Sanctions Update: Ukraine, Crimea And Sevastopol - The Ukrainian Parliament, The EU And The U.S. Impose Further Measures - Export Controls & Trade & Investment Sanctions

This Alert follows our previous alerts on the Russia/Ukraine sanctions available on our website. July continued to be a busy time as the Verkhovna Rada (the Ukrainian Parliament), the EU and the United States intensified their responses to the situation in the Crimea and the escalating situation in eastern Ukraine. The United States has hinted at and promised further intensification.

The measures are becoming increasingly complex. They have, in addition, been developing rapidly and this trend may well continue. It is absolutely essential, therefore, that the position be continuously monitored and nothing is taken for granted.

Executive Summary

Ukraine Parliament closes Kerch, Theodosia, Sevastopol, Yalta and Yevpatoria, advice on the precise nature of which should be sought from Ukraine Counsel before agreeing any new contract without a trading-limits clause excluding Crimea calls, together with English law advice on potential ramifications. So far as existing contracts – which are subject to English law – are concerned, English law advice should be sought where orders are given to call Crimea.
EU adds (by Council Implementing Regulation (EU) No 810/2014 of 25 July) 15 individuals and nine entities to the asset freeze list. These include the Crimean ports of Sevastopol and Kerch. This is likely to make orders to call at either unlawful under an English law charterparty. Advice should be sought.
EU adds (by Council Implementing Regulation (EU) No 826/2014 of 30 July) eight individuals and three entities to the asset freeze and travel ban list. The individuals targeted include close acquaintances of President Putin.
EU imposes a ban (by Council Regulation (EU) No 825/2014 of 30 July) on investments in key sectors in Crimea and Sevastopol (transport, telecommunications, energy and the exploitation of natural resources), and an export ban on key equipment and technology related to those sectors.
EU imposes restrictions (by Council Regulation (EU) No 833/2014 of 31 July) on:
- Exports and sales of certain dual-use goods and technology as laid down in Council Regulation (EC) No 428/2009 and on the provision of related services and on certain services related to the supply of arms and military equipment. This does not affect the exports of dual-use goods and technology, including for aeronautics and for the space industry, for non-military use or for a non-military end-user. EU flag vessels or aircraft shall not be used (by Council Decision 2014/512/CFSP of 31 July).
- The sale, supply, transfer or export, directly or indirectly, of certain technologies for the oil industry in Russia in the form of a prior authorisation requirement.
- Access to the capital markets for certain financial institutions.

The United States (OFAC) imposes (pursuant to Executive Order 13662) Sectoral Sanctions on additional entities operating within Russia's financial services sector, prohibiting U.S. persons from providing new financing to three major Russian financial institutions.

The United States (OFAC) adds one entity and four individuals to the Specially Designated Nationals List ("SDN List") under Executive Orders 13661 and 13660.

The United States (BIS), effective 6 August 2014, will issue new Russian Industry Sector Sanctions amending the U.S. Export Administration Regulations (EAR) and imposing controls on a wide range of items intended for use in the exploration or production of "deepwater", "Arctic offshore" or "shale projects" that have the potential to produce oil or gas in Russia. Reed Smith will issue a detailed publication outlining these changes prior to 6 August 2014.

Ukraine closes Crimean ports

Note: We cannot and do not give Ukraine legal advice. What we set out below comprises our understanding and no more of what appears to us to be a complex and developing legal situation in Ukraine, and its potential ramifications for English law contracts. Before concluding any contract involving calling at Kerch, Theodosia, Sevastopol, Yalta and Yevpatoria (or anywhere else in the Autonomous Republic of the Crimea), or before calling there under any existing contracts, maritime interests should seek specific legal advice from Ukraine Counsel, and then consult with their insurers and other legal advisors.

On 15 April 2014, the Ukrainian Parliament passed Law of Ukraine No 1207-VII, "On Securing the Rights and Freedoms of Citizens and the Legal Regime on the Temporarily Occupied Territory of Ukraine" (amended 6 May 2014 by Law No 1237-VII) ("Law No 1207-VII as amended").

Law No 1207-VII as amended underlined Ukraine's determination not to cede the Autonomous Republic of Crimea and the city of Sevastopol: see Article 1 confirming the legal status thereof and Article 3 defining "Temporarily Occupied Territory". It is noteworthy that Article 10 requires "special permission via entry-exit control points" to enter the Temporarily Occupied Territory of Ukraine.

In pursuance of the general principles enunciated under Law No 1207-VII as amended 16 June 2014, the Ukrainian government issued Directive No. 255, "On Closure of Sea Ports", which according to reports in Lloyds List came into force 16 July 2014. The purported effect of this was to close the ports of Kerch, Theodosia, Sevastopol, Yalta and Yevpatoria (see Clause 1) and to liquidate their administrations (see Clause 2).

The potential ramifications appear to be as follows:

Vessels which call at Ukraine ports after having called at a Crimean port without first having obtained "special permission" may be subject to censure under Law No 1207-VII while in Ukraine.
The lawfulness or otherwise of an order to proceed to a Crimean port is a difficult question. The answer will depend first on identifying the proper law of the place of performance, i.e., the Crimea. Little certainty is to be found here, where both Ukraine and the Russian Federation assert jurisdiction over the Crimea.
As a matter of English law, Shipowners may struggle to bring this development within general sanctions clauses, which may not be drawn widely enough to cover a unilateral measure put in place by an individual state.

In view of the above, Shipowners and Charterers should act with caution where the Crimea is concerned.

Shipowners should be reluctant to agree new contracts without a trading-limits clause excluding Crimea calls.

Where existing contracts are concerned, both Shipowners and Charterers should carefully consider the contractual terms and, if a Crimean call is contemplated or ordered, seek to find a mutually agreeable solution rather than risk becoming embroiled in an unpredictable and potentially expensive situation.

EU Further Measures

Since we last reported, the EU published the following, which imposes further restrictive measures in response to the illegal annexation of Crimea and Sevastopol and the situation in Ukraine:

Council Implementing Regulation (EU) No. 810/2014 of 25 July
Council Decision 2014/507/CFSP of 30 July
Council Decision 2014/508/CFSP of 30 July
Council Regulation (EU) No 825/2014 of 30 July
Council Implementing Regulation (EU) No 826/2014 of 30 July
Council Decision 2014/512/CFSP of 31 July
Council Regulation (EU) No 833/2014 of 31 July

Further individuals and entities subject to a travel ban/asset freeze

Council Implementing Regulation (EU) No. 810/2014 of 25 July added additional names to the list of parties subject to the asset freeze put in place by Article 2 of Regulation 269/2014:

Fifteen individuals and nine entities determined to have been involved in undermining the territorial integrity, sovereignty and independence of Ukraine.
Nine entities whose ownership has been stated as having been transferred contrary to Ukrainian law. Among these nine entities are the Crimean ports of Sevastopol and Kerch (designated respectively as "State enterprise 'Sevastopol commercial sea port'" and "State enterprise 'Kerch commercial sea port'").

The designation of these ports means that:

All funds and economic resources belonging to, owned, held or controlled by the ports are frozen.
No funds or economic resources may be made available, directly or indirectly, to or for the benefit of the ports.

"Funds and economic resources" are very widely defined by Regulation 269/2014. The effect of these designations is that any trade or transaction which would result in a financial benefit of any kind accruing to the port would amount to a breach of sanctions. This would include the payment of port dues, and any other fees and charges incurred as a result of loading or discharging cargo. On a practical level, any cargo loaded or discharged at, or passing through, the ports of Sevastopol and Kerch would likely result in some kind of direct or indirect economic benefit accruing to the port.

The designation of Sevastopol and Kerch is likely to make orders to call at either of those ports unlawful under a charterparty governed by English law, although determination of this question will depend on an analysis of the charterparty terms in question. Such orders may also result in a breach of any specific sanctions clauses incorporated into the relevant charterparty. If orders have already been given to call at these ports, it is strongly recommended that Owners and Charterers seek in the first instance to find a mutually agreeable alternative.

On 30 July 2014, the Council of the European Union published Council Implementing Regulation (EU) No 826/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine. This Regulation adds eight individuals and three entities subject to a travel ban and freeze on their assets within the European Union. The individuals targeted include close acquaintances of President Putin. The three entities listed are:

JOINT-STOCK COMPANY CONCERN ALMAZ-ANTEY (a.k.a ALMAZ-ANTEY CORP; a.k.a ALMAZ-ANTEY DEFENSE CORPORATION; a.k.a ALMAZ-ANTEY JSC;) – A Russian state-owned company which manufactures anti-aircraft weaponry, including surface-to-air missiles which it supplies to the Russian army.
DOBROLET a.k.a DOBROLYOT – a subsidiary of a Russian state-owned airline
RUSSIAN NATIONAL COMMERCIAL BANK

Extension of restrictive measures imposing a ban on investments in key sectors in Crimea and Sevastopol, and an export ban on key equipment and technology related to those sectors

Also on 30 July 2014, the Council of the European Union published Council Implementing Regulation (EU) No 825/2014 (amending Council Regulation (EU) No 692/2014) ("the Regulation"). This Regulation imposes a ban on new investments related to infrastructure in the sectors of transport, telecommunications and energy, and the exploitation of natural resources in Crimea and Sevastopol only, and an export ban on key equipment and technology related to those sectors.

As reported in our Sanctions Update of 17 July 2014, under Regulation 692/214, the European Council prohibited the import into the EU of goods "originating from" Crimea or the city of Sevastopol.

In summary, Regulation No 825/2014 prohibits:

The granting of any financial loan or credit specifically relating to the creation, acquisition or development of infrastructure in the areas of transport, telecommunications or energy, and the exploitation of oil, gas or mineral resources in Crimea or Sevastopol
The acquisition or extension of a participation, including the acquisition in full and the acquisition of shares and securities in enterprises established in Crimea or Sevastopol engaged in the creation, acquisition or development of infrastructure in the above-mentioned areas in Crimea or Sevastopol
The creation of any joint venture in relation to the creation, acquisition or development of infrastructure in the above-mentioned areas in Crimea or Sevastopol (Article 2a)
Providing, directly or indirectly, technical assistance or brokering services related to the investment activities referred to above (Article 2b)
The sale, supply, transfer export, directly or indirectly, of key equipment and technology listed in Annex III to the Regulation to any natural or legal person, entity or body in Crimea or Sevastopol, or for use in Crimea or Sevastopol
The provision, directly or indirectly, of technical assistance or brokering services related to the key equipment and technology listed in Annex III, or related to the provision, manufacture, maintenance and use of items listed in Annex III, to any natural or legal person, entity or body in Crimea or Sevastopol, or for use in Crimea or Sevastopol
The provision, directly or indirectly, of financing or financial assistance related to the key equipment and technology listed in Annex III to any natural or legal person, entity or body in Crimea or Sevastopol for use in Crimea or Sevastopol (Article 2c)

The mineral resources referred to in Article 2a above are extensive and are listed at Annex II to the Regulation, and include copper, nickel, aluminum, lead, tin, and zinc ores and concentrates, as well as petroleum oils, petroleum gases, electricity energy and coal.

The key equipment and technology listed in Annex III targets key equipment and technology related to the transport, telecommunications, energy and exploitation of oil gas and mineral reserves in Crimea and Sevastopol, including pipelines, drilling equipment and production platforms.

The Regulation also prohibits the participation, knowingly or intentionally, in activities, the object or effect of which is to circumvent the above-mentioned prohibitions.

It should be noted that the prohibitions in the equipment and technology listed in Annex II do not apply to the execution until 28 October 2014 of transactions concluded before 30 July 2014, or ancillary contracts necessary for the execution of such contracts, provided that notification of the transactions is provided to the competent authority of the Member State at least 10 working days in advance.

Furthermore, the restrictions in the granting of a financial loan or credit, to the extension of a participation or the creation of a joint venture referred to in Articles 2a and 2b of the Regulation, shall not apply if:

The transaction is required by an agreement or contract concluded before 30 July 2014; and
The competent authority has been informed at least 10 working days in advance.

Restrictions (by Council Regulation (EU) No 833/2014 of 31 July on:

Exports and sales of certain dual-use goods and technology as laid down in Council Regulation (EC) No 428/2009 and on the provision of related services and on certain services related to the supply of arms and military equipment. This does not affect the exports of dual-use goods and technology, including for aeronautics and for the space industry, for non-military use or for a non-military end-user. EU flag vessels or aircraft shall not be used (by Council Decision 2014/512/CFSP of 31 July).
The sale, supply, transfer or export, directly or indirectly, of certain technologies for the oil industry in Russia in the form of a prior authorisation requirement.
Access to the capital markets for certain financial institutions.

In summary, Council Regulation (EU) No 833/2014 prohibits the following:

The sale, supply, transfer or export of dual-use goods and technology wherever originating to any person, entity or body in Russia, or for use in Russia, if those items are or may be intended, in part or otherwise, for military use or for a military end-user. If the end-user is the Russian military, any such goods and technology procured by it shall be deemed to be for a military use (Article 2 (1)). There is limited scope for authorisation under Council Regulation (EC) No 428/2009 and an authorisation may be granted where the export concerns the execution of an obligation arising from a contract or agreement concluded before 1 August 2014 (Article 2 (2)).
Without authorisation under Article 11 of Regulation (EC) No 428/2009, or where the export concerns the execution of an obligation arising from a contract or agreement concluded before 1 August 2014, the sale, supply, transfer or export of certain technologies (listed in Annex II of the Regulation and wherever originating) for use in deep water oil exploration and production, Arctic oil exploration and production or shale oil projects in Russia to any person, entity or body in Russia or anywhere, if such equipment or technology is for use in Russia (Article 3).
Without prejudice to the execution of an obligation arising from a contract or an agreement concluded before 1 August 2014, the provision of technical assistance, financing or financial assistance related to the goods and technology listed in the Common Military List, or the provision of technical assistance, broking services, financing or financial assistance related to dual-use goods or technology (Article 4).
The purchase, sale, or provision of brokering services in respect of certain financial instruments issued by Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB) and Rosselkhozbank (Article 5).

These measures signal the intention of the EU to persuade Russia to modify its approach to Ukraine.

U.S. Recent Ukraine-Related Actions

On 16 July 2014, the United States issued Sectoral Sanctions targeting financial and energy sector entities in Russia pursuant to Executive Order ("E.O.") 13662. An overview of the Sectoral Sanctions is provided here. Last week, the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC") imposed Sectoral Sanctions on additional entities operating within Russia's financial services sector, prohibiting U.S. persons from providing new financing to three major Russian financial institutions. OFAC also added one Russian state-owned defence technology firm and four individuals to the SDN List under the authority of the Ukraine-Related Executive Orders.

OFAC imposed Sectoral Sanctions on the following entities:

VTB Bank OAO, a state-owned bank, which, together with its subsidiaries ("the VTB Group"), is Russia's second-largest banking group. The VTB Group has more than 1,600 offices in Russia, and operates more than 30 banks in 23 countries across Europe, Asia, and Africa. The VTB Group offers financial services including retail, corporate and investment banking; brokering and other stock-market services; insurance; asset management for pension and unit funds; and leasing. VTB Bank's shares are traded on the Moscow Exchange and on the London Stock Exchange.
Bank of Moscow, a state-owned financial institution—through its parent bank, VTB Bank OAO—with 148 sub-offices located in all administrative districts of Moscow.
Russian Agricultural Bank (a.k.a. Rosselkhozbank), a state-owned bank, which acts as a Russian government agent offering a full range of financial services to clients. With a network of 78 regional branches and more than 1,500 additional offices covering Russia, it has the second-largest regional branch network in the Russian Federation.

Under the Sectoral Sanctions, U.S. persons, wherever located, and persons within the United States are prohibited from "transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity for Bank of Moscow, Russian Agricultural Bank, and VTB Bank OAO, their property, or their interests in property." These prohibitions will severely limit the banks' access to medium- and long-term U.S. dollar financing, and will impose additional significant costs on the Russian government for its continued activities in Ukraine.

OFAC has not added these financial institutions to the SDN List or blocked the property or interests in property of these banks, nor has OFAC prohibited transactions with them beyond these specific restrictions. However, OFAC cautions that it may in the future expand "the scope of prohibited activities and the number of sanctioned financial institutions" under E.O. 13662.

OFAC also added one entity and four individuals to the SDN List under Executive Orders 13661 and 13660.

Pursuant to E.O. 13661, OFAC designated and blocked the assets of United Shipbuilding Corporation, a state-owned company identified as operating in the arms or related materiel sector in Russia. Under E.O. 13661, any assets of the entity designated that are within U.S. jurisdiction must be frozen. In addition, transactions by U.S. persons and transactions within the United States involving the designated entity generally are prohibited.

UNITED SHIPBUILDING CORPORATION (a.k.a. OBEDINENNAYA SUDOSTROITELNAYA KORPORATSIYA OAO; a.k.a. OJSC UNITED SHIPBUILDING CORPORATION; a.k.a. UNITED SHIPBUILDING CORPORATION JOINT STOCK COMPANY; a.k.a. "OSK OAO"), 90, Marata ul., St. Petersburg 191119, Russia; 11, Sadovaya-Kudrinskaya str., Moscow 123242, Russia; Website http://www.oaoosk.ru; Email Address .

Under E.O. 13660, OFAC also designated the following four individuals:

CHALIY, Aleksei Mikhailovich (a.k.a. CHALIY, Aleksei; a.k.a. CHALIY, Aleksei Mikhailovich; a.k.a. CHALIY, Aleksey Mikhailovich; a.k.a. CHALIY, Aleksey Mykhaylovych; a.k.a. CHALIY, Alexei; a.k.a. CHALIY, Mikhailovich Oleksiy; a.k.a. CHALY, Aleksey Mikhailovich; a.k.a. CHALY, Alexei; a.k.a. CHALYI, Aleksei; a.k.a. CHALYI, Aleksiy); DOB 13 Jun 1961; POB Sevastopol, Ukraine; Mayor of Sevastopol; Chairman of the Coordination Council for the Establishment of the Sevastopol Municipal Administration -to- CHALIY, Aleksei Mikhailovich (|a.k.a. CHALIY, Aleksei; a.k.a. CHALIY, Aleksey Mikhailovich; a.k.a. CHALIY, Aleksey Mykhaylovych; a.k.a. CHALIY, Alexei; a.k.a. CHALIY, Mikhailovich Oleksiy; a.k.a. CHALY, Aleksey Mikhailovich; a.k.a. CHALY, Alexei; a.k.a. CHALYI, Aleksei; a.k.a. CHALYI, Aleksiy|); DOB 13 Jun 1961; POB Sevastopol, Ukraine; Mayor of Sevastopol; Chairman of the Coordination Council for the Establishment of the Sevastopol Municipal Administration
KONSTANTINOV, Vladimir Andreyevich, Crimea, Ukraine; DOB 19 Nov 1956 -to- KONSTANTINOV, Vladimir Andreyevich; DOB 19 Nov 1956; POB Vladimirovka, Moldova
KOZHIN, Vladimir Igorevich; DOB 28 Feb 1959; POB Troitsk, Chelyabinsk Oblast, Russia; Head of the Presidential Business Management Department -to- KOZHIN, Vladimir Igorevich; DOB 28 Feb 1959; POB Troitsk, Chelyabinsk Oblast, Russia; Head of Administration of the President of the Russian Federation
YAKUNIN, Vladimir; DOB 30 Jun 1948; POB Vladimir Oblast, Russia; President of OJSC Russian Railways -to- YAKUNIN, Vladimir Ivanovich; DOB 30 Jun 1948; POB Zakharovo Village, Gus-Khrustalnyy Rayon, Vladimir Oblast, Russia; alt. POB Melenki, Vladimir Oblast, Russia; President of OJSC Russian Railways

Pursuant to E.O. 13660, any property of these individuals that is in the United States or comes within the possession of a U.S. person is blocked and may not be "transferred, paid, exported, withdrawn, or otherwise dealt in." The Executive Order also suspended the right of these individuals to travel to the United States.

U.S. Next Steps in Ukraine-Related Restrictions Effective 6 August 2014, the Department of Commerce's Bureau of Industry and Security (BIS) United States will expand its current export restrictions on exports to Russia under the EAR, imposing controls on the export, reexport, or transfer (in-country) of certain items when the exporter, reexporter, or transferor knows or is informed that the item will be used directly or indirectly in Russia's energy sector for exploration or production from deepwater (greater than 500 feet), Arctic offshore or shale projects that have the potential to produce oil or gas in Russia.

Unlike the EU regulation, which contains no definition of the term "deepwater", the term is defined to included depths of more than 500 feet in the new BIS regulations. Like the EU regulation, the terms "arctic offshore" and "shale projects" are not defined.

BIS is issuing a positive list of identified items that it considers as falling within the definition above. However, the BIS rule has no "savings clause" or implementation period, thus, any delivery of the listed items to Russia for use in deepwater, Arctic offshore or shale oil and gas projects, occurring on or after the 6 August 2014 publication date, is prohibited and would result in a violation of the EAR.

Reed Smith will publish a detailed overview of the new BIS regulations prior to 6 August 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.