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Sanctions Newsletter (Issue 1, 2015)

Recent Developments in Sanctions Policies by Western Countries and the Russian Federation

Since December 2014, the principal focus of Western sanctions against the Russian Federation has been on Crimea and Sevastopol. New and potentially far-reach responses are being considered in the Russian State Duma.

European Union expands restrictions on business transactions, investment, and technical assistance.

On 29 January 2015 in Brussels, the ministers of foreign affairs of the European Union countries agreed to extend until September 2015 the E.U. sanctions against Russia, which were introduced in March 2014. Representatives of the E.U. member states and the European Commission should prepare proposals to expand the list of persons effected. These proposals will be considered on 9 February 2015 at the meeting of the European Foreign Affairs Council.

This action followed the E.U. Council's release, on 18 December 2014, of Council Regulation 1351/2014 ("the E.U. Regulation"), which amended the previously adopted Council Regulation 692/2014 of 23 June 2014 and tightened sanctions against Crimea and Sevastopol.

Previously, the E.U. restrictions were aimed prohibiting the importation of the Crimean goods in violation of  Ukrainian export laws.  These restrictions also prohibited participation in infrastructure projects in transport, telecommunications, energy, and the development of mineral resources. The new rules established a complete prohibition on E.U.-based investments in Crimea and Sevastopol.

The restrictions of the E.U. Regulation have a broad application.  They apply to any entity having its registered office, central administration, or principal place of business in Crimea or Sevastopol, its subsidiaries or affiliates under its control in Crimea or Sevastopol, or branches and other entities operating in Crimea or Sevastopol. However, paragraph 7 of the E.U. Regulation exempts the conduct of legitimate business with entities outside Crimea or Sevastopol, when there are no reasonable grounds to determine that the related goods or services are for use in Crimea or Sevastopol.

The E.U. Regulation defines "investment services" to include:

  1. reception and transmission of orders related to financial instruments;
  2. execution of orders on behalf of clients;
  3. operating personal accounts;
  4. portfolio management;
  5. investment advice;
  6. underwriting of financial instruments or placing of financial instruments on a firm commitment basis;
  7. executing financial instruments without a firm commitment basis; 
  8. any trading services.

These investment services are prohibited when they are directly related to the following actions, which are also prohibited:

  1. to acquire any new, or extend any existing participation in, ownership of real estate located in Crimea or Sevastopol;
  2. to acquire any new, or extend any existing participation in, ownership or control of an entity in Crimea or Sevastopol, including the acquisition in full of, or the acquisition of shares and other securities of a participating nature of, such an entity;
  3. to grant, or be part of any arrangement to grant, any loan or credit, or otherwise to provide financing, including equity capital, to an entity in Crimea or Sevastopol, or for the documented purpose of financing such an entity;
  4. to create any joint venture in Crimea or Sevastopol or with an entity in Crimea or Sevastopol.

These restrictions do not apply to obligations arising from contracts concluded before 20 December 2014 or additional agreements necessary for the performance of such contracts, provided that the competent authorities have been notified within five days.

Annex II of the E.U. Regulation specifies certain restricted goods and technology, and prohibits their sale, supply, transfer, or export to any person or entity in Crimea or Sevastopol, as well as direct or indirect financing, financial assistance, technical assistance, or brokering services related to them. These prohibitions are not applicable until 21 March 2015 with respect to obligations arising from agreements concluded before 20 December 2014, or ancillary agreements that are necessary for the execution of such contracts.

The E.U. Regulation also prohibits the provision of tourism-related services in Crimea or Sevastopol.  In particular,  no flagged vessel of an E.U. member may provide cruise services, or enter into any port situated in the Crimean Peninsula. The Regulation allows exceptions for maritime emergencies, as well as obligations arising from agreements concluded before 20 December 2014, or additional agreements necessary for the execution of such contracts. Competent authorities may also allow exceptions for consular purposes, in emergency situations, or if there is a risk of “severe adverse consequences."

U.S. imposes sanctions, but with exceptions.

Section 1 of Executive Order 13685, issued by President Obama on 9 December 2014, forbids legal entities and individuals from the United States ("United State persons") to make new investments in Crimea, as well as to import into the United States any goods, services, or technology from Crimea.

It also prohibits the exportation, re-exportation, sale, or supply from the United States, or by a United States person, wherever located, of any goods, services, or technology to Crimea. Also prohibited is any approval, financing, facilitation, or guarantee by a United States person, wherever located, of a transaction by a foreign person when it violates these prohibitions.

 All property and interests in property that are located in the United States and owned by the following persons, should be blocked, if the owners:

  1. operate in Crimea;
  2. are the leaders of an entity operating Crimea;
  3. are owned or controlled by, or have acted or purported to act for, or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to the Executive Order; or
  4. have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to the Executive Order.

Simultaneously with the issuance of Executive Order 13685, the President issued several exceptions, or licenses, to its application. General License 4, for example, permits transactions involving agricultural commodities, medicines, medical supplies, and replacement parts. General License 5 establishes a transitional period until 1 February 2015 with respect to the winding up or termination of transactions and contracts concluded before 20 December 2014.

On 30 December 2014 the United States further relaxed the provisions of Executive Order 13685 to the extent of permitting U.S.-domiciled financial institutions to make payments in Crimea and from its territory, when such transfers are made by individuals residing in Crimea, provided that the transactions are not for business purposes and do not involve accounts owned or controlled by sanctioned persons.

Transactions related to the receipt and transmission of telecommunications, as well as the transfer of mail and parcels in Crimea also are now permitted. However, other activities, such as providing for telecommunication equipment and technologies, and allowing for telecommunications transmission facilities (satellite or terrestrial networks) are still prohibited under the U.S. sanctions regime.

The Russian response of 20 January 2015

In response to the E.U. and U.S. sanctions against Crimea and Sevastopol, the Russian Ministry of Foreign Affairs announced its readiness "to react adequately on... the so-called restrictive measures towards all Russian citizens and legal entities."

On 20 January 2015,  Bill 662902-6, On Amendments to Certain Legislative Acts of the Russian Federation, was adopted on the first reading almost unanimously. Despite the fact that the bill itself is not a "sanctions restrictions" in the traditional sense, it can be regarded as an expected reaction of the Russian Federation to the actions of the Western countries.

Bill 662902-6 is also known as On Undesirable Foreign and International Organizations. It amends Federal Law 272-FZ (28 December 2012), On Measures Against Persons Involved in Violations of Fundamental Human Rights and Human Freedoms and Freedoms of the Citizens of the Russian Federation.

The bill recognizes that certain activities of foreign or international organization may be deemed undesirable on the territory of the Russian Federation, and contrary to the constitutional order, morality, rights, and lawful interests of other persons.  The law requires that such a foreign or international organization may be designated by the General Prosecutor Office of the Russian Federation (in coordination with the Ministry of Foreign Affairs of the Russian Federation) as posing a threat to the defense or security of the State or public order, or to the public health.  Within three days, such a decision would be sent to the Ministry of Justice of the Russian Federation for the purpose of putting the organization on the official list of undesirable foreign and international organizations. The list is published in an all-Russia periodical selected by the Government of Russia, as well as on the official website of the Ministry of Justice.

When an organization is listed as an undesirable organization, it is subject to restrictions and prohibitions such as:

  1. the prohibition against creating structural units of undesirable foreign or international organizations on the territory of the Russian Federation;
  2. sanctions against organizations involved in extremism or terrorism;
  3. a ban on the  dissemination of information materials, published by an undesirable foreign or international organization or distributed by it, including storage or proliferation on the Internet.

The bill provides penalties for illegal activity by listed undesirable foreign or international organizations, and would introduce Article 20.33 to the Russian Federal Code of Administrative Offenses, which would include these administrative fines:

  • RUB 20,000 for the organization engaging in prohibited activities (in the absence of a criminal offense), and a fine of RUB 10,000 for individual organizers and participants;
  • RUB 10,000 for citizens, RUB 50,000 for officials, and RUB 100,000 for legal entities who receive money or other property from listed organizations

Under the proposed amendments, repeated offenses could result in significantly more severe penalties under the Federal Criminal Code, such as:

  • fines of RUB 300,000 to RUB 500,000 for establishing and participating in the activities of a listed organization ;
  • forfeiture of salary or other income for two to three years;
  • forced labor for up to five years, with restraint on liberty for up to two years;
  • arrest for four months to six months;
  • two years imprisonment, with the deprivation of the right to occupy certain positions or engage in certain activities for up to ten years.

A person may be relieved from criminal liability if his or her actions on behalf of a listed undesirable organization do not contain other elements of a crime, or if he or she voluntarily terminates participation in the activity of the listed foreign or international organization.

Finally, the legislation would bar persons participating in the activities of listed undesirable organizations from entry into the territory of the Russian Federation, expanding the list of grounds for exclusion in Article 26 of the Federal Law 114-FZ (15 August 1996) On the Order of Departure from the Russian Federation and Entry into the Russian Federation.

The challenges for businesses and investors in Crimea and Sevastopol

Foreign companies that operate or invest in Crimea or Sevastopol should evaluate all of the possible risks from this recent wave of sanctions.  It might be necessary to make temporary, or even permanent, changes in business models, projects, plans, and agreements. 

Analysts of the ART DE LEX International Sanctions Group monitor systematically the recent and pending legislation to identify the risks that might result for companies, private organizations, individuals, and other legal entities.

For more information please contact one of the ART DE LEX sanctions specialists.