Out-Law Guide 14 min. read
01 Jun 2022, 3:20 pm
New sanctions are coming into force and existing sanctions are being amended without notice or often with no or little lead in time to comply. There are similarities between the UK, EU and US laws but there is not uniformity and navigating Russian sanctions has become a maze of complexity. In addition, formal guidance from the regulatory authorities on the meaning and practical application of the sanctions is either not issued, is not comprehensive or is issued weeks after the law came into force.
Editor's note 1/06/22: This is a general guide which does not constitute legal advice. The guide is up to date as at 1 June 2022 and at the time of reading points may have been superseded by additional sanctions or formal guidance from the sanctions authorities. Before proceeding with any Russia-related business, the updated position should be ascertained and specific legal advice should be taken. The EU has announced its sixth package of sanctions. Ursula von der Leyen, the president of the European Commission, has indicated the measures will include designations of high-ranking military officers; the removal of Sberbank and two other banks from SWIFT; a ban on three Russian state-owned broadcasters; an export ban on accountancy, consultancy and “spin doctor” services; and an import ban on all Russian oil. Implementing legislation has not yet been published.
As a starting point, UK and EU businesses should seek to follow the sanctions of the UK, EU, US and any other jurisdictions involved in a Russia-related contract and then work backwards to see if there are exceptions or other reasons that mean the sanctions of these jurisdictions do not apply to the business or the contemplated transaction. Other reputational and commercial risks should be factored into the risk assessment process with consideration being given to payment risk and whether the business’ banks, insurers and essential suppliers will support any proposed transaction(s).
Where a new transaction is assessed to be lawful and capable of practical implementation, in case of additional sanctions being imposed or banks/suppliers withdrawing support, careful consideration should be given to contractual clauses covering sanctions, choice of law and jurisdiction, change of law, and force majeure.
Where a transaction is assessed to be unlawful or practically too difficult, consideration needs to be given to contractual notice and termination provisions.
UK sanctions apply to British citizens and British overseas citizens; UK incorporated/constituted entities; and any conduct by any persons that takes place wholly or partly in the UK or in UK territorial seas.
EU sanctions apply to nationals of EU Member States; EU incorporated/constituted entities within the territory of the EU; onboard any aircraft or any vessel under the jurisdiction of an EU Member State; and to any person in respect of business conducted in whole or part within the EU.
Under the Ireland/Northern Ireland Protocol, EU sanctions also apply to trade in goods between Northern Ireland and Russia.
US sanctions apply to US persons and businesses and transactions in the territory of the US (including transactions carried out in US dollars), however non-US persons can also be caught by US sanctions under the Countering America’s Adversaries Through Sanctions Act (CAATSA).
CAATSA created a framework for imposing 'secondary' sanctions on foreign (non-US) persons for engaging in various transactions, including:
In addition, generally, banking and insurance agreements will require compliance with UK, EU, US and other sanctions regimes.
The following is an overview of current prohibitions in place. To avoid the guide becoming a lengthy and complex document we have not set out every restriction and not all exceptions and carve-outs (including where authorisations can be obtained) have been detailed nor have the lists of items caught by the various prohibitions been replicated. It is therefore important to take specific advice should a business consider its goods, services, activities or transactions be potentially covered by sanctions.
Numerous Russian individuals and entities have been designated as financial sanctions targets restricting dealings with these persons and businesses. In the UK and EU, these persons/entities are referred to as designated persons. In the US, they are referred to as SDNs.
The designated persons/SDNs targeted include:
UK sanctions confer a power on the secretary of state from 5pm 30 March 2022 to provide that persons of a specified description are designated persons, enabling the UK government to designate persons by description rather than only by name.
The US Office of Foreign Assets Control (OFAC) and UK Office of Financial Sanctions Implementation (OFSI) have useful sanctions list search tools which can be used to identify those who are expressly listed as being subject to sanctions.
Under US law, an entity that is owned (50% or more) by an SDN (or SDNs in aggregate) is also deemed to be an SDN. Under UK and EU law, an entity that is owned or controlled by a designated person is effectively also sanctioned. These entities will often not be listed on the sanctions lists, although they are still caught by the relevant restrictions. As a result, it is important that businesses carry out Know Your Customer/Business Partner checks on entities where there is a suspected Russian connection to check that the entity in question is not owned by an SDN or owned/controlled by a designated person.
Extensive restrictions on the provision and receipt of goods, services and financing to the regions of Crimea, Donetsk and Luhansk and to persons and businesses from these regions have been imposed by the UK, EU and US.
The EU has imposed a prohibition on engaging in any transaction with:
A wind down arrangement was in place until 15 May 2022 for contracts concluded before 16 March 2022. The prohibition does not apply to transactions related to energy projects outside Russia where the targeted entity is a minority shareholder, nor to transactions “strictly necessary” for the purchase, import or transport of natural gas and oil, including refined petroleum products, as well as titanium, aluminium, copper, nickel, palladium and iron ore from or through Russia into the EU, the EEA, Switzerland, or the Western Balkans. For coal and other solid fossil fuels the prohibition will not take effect until August 2022. The European Commission’s current FAQ is being regularly updated and should be consulted for guidance on the practical application of restrictions. Not all issues are covered, however, so specialist advice is advised.
The UK and US have not, at least to date, imposed as extensive a restriction.
Under EU law, it is prohibited to enter into a joint venture with, acquire or extend an interest in, grant any new loan or credit to, or provide financing, including equity capital, to Russian and non-Russian entities operating in the energy sector in Russia. Authorisations can be obtained to act contrary to this prohibition where it is considered necessary for ensuring critical energy supply in the EU or in cases where the prohibition exclusively concerns an EU entity.
The US has prohibitions on investments and services related to the construction and maintenance of energy pipeline projects and exploration or the production for deepwater, Arctic, offshore or shale projects that have (i) the potential to produce oil in Russia (including maritime waters); or (ii) where initiated on or after 29 January 2018 that have the potential to produce oil in any location, and in which any person subject to the restriction has a 33% or greater ownership interest or an ownership of the majority of the voting interests.
The UK and the EU have extensive licensing requirements on export of goods/technology, technical services, financing, brokering and other services relating to specific oil and gas related equipment to persons in Russia, or for use in Russia, and prohibitions relating to deepwater, Arctic offshore and shale projects in Russia.
There are prohibitions, subject to licensing exceptions, on exporting and providing related services applicable to:
The US has banned the import of Russian oil, gas and coal. UK prohibitions capture the import, export and provision of technical services, financing and brokering services relating to oil, gas and coal from or into Crimea, and the EU has similar prohibitions which apply to Crimea, Donetsk and Luhansk.
An additional EU ban on the purchase, import or transfer of coal and other solid fossil fuels into the EU if they originate in Russia or are exported from Russia has been agreed. The prohibition does not apply to the execution of contracts concluded before 9 April 2022 until 10 August 2022.
The EU and UK have prohibited, directly or indirectly, the import of certain iron and steel products into the EU, or the purchase or transport of them, if they originate in, are located in, and/or have been exported from Russia.
Subject to exceptions for protecting safety and dealing with emergencies, the EU and UK have banned their respective ports from allowing access to Russian owned or chartered ships. The US has also said that ships sailing under the Russian flag or owned or operated by a Russian interest will not be allowed to dock in a US port.
Russian aircraft are not permitted to overfly or land in the UK, EU or US.
The UK has introduced a prohibition on directly or indirectly providing to, or for the benefit of, a designated person technical assistance relating to an aircraft or a ship. This prohibition is not contravened where: (i) there was no reasonable cause to suspect that the technical assistance was provided to, or for the benefit of, a designated person; or (ii) a failure to provide technical assistance would endanger the lives of persons on board or the safety of the aircraft or ship.
In the EU there are restrictions on the export of maritime navigation goods and technology to Russia, for use in Russia or for placing on board of a Russian-flagged vessel, as well as prohibitions on the provision of technical assistance, brokering services or other services related to such goods and technology. The EU has also introduced an export ban on jet fuel and fuel additives.
The following banks have been cut off from the swift messaging system meaning that they cannot use the financial messaging system to facilitate cross-border transfers of funds: Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank, VNESHECONOMBANK (VEB) and VTB bank. There are alternatives to SWIFT, but none are as efficient.
The UK, EU and US have had in place since 2014 sanctions that prohibit making new loans or credit available to, and dealings with and related to, certain money market instruments, equities and transferrable securities issued by certain Russian entities. These sanctions have been widened extensively by the EU.
As a starting point, UK and EU businesses should seek to follow the sanctions of the UK, EU, US and any other jurisdictions involved in a Russia-related contract and then work backwards to see if there are exceptions or other reasons that mean the sanctions of these jurisdictions do not apply to the business or the contemplated transaction.
The EU prohibitions now apply to:
They also apply to the following types of transactions connected to a long list of Russian entities:
These prohibitions apply to various entities including, but not limited to, Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB), Rosselkozbank OPK Oboronprom, United Aircraft Corporation and Uralvagonzavod, Roseneft, Transneft and Gazprom Neft. They also apply to non-EU entities more than 50% owned by those falling with the scope of the prohibition; and any entity, including EU entities, acting on their behalf, or at their direction. Similar restrictions have been imposed on the Central Bank of Russia, and any entity acting on its behalf or at its direction.
The US has also now imposed a ban on all new investment in the Russian Federation by US persons.
There is a need to consider the applicable payment terms. The European Commission has previously advised that delayed payment terms are not a form of loan or credit unless misused. However, it is less clear if that remains the case with respect to some of the new financing restrictions. Letters of credit can also be problematic. The safest course is to require payment in advance or immediately on invoicing.
Credit institutions are prohibited from accepting deposits exceeding €100,000 from Russian nationals or those residing within Russia, unless the deposit is necessary for cross-border trade between the EU and Russia that is not prohibited under the sanctions regime. The sale of euro-denominated transferrable securities, or units providing exposure to such securities, and the provision of certain services relating to transferrable securities to such persons after 12 April 2022 is also prohibited.
There are other prohibitions covering a range of activities linked to Russia targeting credit rating services; projects co-financed by the Russian Direct Investment Fund; the broadcasting activities of Russian media outlets; and insurance and re-insurance.
More recently the UK government has prohibited UK persons from providing internet services to or for the benefit of designated persons in the UK. As a result, restrictions are placed on:
The US, EU and UK announced that they would prohibit the export of certain professional services, including accounting and management consultancy services, to Russia. In the US this will take effect from 7 June 2022. No date has yet been set for implementation in the UK and EU.
The UK and the US have issued a number of general licences to enable otherwise prohibited trade to be wound down. Other restricted trade may be authorised by way of a specific licence. It should be noted that the export of dual-use goods and related services may require authorisation from the usual export control authorities as well as authorisation from or notification to the relevant sanctions authority of an EU member state and additional customs declarations.
The answer to this question will depend on a number of factors:
Any contractual requirements relating to giving notice of termination must be followed to the extent presently possible; in the current circumstances effective service on the strict terms of the contract can be difficult. There is a particular need to consider whether the sanctions actually prohibit performance. There may be exceptions or licensing grounds which may enable performance, at least from a legal perspective, to proceed. Termination in such circumstances could not be justified by sanctions.
Any party terminating risks facing a future damages claim if that termination was wrongful. Such a claim could be brought at any point within six years from the date of wrongful termination (five years in Scotland). This risk should be carefully evaluated before terminating, in light of the factors above and the potential loss caused to the counter-party if the termination is unlawful. The sanctions regime creates an additional risk that if a wrongful termination occurs, any Russian counterparty is subject to sanctions that prevents it entering alternative contractual arrangements to mitigate its loss.
Companies should also not assume that standard “compliance with law” or “force majeure” clauses provide adequate protection going forward. Specific sanctions and termination at will clauses are recommended.
The sanctions imposed by the US, EU and UK (and other countries such as Canada and Switzerland) are extremely complex. Given that breaching sanctions exposes businesses and their employees to the risk of committing a criminal offence, there is a need to proceed with care by checking each proposed transaction related to Russia on a transaction-by-transaction basis.
18 Jul 2022