus and Boeing and cast doubt on the various aircraft agreements made.

The commercial outlook for foreign investment in Iran going into 2018 appears positive with international companies signalling that they are prepared to invest in the country and the rising economic prospects for Iran demonstrating the commercial opportunities available. Nevertheless, the political uncertainty caused by the changing US policy may lead to potential reinstatement of sanctions and revocation of existing licences despite continued approval by the International Atomic Energy Agency and the EU of Iran's compliance with the nuclear agreement. It remains to be seen whether this political uncertainty will have a chilling effect on foreign investment in Iran.

Conclusion

As expected at the beginning of 2017, the change in US administration has resulted in a tougher US sanctions policy towards Iran but also Russia too. Sanctions passed by Congress targeting Iran have focused on the exporting and/or re exporting goods or technology that may be used for military purposes in response to Iran's involvement in Syria, whereas sanctions targeting Russia has largely focused on cyber-security and the Russian government's intelligence and defence sectors as a response to Russian hacking during the 2016 Presidential elections. Yet, the sanctions themselves are largely symbolic of the harsh political rhetoric and do not impose restrictions on any new major economic sectors whilst it is also unclear how they will be implemented by executive order from President Trump.

The lack of appetite within the UN and EU to introduce new sanctions is an interesting caveat to the hawkish US policy which may affect any significant sanctions to be imposed on Russia and the viability of the Iran nuclear agreement and its extensive sanctions relief. Commercial transactions in the energy sector in particular suggests that investors in both Russia and Iran have not been deterred by the sanctions imposed in 2017 but US political action in 2018 will again be a consideration for foreign investors.

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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