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1. SBERBANK

2. VTB BANK

3. GAZPROMBANK

4. VNESHECONOMBANK (VEB)

5. ROSSELKHOZBANK

From the oil industry

ROSNEFT (wikipedia)
TRANSNEFT (wikipedia)
GAZPROM NEFT  (wikipedia)

The same restrictions on acces to the capital market apply to companies, which are owned by the above mentioned companies.

A special permit for exports of goods for the benefit of the oil and gas industry

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According to article 3 of the Ukraine Sanctions Regulation for the export and sale of certain goods to Russia, prior authorization is required. The goods wich are meant are listed in Annex II. It are mainly goods related to the oil and gas industry.

In different member states different authorities have the competence to issue such authorization. In the UK, the Export Control Joint Unit is the competent organ. But, according to article paragraph 2 of  article 3 of the Ukraine Sanctions Regulation, authorisation for export of the above mentioned goods granted in one member state shall be valid throughout the Union

Sanctions targeting Crimea

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From a legal point of view the peninsula Crimea and the city of Sebastopol are separate administrative units. That’s why, throughout the EU sanctions regulations it is stated over and over that they apply to the Crimea and Sebastopol. Because there is no difference between the sanctions that apply to the Crimea and to Sebastopol I have, for reasons of readability, opted to just mention Crimea below. Please keep in mind that everything that is said about Crimea below also applies to Sebastopol.

The main regulation applying to Crimea is Council Regulation (EU) No 692/2014 of 23 June 2014 (hereinafter: Crimea Sanctions Regulation) concerning restrictions on the import into the Union of goods originating in Crimea or Sevastopol, in response to the illegal annexation of Crimea and Sevastopol (I haven’t found a consolidated version unfortunately). Current EU sanctions against Crimea will remain in force until 23 June 2019. Unless the scene changes dramatically, they are very likely to be prolonged before that date.

Import ban for goods originating in Crimea

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Article 2 section a of the Crimea Regulation completely bans any imports of goods originating in Crimea. Section b of the same article prohibits providing financing or financial assistance as well as insurance and reinsurance related to such prohibited imports. Article 3 makes an exception for goods originating in Crimea, but approved for export by the competent Ukrainian authorities, in accordance with certain regulations and the Association Agreement between the EU and Ukraine.

Real estate in Crimea

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Later article 2 a was inserted into the regulation and with it a prohibition to acquire any new or extend any existing participation in ownership of real estate located in Crimea. If you are interested in Russian real estate law, please have a look at my earlier blog posts on this theme. It is also prohibited to acquire any new or extend any existing participation in ownership or control of an entity in Crimea.

No participation in an entity in Crimea

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Section of paragraph of the same article contains a prohibition to acquire any new or extend any existing participation in ownership or control of an entity in Crimea. Also founding a Joint Venture in Crimea is prohibited (section D of the same paragraph).

 No granting of loans to Crimean companies

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This prohibition is contained in article 2a paragraph 1 section c of the  Regulation.

No investment services regarding the above mentioned activities

What the term ‘investment service’ encompasses is laid down in article 1 section i of the Regulation. No investment services regarding the prohibitions contained in article 2a, paragraph 1, section a-d are allowed.

Legitimate business with Russian entities

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The second paragraph of article 2a explicitly states that the restrictions just mentioned regarding Crimea  do not apply to the conduct of legitimate business with entities outside Crimea or Sevastopol where the related investments are not destined to entities in Crimea or Sevastopol. This means you may legitimately engage in business activities with a Russian company, even if it has an establishment in Crimea, as long as the investments are not destined for Crimea. Doing business with Russian companies that have a presence in Crimea might prove troublesome in practice though.If they are dishonest with you about the Crimean destination of the goods, you will be the one infringing EU sanction law and the consequences of that might be serious. This explains Siemens offensive reaction when its  gas turbines, which were supposedly destined for mainland Russia, ended up in Crimea.

Goods and technology that may not be supplied to Crimea

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Article 2 b of the regulation refers to a list of goods in Annex II that may not be supplied to any natural or legal person, entity or body in Crimea. Nor may they be supplied if they are destined for use in Crimea.

Annex II mainly consists of goods which can be used in the transport, telecommunication energy, the prospection, exploration and production of oil, gas and mineral resources.

Article 2 c also prohibits to provide technical assistance, or brokering, construction or engineering services directly relating to infrastructure in Crimea in the sectors referred to in Article 2b(1) as defined on the basis of Annex II, independently of the origin of the goods and technology.

Exception for goods not destined to be used in Crimea

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The prohibitions of paragraph 1 and paragraph of article 2b however do not apply when there are no reasonable grounds to determine that the goods and technology or the services are to be used in Crimea.

In a way this is rather strange. So it would be in accordance with the law to sell the listed goods services and technology to a middleman in Crimea, as long as he offers a convincing explanation that they will not be used there.

Prohibiton to provide technical assistance, or brokering, construction or engineering services directly relating to infrastructure in Crimea or the other sectors mentioned in art. 2b par 1

These other sectors as mentioned are:

• transport
• telecommunications
• energy
• the prospection, exploration and production of oil, gas and mineral resources.

The same prohibition applies to any activities the object or effect of which is to circumvent the prohibitions referred to in paragraphs 1 and 2 (of art 2c of the Crimea sanctions Regulation).

Tourism activities in Crimea (article 2d)

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Paragraph 1 of article 2d bluntly determines that it shall be prohibited to provide services directly related to tourism activities in Crimea or Sevastopol.
The second paragraph goes on to say that this prohibition applies in particular to cruise ships

In particular, it shall be prohibited for any ship providing cruise services, to enter into or call at any port situated in the Crimean Peninsula listed in Annex III. This prohibition applies to ships flying the flag of a Member State or any ship owned and under the operational control of a Union shipowner or any ship over which a Union operator assumed overall responsibility as regards its operation.

This prohibition may only be ignored in emergency cases (paragraph 3).

A view of the port of Sebastopol. 

Further exception on the sanctions targeting Crimea (article 2e)

Article 2e of the Crimea Sanctions Regulation offers the possibility for competent authorities (member states institutions) to grant exceptions from the prohibitions contained in Article 2a(1) and Article 2b(2) for:

•  Consular missions or international organisations (a)
•  Projects exclusively in support of hospitals, or other public health institutions providing medical services or civilian education establishments (b)
• Appliances or equipment for medical use

Maintenance in order to ensure safety of existing infrastructure is, according to paragraph 2 also a ground to grant an exception from the prohibitions, that the competent authorities can refer to.

The competent authorities are given broad discretionary powers to grant (or not to grant) authorisation for otherwise prohibited activities in cases of urgent prevention or mitigation of an event likely to have a serious and significant impact on human health and safety, including the safety of existing infrastructure, or the environment.

Activities the object or effect of which is to circumvent the prohibitions

According to Article 4 of the Crimea S

COUNCIL REGULATION (EU) No 269/2014

of 17 March 2014

concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine sanctions Regulation it is prohibited to engage in such activities.

Ignorance is bliss?

According to Article 5 of the Crimea Sanctions Regulation actions shall not give rise to any liability if they did not know, and had no reasonable cause to suspect, that their actions would infringe the measures set out in this Regulation.

No compensation for the ‘bad guys’

Apparently some people and organisation could, at least theoretically claim damages for the changed landscape that was created by the introduction of the sanctions. Article 6 makes clear that, whatever happens, no compensation shall be given to the people who, according to the EU, are to blame for the current situation.

These are: People mentioned in Annex II of Council Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, as well as
any natural or legal person, entity or body acting through or on behalf of one of these persons.

Also people or entities, which have been found guilty of breaking the Sanctions law are not entitled to any compensation (c).

Entry ban

The EU denies entry to its territory for certain people, who it deems responsible for the current situation. This has been laid down in Council Decision 2014/145/CFSP of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine

Enforcement of EU sanctions

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As was mentioned already, enforcement of EU sanction is in the beginning a national matter. It are the competent authorities of a member state that should make sure the sanctions are complied with. The EU however, understandably tries to encourage the Member States to have some kind of uniformity regarding the compliance with and enforcement of sanctions law. To this effect the EU has published several documents, for example the European Commission’s  guidance note on the implementation of certain provisions of the Ukraine Sanctions Regulation and the Council has published the more generally applicable EU Best Practices for the effective implementation of restrictive measures. These are the documents the competent authorities are expected to rely on.

In the UK, for example, the Office of Financial Sanctions Implementation is charged with looking after compliance with the financial sanctions (obviously). In the Netherlands it are the Central Bank of the Netherlands and the financial market authority AFM that are competent in these areas. The penalties that may be imposed for breaching EU sanctions law may differ between one member state and another.

Brexit

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The United Kingdom has already announced that it will adopt new sanctions against Russia when it will have completed Brexit. It is, however, unclear what should be understood with ‘completion of Brexit’. This could mean the moment on which the UK formally will no longer be a part of EU, on 29 March 2018, or 31 December 2020, when the transition period will have ended.

US sanctions against Russia

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Like EU sanctions, US sanctions rules are scattered among different legislative instruments. The most important I will discuss here below.

The Magnitsky Act

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This bill was signed into law by president Obama in 2012. It intended to punish those responsible for the death of Russian tax accountant Sergey Magnitsky (wikipedia). Sergey Magnitsky allegedly discovered large scale corruption in Russia. He was himself arrested and  incarcerated in Moscow’s Butyrka prison, where he got sick, didn’t receive the adequate medical care and eventually died in custody in 2009.

In the beginning only people who were directly involved in the Death of Sergey Magnitsky were placed on the list.  Eventually more and more names were added to the Magnitsky list also of people who had nothing to do with the case with which it all began. People whose names are on the list are not allowed to enter the United States and to make use of its banking system.

In 2016 the US adopted the Global Magnitsky Act (GMA). GMA allows the US government to punish corrupt officials involved in human rights abuses anywhere around the world. With the adoption of GMA Sergey Magnitsky has been made, at least in the USA, into a global symbol of Human Rights Abuses and injustice in general. This is a thorn in the flesh of the Russian government. Before the election of president Trump Russia was lobbying hard to get the Magnitsky Act repealed.

Canada, Estonania. the UK, Latvia and Lithuania have adopted their own Magnitsky legislation.

CAATSA

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Immediately after the alleged annexation of Crimea the US has adopted sanctions against Russia. But only on the 2nd  of August 2017  “Countering American Adversaries Through Sanctions Act” (CAATSA) was adopted. CAATSA consolidates the US sanctions regime against Russia and other countries.

A presidential decree will no longer be enough

Maybe the most important change that has been introduced with CAATSA is that both imposing and withdrawing sanctions is no longer the sole prerogative of the American President. During the election process many considered that, if Trump would be elected, he might get rid of some of the sanctions. But with the adoption of CAATSA, he can no longer do this without the approval of Congress (sec. 216 CAATSA).

Regarding Russia, CAATSA focusses on sanctions in the following policy areas:

• Activities of the Russian Federation
  undermining cybersecurity (sec. 224)
• Russian crude oil projects (sec. 225)
• Russian and other foreign financial
  institutions (sec. 226)
• Sanctions with respect to significant corruption
  in the Russian Federation (sec. 227)
• Serious human rights abusers in the
  Russian Federation (sec. 228)
• Sanctions with respect to persons engaging in transactions
  with the intelligence or defense sectors of the Government of the Russian Federation. (sec. 231)
• Sanctions with respect to the development of pipelines in the Russian Federation. (sec. 232)
• Sanctions with respect to investment in or facilitation of privatization of
  state-owned assets by the Russian Federation. (sec. 233)
• Sanctions with respect to the transfer of arms and related materiel to Syria. (sec. 234)

The International Emergency Economic Powers Act

On the basis of International Economic Powers Act (IEEPA), the US president can establish that somewhere in the world, outside of the USA, an emergency is taking place, which is threatening the USA and adopt measures to deal with the threat.

In 2014 President Obama determined on the basis of IEEPA that the situation in Ukraine is a threat to USA.

And executive Order 13660—Blocking Property of Certain Persons Contributing to the Situation in Ukraine was adopted on the basis of IEEPA (and other legislation).

Extraterritorial effect of US sanctions

If you are neither a citizen nor a resident of the USA, you might assume that US sanctions against Russia won’t affect you. But you might want to reconsider this assumption!

By using the instrument of extraterritorial, or as they are known in the US, “secondary sanctions”, the American legislator imposes its will on the rest of the world.

In practice this means that, if you’re not acting in accordance with US sanctions you risk being targeted by US sanctions yourself, even if you’re not a US citizen or resident. Under President Trump unilateralism of the USA has further increased.

Extraterritorial sanctions have currently been mainly imposed against Iran. Many are critical of this practice. According to some extraterritorial sanctions are being used for protectionism for sectors of the domestic industry.

Even traditional allies express discontent and sometimes downright rebel against the increasing usage of secondary sanctions by the US. For example, because of new secondary sanctions against Iran, the EU has updated  an updated Blocking Statute. This is legislation that aims to mitigate the effects of secondary sanction throughout the EU. The Blocking Statute prohibits residents of the EU to comply with US secondary sanctions against Iran unless a special permit to comply with them has been obtained. There is no EU Blocking Statute to mitigate the effect of secondary sanctions against Russia. But the case with Iran is important to realise that, from a policy point of view, this is a possibility.

Sanction slapped on China for cooperating with Russia

An example of imposing secondary sanctions happened in december 2017. After China  had bought 10 Russian fighter jets from the Sukhoi company (wikipedia), the US imposed sanctions against China’s Central Military Commission. Understandably these measures were met with indignation in China

US sanctions targeting Crimea

On 10 March 2018 , shortly after the Crimea referendum took place President Obama signed Executive Order 13660. This Executive Order allows for the freezing of assets of people who were involved in the alleged annexation of Crimea.

Later in 2014 Executive Order 13685 was signed by Obama.

American sanctions targeting Crimea are laid down in Executive Order 13685 from 19 December 2014.

Based on these Executive Orders and CAATSA, the following is prohibited in relation to Crimea according to US law:

• For an American to invest in Crimea
• Import of goods, services and technology from Crimea
• Export from the US to Crimea of any goods, services and technology
• Financing or facilitating a prohibited transaction

US restrictions on access to the capital market

Americans and people residing in the US or companies having their domicile there are not allowed to grant loans to persons or entities on the Sectoral Sanctions Identifications List (SSI List) with a repayment term of longer than 14 days. This maximum repayment term has recently been shortened further, until the end of November 2017 it was 30 days.

US sanctions targeting the Russian energy sector

It’s not allowed to lend money to with a repayment term of longer than 60 days to certain Russian companies in the energy sector. Up till 28 November 2017 this maximum repayment term was 90 days.

In addition to these prohibitions to grant long-term loans, it is prohibited to export goods or technology for the benefit of the oil industry for carrying out activities underwater, at a depth of more than 500 feet (152.4 meters), for offshore activities in the Arctic and for shale oil for individuals on the SSI list.

US sanctions against the Russian defence industry

It is not allowed to grant loans with a repayment term of over 30 days to certain companies that are active in the Russian defence industry.

US Cyber Security Sanctions

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Both the FSB, the GRU and companies and individuals that have aided these 2 organisations have been sanctioned. The latest additions the list were:

Digital Security
ERPScan,
Embedi
Kvant Scientific Research Institute
Divetechnoservices, for delivering material to the FSB

Aleksandr Lvovich Tribun, the director Divetechnoservices
Oleg Sergeyevich Chirikov, was employed by Divetechnoservices
Vladimir Yakovlevich Kaganskiy , the owner of Divetechnoservices

The American bank accounts of these companies will be frozen. And American persons, companies and residents are not allowed to do business with them.

US sanctions targeting pipelines

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Investments in pipelines with a fair market value of at least 1 million dollars or with a total market value of more than 5 million dollars after 12 months are prohibited if such investment contributes significantly to the export possibilities of Russia (Sec 232 CAATSA).

Nordstream 2

US Secretary of Energy, Rick Perry, announced on 13 September 2018, during a visit to Moscow, to consider introducing sanctions for Nordstream 2. The Americans and many Eastern European countries are against the construction of this pipeline.

President Trump, however, has indicated that he does not intend to accept new sanctions because of Nordstream 2, although he is also an opponent of it.

New sanctions because of the Skripal Case

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According to the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991, within 60 days it has been established that a state has used chemical or biological weapons, sanctions should be imposed. Russia is deemed responsible for trying to kill the former Russian spy Skripal and his daughter with the aid of nerve gas Novichok.

Enforcement of and compliance with US sanctions

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The Office of Foreign Assets Control (OFAC) is responsible for picking persons and entities to whom sanctions should apply, on the basis of the legislation. In the legislation merely a global target for the imposition of sanctions is put forward. OFAC has a wide discretionary power for the placement of persons and entities on the sanction lists. OFAC is part of the US Treasury. Apart from that OFAC is also charged with compliance with and enforcement of the US sanctions.

OFAC maintains a site with so called Specially Designated Nationals (SDNs). SDNs are individuals or companies which are targeted by US sanctions. Here you can find the regularly updated list with SDNs, which currently consists of 1,172 pages, there are 2,885 Russian SDNs on the list currently. Their assets are blocked and U.S. persons are generally prohibited from dealing with them

Russia’s countermeasures

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Non-transparent reciprocity regarding sanctions against persons

After the USA and Canada had imposed sanctions on Russian officials after the alleged annexation of Crimea, Russia retaliated by publishing a list with 9 Americans and 13 Canadians who were denied access to Russia.

As the USA, the EU, Canada and other countries banned more and more Russian people from their territory, Russia followed suit. Russia, however no longer makes its retaliation measures publicly available, it no longer published lists of banned individuals. People would find out they were banned from entering Russia when they would try to cross the Russian border. It is therefore unclear how many people exactly are banned from entering Russia at the moment because of Russian countermeasures, also because most western politicians (they are usually the target of Russian countermeasures) didn’t plan to visit Russia anyway and thus never will find out that they aren’t allowed in.

Russia thus far has ignored pleas from European politicians to publish lists of banned people. Maria Zacharova, the spokeswoman of the Russian Ministry of Foreign Affairs  just gave away a hint, by saying that its countermeasures are aimed at people ‘with an agressive attitude towards Russia.’

People banned from entering Crimea

The State Council of Crimea (you could say Crimea’s own parliament) has published a list (in Russian language only) with people who are not welcome on Crimea. It is for a large part populated by Ukranian politicians.

The Russian embargo on food

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On august 6 2014 President Putin approved measures to stop imports of certain food into Russia. Later this was furher elaborated on and crystallized into the above mentioned list (the name of which is too ugly to translate). Probably this is the most famous Russian countermeasure. It is for sure in countries, which used to export a lot of food to Russia before these countermeasures were imposed, like the Netherlands and Poland.

The EU has prepared a translation of an older version of the list with the food that is subject to the Russian embargo.

But, unlike the EU’s website, Van Rhijn & Partners gives recent and up to date information. The list that is currently in force is the following:

• Meat of bovine animals, fresh, chilled or frozen
• Pork, fresh, chilled or frozen
•  Meat and edible offal of the poultry fresh, chilled or frozen
• Meat salted, in brine, dried or smoked
• Living fish, with the exception of:
  •  Atlantic Salmon (Salmo Salar)
  •  young Brown trout (Salmo Trutta)
  • young Rainbow trout (Oncorhynchus mykiss)
  • young turbot (Psetta Maxima)
• Fish and crustaceans, molluscs and other aquatic invertebrates
• Milk and dairy products
• Vegetables, edible roots and tubers
• Fruit and nuts
• Sausages and similar products of meat, meat offal or blood
• Finished products, including cheese and curd(cottage cheese) based on vegetable fats
• Foods (milk containing products on the basis of vegetable fats)

On 12 June 2018, these measures have been prolonged until the end of 2019. Although the Russian food embargo is meant to be a retaliation, Russia is also trying to use it to develop its agricultural sector and make its economy more self-sufficient.

Reactions to the sanctions among Russian business

Some Russian companies whose assets were frozen have appealed those decisions. One of them is  Almaz-Antey, which also happens to be the manufacturer of BUK missile (which shot down flight MH 17. But they were not succesful.

Rosneft has also made its way to court in an attempt to have the company eliminated from EU sanctions list. When that attempt failed their lawyer made the remark that the situation with the rule of law in the EU is sorrowful.

Transferring money back to Russia out of fear for sanctions

When in April 2018 the US slapped sanctions on Oleg Deripaska and Viktor Vekselberg, their companies lost billions of dollars within hours. Other Russian oligarchs in an attempt to prevent the freezing of their assets have moved them to ‘safer havens’. Large amounts of money have been transferred from western bank accounts back to Russia. Getting money that was earned in Russia back to Russia has traditionally been a policy goal of Putin. It’s ironic that the measures that were supposed to hurt him most, might have actually helped him in this case.

Restructuring

Both Deripaska and Vekselberg have decreased the stakes in their respective companies after they were hit by sanctions.

Panic on the market of bank deposits

Because of the volatility of the ruble many Russian citizens have put their saving away in another currency with Russian banks. After the Director of VTB bank (Russia’s second largest bank and also a target of sanctions) suggested that, if VTB would be deprived of using the dollar after additional sanctions had been slapped on it, bank deposits might have to be returned in rubles, instead of in the currency the money was put away in. The Head of Russia’s Central Bank, Elvira Naibulina, has already declared that that won’t happen. But at the same time the policy of the Central Bank is to discourage the use of the dollar in the Russian economy.

De-dollarization

As mentioned working without the dollar whenever possible is a policy goal of the Russian Central Bank. At the same time Russian officals try to reassure people that the dollar will not be completely banned from Russia.

Many critics mention that this policy to discourage the use of the dollar in Russia is mere wishful thinking. Many countries might prefer to work without the dollar, but this is not possible. The central role of the dollar in international trade is simply too strong. Banning the dollar from Russia would mean the end of free trade for Russia according to critics like Dmitry Potapenko.

Compliance with and enforcement of the Russian countermeasures

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Particularly the Russian food embargo had a big impact on the trade between the EU and Russia. In 2013, before the embargo the import of agri-food products into Russia from the EU amounted to a total of $15,5 billion. In 2016 it amounted to $ 6 billion (source).

According to official statistics, Russia has destroyed 26 thousand tons of food since August 2015.

Bypassing of the food embargo

When the Russian food embargo had just been introduced, many producers sought to bypass it by exporting their products to Belarus or Serbia, where they would be labelled as local produce and subsequently enter the Russian market as such. This, understandably led to conflicts between Russia and these countries. Nowadays controls on such practices are stricter.

Conclusion

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As the USA is increasingly acting unilaterally, the gap between US and EU sanctions against Russia widens. Unfortunately, this increases the level of uncertainty for western business in Russia. The trade relations between the EU and Russia are significantly more important than those between the US and Russia and therefore, the EU is not willing to adopt ever-stricter sanctions, as some American politicians advocate.

The effect of US sanctions on non-US companies is often still underestimated. With the growing discrepancy between American and EU sanctions, for some companies, it might come down to an analysis of what is more important to them, their US interests or their interests in Russia. The same trend can currently be observed in Iran. Big players, like the French oil and gas company Total, have pulled out of the country and smaller companies with little or no US presence have been looking to fill the gap left behind by bigger companies.

For any internationally operating company with activities in Russia, it is essential to make a proper risk analysis of doing business in Russia.

Such an analysis should start with checking whether your Russian counterparties figure on EU or US sanctions list, or are controlled by persons or entities on these lists. Van Rhijn & Partners can help you make a risk analysis of doing business in Russia and with proper Know Your Customer procedures for your Russian counterparties. This can also be done as part of our Due Diligence Services.

But it is important to realise that neither EU law, nor US law contain a prohibition of doing business in Russia. There are plenty of opportunities to do business and earn a profit in Russia. Van Rhijn & Partners is ready to help you seize these opportunities!