Sanctions Briefing: Ukraine and Russia: where are we now?

6 March 2015 marked the first anniversary of the coming into force of Council Regulation (EU) No 208/2014, which froze the assets of certain members of the former government of Ukraine and was passed by the Council of the European Union in response to the escalating violence in Ukraine. Over a year on, the EU continues to pass sanctions legislation (with direct effect in EU member states) and looks set to continue to do so.

Key EU sanctions in force

Our previous sanctions updates explain in detail the main EU sanctions in force. Broadly speaking, there are three main categories of sanctions:

1. Asset freezes and visa bans: There is a prohibition on making funds or economic resources available to named individuals, and entities owned or controlled by such individuals.  The EU is operating two separate sanctions lists relating to the political crisis in Ukraine. The first relates to the collapse of the Ukrainian government in February 2014 and allegations that members of the former government were involved in the misappropriation of state funds. The second (and more extensive sanctions list) constitutes part of the EU’s response to actions by Russia, which it considers to have undermined and threatened Ukraine’s sovereignty and territorial integrity.  
    
2. Restrictions for Crimea and Sevastopol: In June 2014, Council Regulation 692/2014 came into force which bans the import of any goods into the EU which originated in Crimea or Sevastopol. Additionally, the regulation prohibits the provision by EU companies of financing, financial assistance, insurance or re-insurance relating to the import of such prohibited goods. On 30 July 2014 the restrictive measures in place were increased to include, amongst others, prohibitions on: (1) providing loans or other credit which would be used to (i) exploit oil, gas and other mineral resources and (ii) acquire or develop infrastructure in the transport, telecommunications and energy sectors in Crimea and Sevastopol; (2) providing any other financial assistance related to such sectors; (3) acquiring shares involved in the above sectors; and (4) the supply of specific equipment listed in the Regulation. The Regulation was further amended on 20 December 2014, which retained the import ban but replaced the trade and investment restrictions with a broader ban on investment in Crimea and Sevastopol.
    
3. Sectoral sanctions: In August 2014, the EU went beyond its previous targeted sanctions against individuals and entities and adopted a new range of ‘sectoral’ sanctions, in line with the approach that had already been adopted in the US. The ‘sectoral sanctions’ were extended on 8 September 2014 and 4 December 2014. These measures target the Russian financial services, military and energy sectors. They contain restrictive measures prohibiting, amongst others, EU investors from dealing or indirectly purchasing, selling, providing brokering or assistance in the issuance of “transferable securities” of certain Russian state-owned banks. The Russian banks currently listed are: Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB), and Rosselkhozbank.

For a more detailed analysis of the EU sanctions, please see our previous updates.

The Rosneft challenge

The EU sanctions and the UK legislation which give effect to them have not gone without challenge. In November 2014, the Russian oil company Rosneft sought to challenge the legality of the EU sanctions imposed on Russia (OJSC Rosneft v. Her Majesty’s Treasury and others [2015] EWHC 248 (Admin)).

According to the judgment of Green J, the activities of Rosneft (and its group companies) are said to include: (i) hydrocarbon exploration and production; (ii) upstream offshore projects; (iii) hydrocarbon
refining and (iv) crude oil, gas and product marketing in Russia and abroad. Its exploration activities take place in waters deeper than 150 metres and in shale formations.

Although the judgment did not set out the areas of Regulation (EU) 833/2014 that had directly affected Rosneft, it is likely that Rosneft would have been directly affected by, amongst others, Article 3(5) of the Regulation.  This Article  prevents a competent authority from granting authorisation for the sale etc. of prohibited technologies if the prohibited technologies are for projects pertaining to deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia.

Rosneft’s action for interim relief failed, but an expedited hearing of Rosneft’s challenge was ordered and heard in the English High Court in late January 2015. Rosneft had also brought an application (which is pending) before the General Court (part of the Court of Justice of the EU) for the annulment of the EU Regulations.

The High Court in turn referred a number of issues of EU law to the Court of Justice of the EU (“CJEU“) notwithstanding the pending application before the General Court. The wide-ranging referral to the CJEU includes questions relating to the validity of the EU Regulation and the UK implementing measures.

There are also questions relating to interpretation. The High Court noted that a ruling of the CJEU would be “of considerable importance in providing the domestic authorities with a definitive interpretation” of the relevant Regulation. This would help to ensure a “level playing field for all businesses operating within the EU“. Lawyers advising on EU sanctions frequently comment on the broad nature of the drafting of the legislation and the diverse approaches of enforcing authorities in different EU states.  The Court heard evidence from the Defendants to this effect:

“There has been discussion of the meaning of “financing or financial assistance” in relevant EU working groups.  It is clear from this that some other Member States have interpreted the phrase more narrowly than the UK.”

In light of these uncertainties, many parties will continue to adopt a conservative view when interpreting the sanctions provisions and to seek advice from the relevant competent authority where necessary.

What should you be doing?

Before Regulation 208/2014, transactions with Russia had arguably not attracted particular attention from an internal compliance perspective.  That has now changed.  Parties are carefully ascertaining beneficial owners and directors of counterparties to ensure that the risk of (for example) inadvertently providing funds or economic resources to a sanctioned person are mitigated.

In addition, EU parties involved in M&A are seeking to include specific sanctions warranties in transaction documents, including, amongst others, a warranty that the selling company (and the selling company’s group) is not a sanctioned entity.

Also, as part of their risk management, EU parties are also insisting on specific sanctions wording in agreements with Ukrainian/Russian counterparties (or indeed with any party outside of the EU) to ensure that there is a mechanism to deal with the applicability of sanctions.  The English law doctrine of frustration and a non-specific force majeure clause will not, as a rule, be sufficient protection.

What next?

It is likely that the EU will continue implementing further sanctions in this area for the time being. The CJEU judgment in the Rosneft  case is eagerly awaited and will hopefully provide guidance as to interpretation of the sanctions for those advising and those enforcing.