Ukraine Crisis: EU imposes broad sanctions package on Russia

As the Ukraine Crisis continues to deteriorate following the Russian decision to recognise the Ukrainian regions of Donetsk and Luhansk as independent entities and officially deploying Russian troops, the EU has imposed its first set of sanctions. Also the US and the UK have imposed sanctions. The present blog post addresses the sanctions package that was adopted by the EU late on 23 February 2022. The EU, like other jurisdictions, is expected to issue additional sanctions shortly, and we will keep reporting on those. The below Q&A provides you with all the information you need to gain a quick understanding of the EU’s Russia sanctions package of 23 February 2022.

What specific sanctions have been imposed? The sanctions imposed by the EU on Russia are far-reaching and cover several industries and individuals:

• Blacklisting key individuals and entities

The sanctions blacklist 336 members of the Russian State Duma who voted in favour of the recognition of the independence of Donetsk and Luhansk. These are listed in the Annex to Council Implementing Regulation (EU) 2022/261 of 23 February 2022 implementing Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine. In addition, 26 high profile individuals and entities have been blacklisted: Persons:

1. Sergei Shoigu, the Russian Defence Minister;
2. Anton Vaino, Chief of Staff of the Russian Presidential Executive Office;
3. Marat Khusnullin, Russian Deputy Prime Minister for Construction and Regional Development;
4. Dmitriy Yuryevich Grigorenko, Russian Deputy prime Minister, Chief of the Government Staff of Russia, and Chairman of the Council of the VTB Bank;
5. Maxim Gennadyevich Reshetnikov, Russian Minister of Economic Development, and Member of the Supervisory Council of the VTB Bank;
6. Nikolay Anatolyevich Yevmenov, Commander in chief of the Russian Navy;
7. Vladimir Lvovich Kasatonov, Deputy Commander-in-Chief of the Russian Navy;
8. Igor Vladimirovich Osipov, Commander in Chief of the Black Sea Fleet;
9. Oleg Leonydovych Salyukov, Commander-in-Chief of the Russian Ground Forces;
10. Sergei Surovikin, Commander-in-Chief of the Russian Aerospace Forces;
11. Sergey Vladimirovich Dronov, Commander of the Russian Air Force, and Deputy Commander-in- Chief of the Russian Air and Space Forces;
12. Violetta Prigozhina, owner of, inter alia, Concord Management and Consulting LLC;
13. Lyubov Valentinovna Prigozhina, owner of Agat LLC;
14. Denis Aleksandrovich Bortnikov, Deputy President and Chairman of VTB Bank Management Board;
15. Andrei Leonidovich Kostin, President of the VTB Bank Management Board, and member of the Supreme Council of the “United Russia” political party;
16. Igor Ivanovich Shuvalov, Chairman of State Development Corporation VEB.RF, and a member of the Council of the Eurasian Economic Commission;
17. Margarita Simonyan, Editor-in-chief of Russia Today (RT);
18. Maria Zakharova, Director of the Information and Press Department of the Russian Ministry of Foreign Affairs;
19. Vladimir Roudolfovitch Soloviev, Presenter of the Russia-1 channel and Rossia 24;
20. Konstantin Knyrik, runs MediaGroup News Front Ltd, and chief of the Crimean division of the Rodina Party;
21. Aleksey Konstantinovich Pushkov, Senator from Perm Krai, member of the ruling United Russia political party, and Chairman of the Commission on Information Policy; and
22. Pyotr Tolstoy, Deputy Chairman of the Russian State Duma, head of the Russian delegation at the Parliamentary Assembly of the Council of Europe (PACE), and TV-Host of “Vremya Pokazhet”.

Entities:

1. Internet Research Agency;
2. Bank Rossiya;
3. PROMSVYAZBANK; and
4. VEB.RF.

As usual under EU sanctions, blacklisting involves an asset freeze and a prohibition to make any funds or economic resources available, directly or indirectly, to or for the benefit of the blacklisted individuals and entities. That prohibition is very broad and essentially precludes making anything of value available to blacklisted individuals or entities, as well as to anyone owned or controlled by such blacklisted individuals or entities (see also below). The blacklisting also results in an EU travel ban for the blacklisted individuals. With respect to Bank Rossiya, PROMSVYAZBANK, and VEB.RF, there is a derogation allowing for the release of certain frozen funds or economic resources belonging to those entities, or the making available of certain funds or economic resources to those entities where such funds or economic resources are necessary for the termination by 24 August 2022, of operations, contracts, or other agreements, including correspondent banking relations, concluded with those entities before 23 February 2022.

• Financial restrictions

The measures impose a sectoral prohibition to finance Russia, its government, and its central bank. They aim at restricting their access the EU’s capital and financial markets and services. Specifically, the sanctions prohibit to directly or indirectly purchase, sell, provide investment services for or assistance in the issuance of, or otherwise deal with transferable securities and money-market instruments issued after 9 March 2022 by Russia and its government, the Central Bank of Russia, and any legal person, entity, or body acting on behalf or at the direction of the Central Bank of Russia. It is also prohibited to directly or indirectly make or be part of any arrangement to make any new loans or credit thereto. There are certain derogations from these prohibitions, namely for:

• drawdown or disbursements made under a contract concluded before 23 February 2022, provided that certain conditions are met; and
• loans or credit that have a specific and documented objective to provide financing for non-prohibited imports or exports of goods and non-financial services between the Union and any third State, including the expenditure for goods and services from another third State that is necessary for executing the export or import contracts.

These financial restrictions largely mirror the restrictions that already existed with respect to some Russian entities under the sanctions that were imposed in the light of the Russian annexation of Crimea and Sevastopol (see below).

• Trade restrictions on the Donetsk and Luhansk regions that are not under control of the Ukrainian government

These measures also target the breakaway regions of Donetsk and Luhansk that are not under the control of the Ukrainian government, including:

• an import ban on goods originating in those territories;
• a prohibition to provide, directly or indirectly, financing or financial assistance as well as insurance and reinsurance related to the import of such goods;
• an export ban for certain listed goods and technologies suited for the use in the following sectors:
  • transport;
  • telecommunications;
  • energy; and
  • the prospecting, exploration and production of oil, gas and mineral resources;
• a prohibition to provide, directly or indirectly, technical assistance or brokering services related to the goods and technology subject to the export ban, or related to the provision, manufacture, maintenance and use of such items to any natural or legal person, entity or body in those territories or for use in those territories;
• a prohibition to provide, directly or indirectly, financing or financial assistance related to the goods and technology subject to the export ban to any natural or legal person, entity or body in those territories or for use in those territories;
• a prohibition to provide technical assistance, or brokering, construction or engineering services directly relating to infrastructure in those territories in the sectors subject to the export ban, independent of the origin of the goods and technology;
• a prohibition to acquire any new, or extend any existing participation in ownership of, real estate located in those territories;
• a prohibition to acquire any new, or extend any existing participation in ownership or control of, entities in those territories;
• a prohibition to grant or be part of any arrangement to grant any loan or credit or otherwise provide financing, including equity capital, to an entity in those territories, or for the documented purpose of financing such an entity;
• a prohibition to create any joint venture in those territories or with an entity in those territories;
• a prohibition to provide investment services directly related to the activities listed above in those territories; and
• a prohibition to supply tourism services in those territories.

There are certain derogations from these prohibitions. For instance, the import ban does not apply to goods that have been granted a certificate of origin by the Government of Ukraine under the EU-Ukraine Association Agreement. There are also certain specific derogations for the execution obligations arising from contracts concluded before 23 February 2022. These are generally subject to an advance notification requirement to competent EU Member State authority, ranging from at least five to ten working days. These derogations generally also only apply for the execution until a certain specified date, such as 24 May 2022 or 24 August 2022, depending on the prohibition. There is also the possibility to request authorisations for several of the activities that would otherwise be prohibited, in certain limited circumstances, such as for official purposes, hospitals, or equipment for medical use. The abovementioned trade restrictions largely mirror the restrictions that already existed with respect to Crimea or Sevastopol (see below). What steps can businesses take to protect themselves?

• Screening of all counterparties

It is crucial to screen all counterparties, especially those that are Russian or could have links to Russia. This should include all existing and future customers and suppliers, but also other third parties including, but not limited to, joint venture partners, distributors, agents, etc. Of key importance is that the sanctions do not only cover the individuals and entities that have been blacklisted, but will also in principle trickle down to all entities that are “owned” or “controlled” by them. It is therefore important to understand the ownership and control structure of relevant counterparties. This can be a very challenging exercise. Under EU sanctions, ownership is typically considered as the possession of at least 50% of the proprietary rights of an entity or having majority interest in it. The criteria to assess control of an entity include:

• having the right or exercising the power to appoint or remove a majority of the members of the administrative, management or supervisory body of such an entity;
• having appointed solely as a result of the exercise of one's voting rights a majority of the members of the administrative, management or supervisory bodies of an entity who have held office during the present and previous financial year;
• controlling alone, pursuant to an agreement with other shareholders in or members of an entity, a majority of shareholders' or members' voting rights in that entity;
• having the right to exercise a dominant influence over an entity, pursuant to an agreement entered into with that entity, or to a provision in its Memorandum or Articles of Association, where the law governing that entity permits its being subject to such agreement or provision;
• having the power to exercise the right to exercise a dominant influence referred to in the previous point, without being the holder of that right;
• having the right to use all or part of the assets of an entity;
• managing the business of an entity on a unified basis, while publishing consolidated accounts; and
• sharing jointly and severally the financial liabilities of an entity, or guaranteeing them.

Of note, the fulfilment of the above criteria of ownership or control are rebuttable in a case by case basis.

• Trade

Trade with anyone in the Donetsk and Luhansk regions under that are not under control of the Ukrainian government is heavily restricted. It will therefore be of utmost importance to ensure that any dealings that might directly or indirectly involve those areas are identified and halted. Any such dealings can only proceed if it has been positively established that they would not be covered by the extensive restrictions, or fall under any of the exempted activities. This implies that companies will have to find ways to identify such dealings, based on, inter alia, the location of their counterparties.

• Review of financing and other arrangements

Companies may also want to review their financing and other contractual arrangements, to see if these include specific restrictions in relation to dealings involving sanctioned countries, jurisdictions or individuals or entities. This might be particularly relevant for companies who have any involvement in joint ventures with Russian parties or other forms of investments in Russia.

• Risk mitigation for additional blacklisting and sanctions

In order to mitigate risks associated with the upcoming additional sanctions, businesses may want to consider cash in advance terms for all Russian customers for business activities that are currently not restricted. In addition, businesses may want to check whether they have credit insurance coverage for failure to pay in case payment of their invoices by Russian customers for past, ongoing, or future business might become difficult, or even impossible. Businesses engaging in transactions with Russian counterparties should also review contractual arrangements to ensure that they have the right to terminate any transactions at any stage with immediate effect. Particular attention should be paid to the language of such contractual provisions so as to mitigate the risk of potential Russian countersanctions. Who must adhere to the sanctions? The sanctions apply to:

• EU nationals, whether located inside or outside the EU;
• any legal person, entity, or body, whether inside or outside the EU, which is incorporated or constituted under the law of an EU Member State;
• in respect to any business done in whole or in part within the EU;
• within the territory of the EU; and
• on board any aircraft or vessel under the jurisdiction of an EU Member State.

What are the legal instruments and when do they enter into force? The EU’s sanctions are laid down in:

• Council Regulation (EU) 2022/259 of 23 February 2022 amending Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine;
• Council Implementing Regulation (EU) 2022/260 of 23 February 2022 implementing Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine;
• Council Implementing Regulation (EU) 2022/261 of 23 February 2022 implementing Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine;
• Council Regulation (EU) 2022/262 of 23 February 2022 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine;
• Council Regulation (EU) 2022/263 of 23 February 2022 concerning restrictive measures in response to the recognition of the non-government controlled areas of the Donetsk and Luhansk oblasts of Ukraine and the ordering of Russian armed forces into those areas;
• Council Decision (CFSP) 2022/264 of 23 February 2022 amending Decision 2014/512/CFSP concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine;
• Council Decision (CFSP) 2022/265 of 23 February 2022 amending Decision 2014/145/CFSP concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine;
• Council Decision (CFSP) 2022/266 of 23 February 2022 concerning restrictive measures in response to the recognition of the non-government controlled areas of the Donetsk and Luhansk oblasts of Ukraine and the ordering of Russian armed forces into those areas; and
• Council Decision (CFSP) 2022/267 of 23 February 2022 amending Decision 2014/145/CFSP concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine.

The sanctions entered into force on the day of their publication in the Official Journal of the European Union, i.e. 23 February 2022. They are available here. What about the previous EU sanctions relating to Russia? The sanctions that were imposed by the EU on 23 February 2022 are in addition to and build on those that were already imposed in 2014 in the light of the Ukraine crisis, and in particular the Russian annexation of Crimea and Sevastopol. Also prior to the 23 February sanctions package, these had been amended/extended from time to time, including with five additional designations on 21 February 2022, and include:

• travel bans and asset freezes on a number of legal and private persons;
• severe restrictions on trade with Crimea and Sevastopol;
• restrictions on the access to EU primary and secondary capital markets for certain specific Russian banks and businesses;
• an arms embargo on Russia;
• an export ban for dual-use goods for military use/end users; and
• export restrictions on certain sensitive technologies that could be used for oil production and exploration.

What’s next? Right after the publication of the EU’s first sanctions package, Russia has taken further actions that are considered by the EU and its allies to further destabilise Ukraine. President von der Leyen has already announced that, in reaction to those latest developments, the EU will impose additional sanctions, targeting strategic sectors of the Russian economy by blocking their access to key technologies and markets and stopping the access of Russian banks to the European financial market. Like with the first package of sanctions, the EU intends to remain closely aligned with partners and allies. Depending on how the situation unfolds, (additional) sanctions could also be imposed on Belarus and the Moldovan breakaway region of Transnistria. Steptoe’s Economic Sanctions team in Brussels, London, and Washington are closely following developments and are able to assist you with any sanctions related issues you may have. Watch this space.