On 21 February 2022, the Russian Federation declared to recognise the non-government controlled areas of Donetsk and Luhansk as independent republics. As of 24 February 2022, Russian troops have launched military operations against Ukraine. In response, the European Commission and European Council have stated that these actions constitute a violation of international law, and Ukraine's territorial integrity and sovereignty.
As a consequence, new EU sanctions against the Russian Federation were adopted on 22 and 23 February 2022. These first packages included sanctions against members of the Russian State Duma, sanctions against additional individuals and entities who contributed to the undermining or threatening of the sovereignty and independence of Ukraine, restrictions on economic relations with the non-government controlled areas of Donetsk and Luhansk, and restrictions on the ability of the Russian state and government to access the EU’s capital and financial markets and services.
During a special meeting of the European Council on 24 February 2022, further restrictive measures were announced, in close cooperation with the EU’s transatlantic partners. The sanctions package further specified on 25 February 2022 is built on five pillars: the financial sector, the energy sector, the transport sector, export controls and a ban on export finance, and visa policy. Then on 26 February 2022, four more measures were added, including removing selected Russian banks from the SWIFT messaging system.
These developments severely impact the ability of companies to do business and to enter into certain transactions involving Russian nationals, entities, economic sectors, or projects. For this reason, AKD has prepared a high-level Q&A.
- What sanctions do I need to worry about, regarding Russia?
- What types of sanctions are put in place by the EU against Russia?
- Do the sanctions only hit exports, or also imports?
- What sectors are hit by the new economic restrictions on business with Donetsk and Luhansk?
- What exactly is it that I cannot do that I previously could do, when it comes to doing business with sanctioned individuals?
- Which persons do I have to check?
- I have already committed to certain services or transactions, indirectly involving newly sanctioned persons. What to do?
- I want to avoid litigation and liabilities because of changing sanctions. What can I do?
- I have designed a construction that I believe circumvents the restrictions imposed by the EU, like using intermediaries and off-shore entities. Am I good to go?
- I have some further questions. Who can I contact at AKD?
What sanctions do I need to worry about, regarding Russia?
The EU Member States enforce sanctions imposed by the European Union; they do not have unilateral sanctions in place. Apart from the EU, the United States and the United Kingdom each have different sanction regimes, which have been expanded in scope significantly over the past days. This means that apart from checking for applicable EU sanctions, companies should also check whether US or UK sanctions could (directly or indirectly) apply. These sanctions might have a wider scope and might target other persons than the sanctions imposed by the EU.
What types of sanctions are put in place by the EU against Russia?
The EU has imposed various types sanctions of the following type targeted specifically against Russia. First, there are sanctions targeting specific economic sectors.
- Military: Importing and supplying goods and services that can be used for military purposes is sanctioned. This includes an arms embargo and providing military goods and services.
- Technology: It is prohibited to export ‘dual-use’ goods and technology (goods that may be used in both a civil and military context). This will be expanded by including restrictions on exports of certain goods and technology which might contribute to Russia’s technological enhancement of its defence and security sector, like semiconductors or cutting-edge technologies.
- Energy: The EU has already put in place specific sanctions relating to Russia’s oil industry. Broadening the already existing restrictions, the EU will prohibit the sale, supply, transfer or export to Russia of specific goods and technologies in oil refining, and will introduce restrictions on the provision of related services.
- Transport: The EU will introduce an export ban covering goods and technology in the aviation and space industry. Furthermore, it will be prohibited to provide insurance, reinsurance, and maintenance services related to those goods and technology. This includes providing related technical and financial assistance.
Apart from sanctions relating to specific industries or services, the EU has targeted specific persons and legal entities – aiming to cut Russia’s access to the most important capital markets.
- This includes a prohibition to deal with transferable securities and certain money-market-instruments of specifically listed entities (and entities acting on their behalf), and providing loans to specifically listed entities (and entities acting on their behalf).
- Secondly, there are restrictions on financing the Russian Federation, and its government and central bank. Also, measures will be put in place preventing the Russian central bank from undermining the EU sanctions.
- The EU will prohibit the listing and provision of services in relation to sharesof Russian state-owned entities on EU trading venues.
- The EU has proposed measures prohibiting the acceptance of deposits exceeding certain values from Russian nationals or residents, the holding of accounts of Russian clients by the EU Central Securities Depositories, as well as the selling of euro-denominated securities to Russian clients.
- Selected Russian banks will be removed from the SWIFT messaging system, disconnecting them from the international financial system.
With respect to certain individuals, the EU has instituted an asset freeze on certain listed natural persons and entities (and bodies associated therewith). These measures will apply to a total of 654 individuals and 52 entities. Furthermore, visa policies have been amended, and issuing ‘golden citizenships’ has been limited.
Finally, the EU instituted restrictions on economic relations with Crimea, Sevastopol, and the non-government controlled areas of the Donetsk and Luhansk oblasts.
Do the sanctions only hit exports, or also imports?
Both. The import restrictions mainly target military goods, and imports from specifically identified areas in Ukraine (Crimea, Sevastopol, and the non-government controlled areas of the Donetsk and Luhansk oblasts).
What sectors are hit by the new economic restrictions on business with Donetsk and Luhansk?
This pertains to the following sectors: (i) transport; (ii) telecommunications; (iii) energy; and (iv) the prospecting, exploration and production of oil, gas and mineral resources. The restrictions relate to selling, transferring, supplying and exporting goods and technology, as well as providing technical assistance, training and other services, and financing any of these prohibited activities. Furthermore, technical assistance, or brokering, construction or engineering services directly relating to infrastructure in these areas are prohibited.
What exactly is it that I cannot do that I previously could do, when it comes to doing business with sanctioned individuals?
An asset freeze essentially compasses of two things:
- All funds and economic resources belonging to sanctioned entities must be frozen, and
- No funds or economic resources can be made available to or for the benefit of such persons.
‘Funds and economic resources’ is defined very broadly. It includes assets of any kind (tangible and intangible), but also providing labour or services, insofar as it enables the latter to obtain funds, goods, or services. One has therefore to be extremely careful when doing business involving persons subjected to an asset freeze.
Which persons do I have to check?
First, of course, persons and entities listed as sanctioned entities must be checked for. However, the asset freeze extends to “natural or legal persons, entities or bodies associated with them”. That is why it is always important to fully understand the exact transaction structure and the parties ultimately involved in transactions and projects.
I have already committed to certain services or transactions, indirectly involving newly sanctioned persons. What to do?
Some of the sanctions have immediate effect, others allow for the execution of existing agreements. The first step, therefore, is to check whether the contemplated transaction is prohibited. If sanctions are applicable, the course of action depends on the exact agreements in place. That is why it is advisable to provide for changing sanction regimes in agreements. EU law contains a limitation of liability for a refusal to make funds or economic resources available (provided certain conditions are met, and with certain exceptions). Whether this limitation can be invoked, and how best to do this, of course depends on the specific circumstances.
I want to avoid litigation and liabilities because of changing sanctions. What can I do?
For any internationally operating business it is of crucial importance to make sanctions compliance part of its contracting process. This includes risk-based due diligence up front, and a standard contractual framework that provides for flexibility in the event of a changing regulatory environment. These can include repeated reps and warranties, sufficiently broad termination and suspension grounds, and audit rights.
I have designed a construction that I believe circumvents the restrictions imposed by the EU, like using intermediaries and off-shore entities. Am I good to go?
No. The sanction legislation contains several circumvention prohibitions. The rationale is that sanctions must have a practical effect, and not be blunted by circumventing them.
I have some further questions. Who can I contact at AKD?
At AKD, Sebastiaan Moolenaar, Vincent de Bruijn and Philippine Beerman are our primary points of contact.