Sanctions, ownership and related issues

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

Published on 22nd Apr 2015

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

  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,
    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
     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
     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
  3. Sectoral sanctions: In August 2014, the
    EU went beyond its previous targeted sanctions against individuals and entities
    and adopted a new range of
    , in line with the approach that had already been adopted in the
    US. The ‘sectoral sanctions’ were extended on
    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 here.

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

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

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
, 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

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. 

Interested in hearing more from Osborne Clarke?

* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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