Both the United States and the European Union have issued calibrated Ukraine-related sanctions as a direct response to the recent political upheaval in Ukraine. Although both US and EU sanctions target certain persons for escalating the Ukrainian crisis, there is a budding rift in the international sanctions community. Specifically, the economic, structural and legal limitations of the EU make it unlikely that the EU will match US sanctions (already authorised but not issued) that directly target the Russian economy.

Although the initial US and EU sanctions targeting the Russian Federation appear to have been in close lock step, a closer review of who has been designated under each regime reveals a different story. There are a total of 64 persons designated in the two regimes, but only 18 persons (less than 29%) are designated under both regimes. Indeed, 13 members of President Vladimir Putin's inner circle have been designated only under US sanctions.

If the Ukrainian crisis persists, there may be additional divergence due in large part to: (i) the EU's unanimous vote requirement to impose any sanction; (ii) the degree that the EU and Russian economies are intertwined – the Russia Federation conducts 14 times more business with the EU than it does with the US; and (iii) the EU's Iranian designations having been successfully challenged in Member States' judicial systems.

US authorities have taken a carrot and stick approach to sanctioning persons under the Ukrainian orders. On the one hand, prior guidance and recent releases from US authorities have made it clear that the 50% rule is being strictly interpreted, i.e., if a specially designated national and blocked person ("SDN") holds more than 50% of any entity, then that entity would automatically be blocked as well. But in the absence of a clear 50% ownership interest, the entity is not likely to be blocked. On the other hand, US Executive Order 13662 (dated 20 March 2014) authorises (and thus threatens) sanctions on entire sectors of the Russian economy, including financial services, energy, metals and mining, engineering, and defence and related materiel. Thus, US authorities are indicating that they will not block an entity not clearly owned by an SDN (i.e., the carrot), but they may impose sanctions on any person (individual or entity) they desire based on their political calculations (i.e., the stick). Based on this approach, we would expect any future US sanctions to be targeted towards the specific interests of President Putin, his cronies, or specific sectors of the Russian economy likely to impact either of those interests.

Our related client publication is available at: http://www.shearman.com/~/media/Files/NewsInsights/Publications/2014/04/Ukraine-Related-Sanctions-LIT- 040114.pdf

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