EU-Sanctions on Russia: it still takes two to dance a tango
Moscow/ Amsterdam, 16 January 2015
On 4 December 2014, the EU issued Council Regulation No 1290/2014 which in fact somewhat softens the sanctions already in force (enacted by EU Council Decision No 833/2014 of 31 July 2014 and Council Regulation No 960/2014 of 8 September 2014).
On 18 December 2014, Council Regulation No 1351/2014 was issued which amended the “Crimea” Regulation No 692/2014 and outlaws practically all investments in Crimea as well as deliveries of a very wide range of items, related services and all tourism in general.
What do the sanctions currently encompass? A summary:
- A list of persons and companies (also referred to as the EU freeze list) whose assets must be frozen and with whom no business should be done;
- An outright prohibition of export of military goods and a license requirement for dual use goods;
- A list of specific items (the “Oil Industry List”) which may only be supplied with an export license to the so called “difficult” (deep sea, arctic and shale) oil projects as well as services related to these projects;
- A prohibition to invest in Crimea and to supply a wide range of goods and services to companies located in Crimea;
- A prohibition to buy, trade or otherwise facilitate transactions with transferable securities with a maturity over 30 days from 5 major Russian state owned banks, 3 defense related companies and 3 oil companies or to be part of any loan arrangement in which these entities are the loan recipient;
What has changed since 4 December 2014 (relative to the sanctions in force since 31 July 2014)?
- The grandfathering rule for contracts concluded before the respective sanctions entered into force has now been expanded to “ancillary” contracts;
- The restriction to supply specific materials to “difficult” oil projects (deep sea, artic and shale oil) relates not only to projects in Russia itself (which includes only the land and the territorial waters) but also Russia’s Exclusive Economic Zone and its Continental Shelf. The following terms have been specified (in line with the recommendations already issued by the Dutch Ministry of Finance in August 2014):
o “Deep sea” relates to oil production and exploration in waters deeper than 150 meters;
o “Artic” means above the Arctic Circle (currently just over 66º N);
o “shale oil” specifically relates to projects that have the potential to produce oil from resources located in shale formations by way of hydraulic fracturing;
- With regard to “difficult” oil projects, the term “associated services” has been specified. These now seem to be restricted to “drilling, well testing, logging and completion services and the supply of specialised floating vessels”;
As of 18 December 2014, Crimea and Sevastopol have practically become no go areas for foreign investors and suppliers. Previously, the supply of specific key equipment to entities in Crimea or for use in Crimea was restricted, whereas infrastructural investments in the areas of transport, telecommunications or energy in Crimea or Sevastopol were not allowed. Now, any acquisition or investment (loan or equity) to an entity in Crimea of Sevastopol is no longer allowed. In addition, the supply of a very wide range of items (including, for example, pocket calculators) to entities in Crimea is no longer allowed. Special attention should be paid to the definition of “entity in Crimea of Sevastopol”: this includes not only entities which are primarily registered there but also “branches and other entities operating in Crimea or Sevastopol”.
The following areas give rise to some difficulties in that respect. Firstly, running potential customers and suppliers through the EU freeze list is not that difficult but may not be enough. You should also make sure that your counterpart is not more than 50% owned by or controlled by a sanctioned person. We have run all sanctioned persons through SPARK, a widely used Russian database for tracing relationships between companies and individuals and have put together a list of entities which are affiliated with sanctioned persons. Secondly, any loan arrangement (not only to Russian entities but, in principle, to any entity or person after 12 September 2014!) should not be used to indirectly finance the forbidden banks and entities. This poses the question whether or not a European company may finance its Russian subsidiary with working capital loan. The obvious answer may be: yes, but in order to rule out that money sent out as a loan indirectly ends up with the sanctioned banks and companies, there should be a purpose clause in every loan agreement and the loan recipient should be held accountable for it.
The analogy may not strike everyone as appropriate, but the new reality looks like a tango: contained passion and aggression, some fatalism and carefully synchronised steps are the name of the game for Russian business in 2015. The polonaise is definitely off.
We strongly recommend that you assess the impact of the sanctions for your current Russian business as follows:
- Counterpart due diligence: make sure the candidate is not on the EU freeze list and not on the list of affiliated Russian entities either;
- Contract and destination due diligence: if the contract is for delivery of goods or services, make sure the goods supplied are not on the Military Goods List, the Dual Goods List, the Oil Industry List, or, if the customer is located in Crimea or Sevastopol, on the Crimea List;
- Loan Due Diligence: if money is transferred as a loan or other financial instrument, it must be clear what the purpose of the financing is and the recipient should be held accountable for it, with the aim of the money not being provided to one of the sanctioned Russian banks, oil companies or defense related companies.
All EU companies must apply these rules but also any EU citizen, branches of EU companies in Russia and “active” subsidiaries (subsidiaries where the EU parent is actively involved). The anti-avoidance rules imply that any of the companies supplying loans, goods or services to Russian customers should make a reasonable effort to ensure that these do not end up with sanctioned persons or in sanctioned areas and document this. In addition, you are punished quicker if you did carry out a sanctioned transaction than if you were overcautious and did not do it. Auditors, banks and insurance companies will ask you for proof that your Russian business is clean, and such proof can only be collected in advance.
As a matter of fact, customer and contract due diligence are standard procedures for all professionally managed Russian companies and the disclosure of ownership structures is nothing extraordinary in a Russian business context. You should therefore not be afraid to upset your Russian business partners with these questions but carefully address them. By integrating sanction due diligence with already existing procedures from a Russian perspective, the vast majority of all intended transactions should still be possible.
In order to help you, we have prepared due diligence procedures and consolidated lists which can quickly help you to assess and mitigate your exposure to sanctions as well as a program to make your Russian business “sanctions proof”. Would you like to receive the free of charge “starters kit”, then please write to [email protected].
The information in this newsletter is of a general nature only and should not be relied upon as advise.