National and International Sanctions Overview
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1. US SANCTIONS AGAINST THE RUSSIAN FEDERATION AND CRIMEA
US sanctions in response to actions of the Russian Federation in Ukraine were imposed in three stages. First executive order on target sanctions against Russian nationals and entities being specified by the Secretary of the Treasury was signed by the President of the United States on 6 March 2014. Target sanctions envisage travel bans and the freezing of US assets of individuals who had asserted governmental authority in the Crimean region without the authorisation of the Government of Ukraine and whose actions were found to undermine democratic processes and institutions in Ukraine.
The sectoral sanctions imposed on specified persons operating in sectors of the Russian economy identified by the Secretary of Treasury were done under Executive Order 13662 through Directives issued by OFAC pursuant to its delegated authorities. Sectoral sanctions prohibit transacting in, providing financing for, or otherwise dealing in debt with a maturity of longer than 30 days or equity if that debt or equity is issued on or after the sanctions effective date by, on behalf of, or for the benefit of the persons operating in Russia’s financial sector, their property, or their interests in property.
It should be noted, that the "50% rule" is applied in relation to sectoral sanctions. It means, among other things, that the property and interests in property of entities directly or indirectly owned 50 percent or more in the aggregate by one or more blocked persons are considered blocked regardless of whether such entities appear on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List) or the annex to an Executive order. Thus, in case a Ukrainian entity is owned 50% or more by a Russian financial or energy company subject to sanctions, those sanctions are applied to such Ukrainian company as well.
Moreover, the Treasury clarified that US persons and persons conducting business in or through the United States should avoid omission of originator or beneficiary address information in SWIFT messages involving individuals ordinarily resident in, or entities located in, Crimea, while doing payments. In addition, there is total prohibition for direct and indirect exportation or reexportation of goods, technology, and services (including financial services) from the United States to Crimea. It means, that Ukrainian subsidiary companies of US entities should avoid any payments and sale deals with Crimean entities, since such practices may be recognised as evasive and purported for circumvention of effective sanctions.
2. EU SANCTIONS AGAINST THE RUSSIAN FEDERATION AND CRIMEA
On 31 July 2014 the EU adopted a package of restrictive measures targeting sectorial cooperation and exchanges with the Russian Federation. The package consist of measures aimed at limiting access to EU capital markets for Russian State-owned financial institutions, an embargo on trade in arms, an export ban for dual use goods for military end use and end users, and restrictions on access to certain sensitive technologies particularly in the oil sector. The package was further extended on 8 September 2014 by the adoption of the Council Regulation (EU) No 960/2014 and amended on 4 December 2014 by the adoption of the Council Regulation (EU) No 1290/2014.
Those restrictive measures include, in particular:
- Prohibition for EU nationals and companies to buy or sell new bonds, equity or similar financial instruments with a maturity exceeding 30 days, issued by five major state-owned Russian banks, their subsidiaries outside the EU and those acting on their behalf or under their control, three major Russia energy companies and three major Russian defence companies. EU nationals and companies are also prohibited to provide auxiliary services related to the issuing of such financial instruments, such as brokering;
- Prohibition for EU nationals and companies to provide loans to five major Russian state-owned banks;
- Embargo on the import and export of arms and related material from/to Russia, covering all items on the EU common military list;
- Prohibition on exports of dual use goods and technology for military use in Russia or to Russian military end-users, including all items in the EU list of dual use goods. Export of dual use goods to nine mixed defence companies is also banned;
- Exports of certain energy-related equipment and technology to Russia are subject to prior authorisation by competent authorities of Member States. Export licenses will be denied if products are destined for deep water oil exploration and production, arctic oil exploration or production and shale oil projects in Russia.
- Prohibition for EU nationals and companies to provide services necessary for deep water oil exploration and production, arctic oil exploration or production and shale oil projects in Russia.
It should be noted that in general Ukrainian subsidiary companies of EU entities should not comply with the adopted restrictive measures. However, the scope of the Regulation envisaging those measures is extended to any legal person, entity or body in respect of any business done in whole or in part within the Union as well. Therefore, in case a Ukrainian company has branches, supply depots or factories within the EU, it is recommended to follow the restrictive measures to avoid liability for breach of sanctions.
In addition, the EU adopted strict sanctions against Crimea as against the occupied territory of Ukraine. In particular, following restrictions were imposed:
- Prohibition on imports originating from Crimea and Sevastopol unless accompanied by a certificate of origin from the Ukrainian authorities.
- EU nationals and legal entities are not allowed to invest in real estate or entities in Crimea, finance Crimean companies or supply related services.
- Prohibition to provide tourism services in Crimea, prohibition for European cruise ships to make calls at ports in the Crimean peninsula.
- Prohibition for export of certain goods and technology to Crimean companies or for use in Crimea in transport, telecommunications and energy sectors or for prospection, exploration and production of oil, gas and mineral resources. Providing of technical assistance, brokering, construction or engineering services related to infrastructure in the same sectors is also prohibited.
Ukrainian subsidiaries of European companies are generally recommended to comply with the listed restrictions, notwithstanding such sanctions are not extended to non-residents of EU Member States owned by EU nationals. This is because such sanctions are also extended to any legal person, entity or body in respect of any business done in whole or in part within the EU.
3. Ukrainian national sanctions against the Russian Federation
On 22 September 2015 Ukraine personal sanctions were imposed on a number of individuals and legal entities (mostly of Russian origin) associated with support of the continuing violation of the national sovereignty and territorial integrity of Ukraine. Restrictive measures were introduced under the Presidential Decree dated 16.09.2015 No.549/2015 "On Decision of the National Security and Defense Council of Ukraine dated 2 September 2015 "On Application of Personal Special Economic And Other Restrictive Measures (Sanctions)."
While sanctions on individuals are prohibit their entry into Ukraine and freeze their assets located in Ukraine, sanctions on legal entities can be classified under the following groups:
- Restriction and suspension of transit and traffic of resources through Ukraine;
- Ban on participation in public procurement;
- Freezing of assets and a ban on doing business in Ukraine;
- Ban on financing companies that are subject to the sanctions.
The most notable restrictive measures are sanctions against Russian transport companies. Thus, airlines that performed flights to Crimea after acquiring the peninsular had acquired the status of a temporarily occupied territory shall be prohibited to fly to Ukraine and transit passages through the airspace of Ukraine.
It should be additionally noted that the sanctions applied to sea ports of Kerch and Sevastopol provide for prohibitions or restrictions on the entry of foreign non-military vessels and warships into the territorial sea of Ukraine. Thus, it may be assumed that this is an official ban on any ships’ calls to these ports. It should be noted that these ports (and other Crimean ports) were closed previously. However, there was no direct ban for vessels to visit these ports. Anyhow, any visit of foreign vessels to Crimean ports would be considered by Ukraine a violation of its state border and of the temporarily occupied territory regime.
In its Decree dated 1 October 2015 No. 654 "On providing implementation and monitoring of efficiency of personal special economic and other restrictive measures (sanctions) the Board of the National Bank of Ukraine clarified that in case a block of assets measure is applied to a person then funds may be entered in the bank account, however, a bank should reject any payment document of an account's owner envisaging disposal of such funds. Also, payments to accounts of sanctioned persons to which the sanction of stoppage of financial transactions must not be provided, banks are obliged to reject any payment documents envisaging payments to accounts of sanctioned persons.
While there is a clear mechanism for block assets of sanctioned persons and prohibited transactions by banks, there are no instructions for other entities and institution on compliance with adopted sanctions. In practice, compliance with the sanctions regime is possible only if all those concerned regularly monitor the relevant lists of entities subject to sanctions and voluntarily refrain from actions that may violate the regime of restrictive measures. It is advisable for the Government to provide some clarifications on the effect of particular sanctions.
Additionally, it should be stressed that the relevant Law of Ukraine "On Sanctions" does not envisage any liability for breach of the sanctions regime.
Moreover, the Law of Ukraine "On Sanctions" does not contain the procedure for contesting imposed sanctions, so the sanctioned person should apply to the administrative court with a claim to reject the Decree of the President of Ukraine whereby the sanctions were imposed. Such a claim will be considered in ordinary procedure for administrative claim, so the burden of prove in regard to legality of imposed sanctions will be on the state authorities, in particular, on the President of Ukraine.
Please do not hesitate to contact us in case of any questions regarding the information above.
Counsel, Head of South Ukrainian Branch