ClientAlert
April 2014
Russia – Ukraine – US and EU Sanctions
Legal Issues on Which Chadbourne is Working
A referendum in Crimea was held on Sunday, March 16. Within the limited options presented, an overwhelming majority
of those who participated voted in favor of making application to formally become part of the Russian Federation. Shortly
thereafter, a series of legislative and executive actions were taken by local authorities in Crimea and in Russia by the legislature and President to annex Crimea to become part of the Russian Federation. The US, EU, the government of Ukraine in
Kyiv and a large preponderance of the international community have stated that they will not recognize the results of what
are deemed to be illegal and unconstitutional procedures.
The consequences of restrictions imposed by the US and the EU for investors with economic interests in Russia and Ukraine
or who are engaging in transactions involving entities with such interests implicate a range of complex legal, economic
and political issues. There are questions arising directly from sanctions and export license controls imposed to date by the
US, the EU and other countries. In addition, there will be questions relating to the sovereignty of Crimea and the extent to
which Russian, Ukrainian or international law will apply to transactions preceding or subsequent to the annexation. There
have been, and likely will be further, Russian countermeasures affecting Ukraine.
Chadbourne has offices on the ground in Russia and Ukraine with support from our offices in the US and EU. Chadbourne
stands ready to help you understand and cope with the consequences of these sanctions for your business in a rapidly
changing environment.
Sanctions Imposed by the US and EU
US Executive Orders and Export Controls
Three Executive Orders issued on March 6, 17 and 21, 2014 authorize the United States to impose sanctions for conduct
relating to the recent actions in Ukraine. Such sanctions may be directed against individuals or entities responsible for
the turmoil in Ukraine who operate in certain sectors of the Russian economy, (e.g., financial services, energy, metals and
mining, engineering, and defense) or who have provided support to persons designated by the Executive Order, or who
acted directly or indirectly on their behalf, among others.
The Executive Orders that comprise the US sanctions essentially purport to delegate the President’s statutory authority to
various US government agencies so that the latter may try to reach almost anyone in or connected with Russia. Thus far,
under the US sanctions, the US has sanctioned at least 30 individuals and one entity. The sanctioned entity is Bank Rossiya.
In addition to freezing the assets of sanctioned persons that come within the US or the control of a US person, the US sanctions prohibit giving a sanctioned person or receiving from a sanctioned person any funds, food or services. The US sanctions also prohibit any transaction that evades or avoids the prohibitions imposed by the sanctions, as well as conspiracies
formed to evade the sanctions. The US sanctions apply to contracts and transactions that were entered into prior to the
effective date of the Executive Orders. It is, however, possible to obtain certain licenses from the US government to allow
an exception to such prohibitions.
To the extent that any of the sanctioned persons have an interest that is 50% or greater in an entity, that entity is also considered a sanctioned person. In addition, the guidance on the US sanctions indicates that caution should be exercised by a
US person when engaging in transactions with an entity in which a sanctioned person owns an interest that is significant
but that is less than a 50% interest.
The US sanctions operate to constrain the actions of any “United States person”. A US person is defined as “any United
States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the
United States (including foreign branches), or any person in the United States”. It should be noted that the US sanctions
apply to constrain the activities of US citizens and entities incorporated in the US no matter where they are located. Even
if an entity does not qualify as a US person, and therefore is not obligated to comply with the sanctions, employees of the
entity that are US citizens must comply with the sanctions.
In addition to the sanctions set forth in the Executive Orders, on March 27, the US Department of State and US Department
of Commerce announced that they have placed holds on the issuance of new licenses for the export or re-export to Russia
of certain controlled items. The suspension applies to defense articles and services and were effective as of March 1, 2014.
http://www.bis.doc.gov/; http://www.state.gov/
The EU Regulations
On March 6, 2014, the EU Council adopted Council Regulation (EU) No. 208/2014, which imposed an asset freeze on former
President Yanukovych and 17 other former Ministers and senior officials identified as being “responsible for the misappropriation of Ukrainian state funds.” On March 17, 2014, the EU adopted Council Regulation (EU) No. 269/2014, which
imposed travel restrictions and an asset freeze on 21 Russian and other officials and military personnel who are deemed
to be directly associated with the recent events in Ukraine. A few days later, on March 21, 2014, the EU adopted Council
Regulation (EU) 284/2014, which expanded the list of sanctioned persons to 33.
These EU Regulations apply to all EU Member States. Each Member State may, however, enact specific domestic measures
in relation to matters such as offenses and penalties for breach. Member States may also issue their own guidance on the
interpretation of these sanctions and the measures that businesses and others in their territories are expected to take in
order to comply with them. For example, the UK enacted regulations – The Ukraine (European Union Financial Sanctions)
Regulations (SI 2014/507) – to make provision for the enforcement of the EU sanctions.
The EU Regulations require the freezing of all funds and economic resources belonging to or owned, held or controlled by a
sanctioned person and prohibit making funds or economic resources available, directly or indirectly, to or for the benefit of
a sanctioned person. Essentially, the EU sanctions prohibit transactions that touch upon the funds or economic resources
of sanctioned persons or which permit them to be used in any way.
One of the difficulties facing individuals and companies trying to comply with the EU sanctions is identifying whether a
sanctioned person owns or controls an entity. EU guidance suggests that a sanctioned person is presumed to own a business if the person has a 50% or greater interest in it. Whether a sanctioned person has a controlling interest in a business
is less definitive, and each EU Member State can adopt different interpretative rules. The UK, for example, has issued guidance stating that the question of “ownership” and “control” by a designated person will be assessed on a case-by-case
basis. Factors taken into account to make this determination include considering the management structure of the business, and whether the sanctioned person can exercise dominant influence. It should be noted that the EU Regulations state
that institutions that wrongly freeze assets of a sanctioned person will not face civil claims for their mistake as long as they
have acted in good faith and have not been negligent.
The EU regulations include various exemptions, including provisions that, in certain circumstances and under the terms
of applicable licenses, allow EU businesses to make payments for contractual obligations that they entered into before the
sanctions came into force.
CHADBOURNE & PARKE LLP
2
The EU sanctions apply both within the EU and to EU persons anywhere in the world, including EU nationals, and companies incorporated in the EU. Even if an entity does not qualify as an EU person, and therefore is not obligated to comply with
the sanctions, employees of the entity who are EU nationals must comply with the sanctions.
Chadbourne Can Help
As part of our longtime focus on Central and Eastern Europe and other emerging economies, Chadbourne has had substantial offices in Moscow and Kyiv (and in Warsaw) for many years. Our Russian and Ukrainian lawyers practice local law,
litigate in local courts and are well connected in professional and business circles. Our clients do business and have various
types of investments in both countries, as well as elsewhere in Central and Eastern Europe. Our lawyers in the US and EU
have experience working with authorities in the US and EU Member States regarding sanctions and, when necessary,
obtaining guidance from US or EU Member States on the application of sanctions, licensing and other issues. We are in
a position to provide informed and practical advice on the likely economic consequences (a) of sanctions and export controls imposed by the US, the EU and others on Russia and (b) of economic countermeasures on Ukraine with which Russia
responds.
In this Client Alert, we have presented significant economic and political steps taken by governments and agencies to date.
There will be more; how many and of what nature will largely depend on political decisions made by Russia. Traditional
media outlets will continue to be your best day-to-day sources for new developments.
We thought it would be helpful to you to give you a few examples of the types of legal issues on which our lawyers are
already working:
• Do entities qualify as US or EU persons and, if so, are they therefore obligated to comply with US or EU sanctions, respectively? The question of whether an entity is obligated to comply with US or EU sanctions may
depend in part on whether such entity has a presence in the US or EU. Among the factors to be considered
are whether such entity has an affiliate or a branch in the US or EU, and whether such affiliate or branch has
in the past, or might in the future, participate in dealings with a sanctioned person. Non-US and EU entities
which are not themselves sanctioned will still need to consider that those of their employees and contractors who are themselves US persons will be prohibited by US and EU sanctions from participating in a transaction involving a sanctioned person even if their employer is not, and that facilitation of such transactions
by employees or contractors who are US persons might be characterized as a form of conspiracy under US
law.
• What is the impact of sanctions on contractual obligations incurred prior to the onset of sanctions? Is a
party to a contract obligated not to perform a pre-existing obligation owed to a sanctioned entity? Could
the sanctioned entity consider the other party in default for compliance with sanctions and claim damages?
• Will a planned joint venture or supply arrangement with a Russian party for certain aviation technology
require an export license and, if so, will it be characterized as defense-related and therefore blocked?
Independent of sanctions regimes, there are a number of difficult questions under both public and private international
law turning on issues of national sovereignty:
• How should potential foreign investors conduct due diligence in evaluating prospective investment decisions in Crimea, including investments they may already have expressed an intent to make, if basic factors
such as clear title, debt exposures, liabilities, regulatory licenses and insurance, among others, are affected
by a sovereignty controversy involving Crimea?
• In regards to protection of foreign investments made in Crimea before the onset of the sovereignty dispute,
should foreign investors look to multilateral or bilateral investment treaties (“BITs”) with Ukraine or with
Russia?
CHADBOURNE & PARKE LLP
3
• Should Ukrainian investors in Crimea seek protection under Ukrainian law on the basis that Crimea is part
of Ukraine under an unlawful Russian occupation, or under Russian or international law on the basis that
Crimea is now, de jure or de facto, part of Russia?
• As to oil and gas exploration and development in the Black Sea, a range of questions under the Law of the
Sea Treaty and other principles of public international law may arise alongside questions about contractual
undertakings made by or with Ukraine.
• What are the legal risks facing Russian energy companies that might invest in fields potentially disputed
between Russia and Ukraine?
We believe Chadbourne lawyers may be able to assist you and your company to cope with this rapidly changing environment
based on their deep familiarity with the region and their years of experience in solving complex problems as they arise.
Our client alerts are for general informational purposes and should not be regarded as legal advice.
If you would like additional information or have any questions, please contact:
WASHINGTON, DC
KYIV
Michael Socarras
+1 (202) 974-5610
[email protected]
Jaroslawa Z. Johnson
+380 (44) 461-7575
[email protected]
Abbe D. Lowell
+1 (202) 974-5605
[email protected]
Adam Mycyk
+380 (44) 461-7575
[email protected]
MOSCOW
Mikhail Rozenberg
+7 (495) 974-2424
[email protected]
Konstantin Konstantinov
+ 7 (495) 974-2424
[email protected]
DUBAI
Ramsey B. Jurdi
+971 (4) 422-7088
[email protected]
ISTANBUL
Ayşe Yüksel
+90 (212) 386-1310
[email protected]
WARSAW
NEW YORK
Wlodek Radzikowski
+48 (22) 520-5000
[email protected]
Charles K. O’Neill
+1 (212) 408-5365
co’[email protected]
LONDON
Adrian Mecz
+44 (0) 20-7337-8040
[email protected]
Whitney Gerard
+1 (212) 408-5265
[email protected]
Patrick Devine
+44 (0) 20-7337-8049
[email protected]
About Chadbourne
Chadbourne & Parke LLP, an international law firm headquartered in New York City, provides a full range of legal services, including mergers
and acquisitions, securities, project finance, private funds, corporate finance, venture capital and emerging companies, energy/renewable
energy, communications and technology, commercial and products liability litigation, arbitration/IDR, securities litigation and regulatory
enforcement, special investigations and litigation, intellectual property, antitrust, domestic and international tax, insurance and reinsurance,
environmental, real estate, bankruptcy and financial restructuring, executive compensation and employee benefits, employment law and
ERISA, trusts and estates and government contract matters. Major geographical areas of concentration include Russia, Central and Eastern
Europe, the Middle East and Latin America. The firm has offices in New York, Washington, DC, Los Angeles, Mexico City, São Paulo, London,
Moscow, Warsaw, Kyiv, Istanbul, Dubai and Beijing. For additional information, visit: www.chadbourne.com
www.chadbourne.com
New York ■ Washington ■ Los Angeles ■ Mexico City ■ São Paulo ■ London
This material may constitute Attorney Advertising in some jurisdictions.
■
Moscow
■
Warsaw
■
Kyiv
■
Istanbul
■
Dubai
■
Beijing