The Situation In Ukraine: New US And EU Sanctions - Export Controls & Trade & Investment Sanctions

As the events in Ukraine and Russia continue to unfold, the reaction by the US and the EU, including imposing sanctions, will impact individuals, businesses, and entire sectors. The recent events in Ukraine lead clients in every corner of the globe to seek our strategic guidance as the situation develops.

As a polycentric firm, with no headquarters, no dominant culture and no flag, and with partners throughout the world, including Russia, Ukraine and Central and Eastern Europe, Dentons is particularly well positioned to explain the nuances that surround every facet of these complicated developments to our clients.

We understand that in diplomatic disputes there is often much posturing, but not every threat leads to action. We also understand that headlines and news reports rarely capture the complexities that are vitally important to clients. Most importantly, in situations involving so many nationalities, much can be lost in translation. Fortunately, Dentons has partners who literally speak the language of every nation involved and we invite clients to take advantage of our offices in the region.

This client update contains an analysis of the policy issues arising from the current situation in Ukraine prepared by our Public Policy and Regulation team. We try to present the facts as they are known, and the potential ramifications of what might happen, without expressing any political view. We believe this is the best way to serve our clients.

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The US and the EU have each imposed a range of sanctions targeting individuals and one entity which are associated with the developments in Crimea and with political disruption in Ukraine.

The US has established a wide-ranging set of Ukraine-related sanctions. Via three Executive Orders, the US established a legal framework for sanctions on a broad array of individuals and entities determined to be contributing to the situation in Ukraine. To date, the US has imposed sanctions, including asset freezes and US visa bans, on senior officials of the former Yanukovych administration in Ukraine, several senior Russian government officials and one Russian bank.
The US has not imposed broad sanctions on Russia as a country. The US sanctions authorized by the three Executive Orders do not establish or authorize a commercial embargo of Russia, nor do they restrict ordinary trade or investment - unless a prohibited party is involved.
The European Union imposed targeted sanctions on 33 individuals in connection with the situation in Ukraine. The Council of the European Union, giving force to its Decision 2014/145/CFSP authorizing travel restrictions and the freezing of funds and economic resources of certain individuals believed to have been responsible for actions "which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine" ("designated individuals"), adopted Council Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine. While Council Regulation (EU) No 269/2014 imposed sanctions on 21 individuals, Council Regulation (EU) No 284/2014 expanded the list of persons by 12, for a total of 33.
The EU list of designated individuals does not include sanctions on legal entities or Russia as a country. The list of the designated individuals has been annexed to the Council Regulation 269/2014, as amended by Council Regulation 284/2014. This list is an open list, which means that it can be expanded in the future.

Given the pace of ongoing political, diplomatic, military and commercial events on the ground, and continuing negotiations between and among the EU, Russia, Ukraine, and the US, active monitoring of the sanctions landscape is particularly critical. Additional or enhanced sanctions can be imposed by the US or EU, without any further advance notification under the authorities currently in use.

US SANCTIONS

The US has established a new legal framework for the imposition of economic sanctions, including asset freezes and US visa restrictions. The underpinnings of this legal framework are three executive orders¹ issued by the President of the United States: (1) Executive Order 13660², issued on March 6, 2014; (2) Executive Order 13661³, issued on March 17, 2014; (3) and Executive Order 13662⁴, issued on March 20, 2014.

On March 17, 2014, the US announced its first sanctions under two executive orders then in existence (13660 and 13661).⁵ These initial sanctions targeted 11 individuals. On March 20, 2014, the US announced a second, larger round of sanctions, targeting 20 individuals and one entity — Bank Rossiya.⁶

None of the Ukraine-related executive orders, as a legal matter, require any new law or act of Congress to become effective. Rather, the President issued these executive orders under general authority already granted to him by three long-standing US federal statutes, which form the basis for nearly all of the current US economic sanctions programs: the International Emergency Economic Powers Act (50 USC 1701 et seq.), the National Emergencies Act (50 USC 1601 et seq.), and the Immigration and Nationality Act of 1952 (USC 1182(f)). Absent specific new authority from the US Congress, the authorization of sanctions related to the situation in Ukraine is more limited than other US sanctions programs that have specific statutory bases, such as the sanctions with respect to Cuba, Iran, North Korea, Sudan and Syria.

Key Provisions of the First Ukraine-Related Executive Order (EO 13660)

Under the terms of EO 13660, the President authorizes the Secretary of the Treasury, in consultation with the Secretary of State, to freeze the assets (within US jurisdiction) of, and prohibit the issuance of US visas to, any person -- regardless of nationality -- determined to have been "responsible for or complicit in":

"actions or policies that undermine democratic processes or institutions in Ukraine";
"actions or policies that threaten the peace, security, stability, sovereignty or territorial integrity of Ukraine"; or
"misappropriation of state of assets of Ukraine or of an economically significant entity in Ukraine".

EO 13660 also authorizes the designation of any person who has asserted governmental authority over any part or region of Ukraine without the authorization of the Government of Ukraine.

Notably, EO 13660, by its terms, can also reach a wider array of persons who facilitate these types of sanctionable-activities. For example, EO 13660 authorizes the designation of leaders of entities that have, or whose members have, engaged in the sanctionable activities noted above -- or leaders of entities that have, or whose members have, themselves been designated under EO 13660. This means that the US could impose sanctions on the leaders of a group whose members have engaged in EO 13660-sanctionable conduct, even if that leader himself did not participate in the conduct directly.

Moreover, EO 13660 also authorizes the designation of any person who provides material support, or goods or services to or in support of, any activity sanctionable under EO 13660 or any person sanctioned under the authority of EO 13660. This language could provide a basis for the imposition of sanctions upon individuals and entities who facilitate EO 13660-sanctionable conduct, regardless of whether the individuals or entities themselves are directly involved in the conduct.

As is customary in US sanctions programs, EO 13660 further authorizes the designation of any person owned or controlled by, or who has acted or purported to act for or on behalf of, any person already designated under EO 13660.

Key Provisions of the Second Ukraine-Related Executive Order (EO 13661)

Executive Order 13661 utilizes the same structure as EO 13660, but expands the scope of sanctionable conduct or status, and imposes sanctions on specific individuals.

Under the March 17 Executive Order, the President authorizes the Secretary of the Treasury to freeze the assets (within US jurisdiction) of, and prohibit the issuance of US visas to any:

"official of the Government of the Russian Federation";
any person that "operate[s] in the arms or related material sector in the Russian Federation";
or any person owned or controlled by, or acting or purporting to act on behalf of, a senior official of the Government of the Russian Federation or a person whose property is blocked by this Executive Order.

Similar to EO 13660, the EO 13661 also authorizes the imposition of sanctions against any person who provides material assistance to, or goods or services to or in support of, a senior official of the Government of the Russian Federation or a person who is blocked by the EO 13661.

Key Provisions of Third Ukraine-related Executive Order (EO 13662)

Executive Order 13662 also utilizes the same structure as EO 13660. However, Executive Order 13662 significantly expands the scope of sanctionable conduct or status under both of the previous executive orders to include a far wider range of potential targets -- most notably by taking a sectoral approach.

Under EO 13662, the President authorizes the Secretary of the Treasury to designate sectors of the Russian economy, and then freeze the assets (within US jurisdiction) of, and prohibit the issuance of US visas to, any person operating within such a sector. EO 13662 lists several possible sectors for future designation, including:

financial services,
energy,
metals and mining,
engineering, and
defense and related material.

However, EO 13662, by its terms, does not actually issue any such sectoral designation. Rather, EO 13662 simply establishes the legal framework for potential use in the future.

As with the other Ukraine-related executive orders, and consistent with standard US sanctions practice, EO 13662 also authorizes the designation of any person who provides material assistance to, or goods or services to or in support of, any person who is blocked under EO 13622.

On March 20th, the same day that the White House issued EO 13662, the US Treasury Department extended sanctions to a Russian company for the first time, St. Petersburg-based Bank Rossiya.

Congressional Legislation

Last night, the US Congress passed a bill that seeks to enact sanctions against officials involved in human rights abuses in Ukraine or in undermining the Ukrainian territorial integrity or sovereignty. The bill also authorizes the President to apply sanctions against persons involved in corruption in the Russian Federation. In addition to the sanctions provisions, the bill also provides substantial financial aid to Ukraine.

With the US House's vote last night to accept Senate amendments, the bill now goes to the President, who is expected to sign the bill into law. The resulting sanctions appear largely consistent with those already imposed by the President: based on a determination by the President that a person is involved in the proscribed conduct, the US assets of the person are to be frozen and the person barred from entry to the US.

The most significant difference between the sanctions set forth in the bill and those of the executive orders discussed above is the bill's express provision of sanctions against persons involved in corruption in the Russian Federation.

Implications and Next Steps

The three Ukraine-related executive orders, and two rounds of sanctions to date, may well provide the basis for additional designations of Russian officials -- possibly even without a linkage to the situation in Ukraine. EO 13661 does not define "official of the Government of the Russian Federation" or "senior official of the Government of the Russian Federation." Nor does it require such an official to be linked to the situation in Ukraine to be subject to sanctions. Similarly, EO 13662, by its terms, does not require any linkage between a designated sector of the Russian economy and the situation in Ukraine.

While it remains to be seen how these new authorities will be exercised (beyond the initial two rounds of sanctions designations), there is the prospect of a wider and evolving series of measures -- and countermeasures -- between the United States and Russia in the trade and economic arenas.

EU SANCTIONS — THREE-STEP APPROACH

At an emergency session of the European Council on March 6, 2014, the EU Heads of State committed to implementing a three–step approach to sanctions against Russia, as the EU deems appropriate based upon facts on the ground in Ukraine and ongoing diplomatic negotiations.

Under the EU's agreed-upon approach:

First, the EU would suspend discussions with Russia about the potential for visa-free travel between Russia and the EU;
Second, the EU would suspend its attendance of the June 2014 G8 Summit in Sochi; and
Third, as a next step, the EU would impose targeted restrictive measures such as travel bans, freeze of certain Russian assets and the cancellation of the EU-Russia summit, depending on Russia's stance on Ukraine.

By adopting Council Regulation (EU) No 269/2014 on March 17, 2014, Council Regulation (EU) No 284/2014 on March 21, 2014, and Decision 2014/145/CFSP, the EU has entered into the third stage of this approach. It is noteworthy in this context that in the EU Law a regulation is a legal act of the European Union that becomes immediately enforceable as law in all EU member states simultaneously. Therefore, the EU sanctions on Russia imposed by Council Regulation (EU) No 269/2014 and No 284/2914 have become binding on all EU member states with an immediate effect.

Key Aspects of the EU Approach

The EU currently imposes sanctions against a range of countries and designated individuals and entities. While the specific regimes vary by jurisdiction, they generally involve political steps as well as restrictive measures, which can take several forms, such as:

diplomatic sanctions (for instance, severing of diplomatic ties, suspension of official visits, etc.);
suspension of diplomatic or organizational cooperation (e.g. the announced suspension of attendance of the G8 summit in Sochi);
boycotts of sport or cultural events; (this has happened with Winter Paralympic Games in Sochi);
trade sanctions (general or specific trade sanctions, arms embargoes);
financial sanctions (freezing of funds or economic resources, prohibition on financial transactions, restrictions on export credits or investment);
flight bans; and
restrictions on admission into the EU (entry bans, suspension of issuance of Schengen visas, and visas for the UK as the case may be).

EU sanctions may target governments, as well as individuals or non-state entities, including business companies. For example, on March 5, 2014, the EU imposed restrictive measures, including an asset freeze, on 18 former senior Ukrainian government officials that it determined to be responsible for the misappropriation of Ukrainian state resources. Similarly, restrictive measures adopted by the EU on March 17,2014 in connection with the situation in Ukraine authorized travel restrictions and the freezing of funds and economic resources of 21 individuals believed to have been responsible for actions which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine.⁷ On March 21, 2014, following Russia's decision to annex Crimea, the EU has imposed those sanctions, i.e. visa bans and asset freezes, on another 12 individuals,⁸ thereby expanding the EU list of designated individuals to 33 persons.

Implications and Next Steps

EU economic and financial sanctions apply to all persons and entities doing business in the EU, including nationals of non-EU countries, and EU nationals and entities incorporated or constituted under the law of an EU Member State when doing business outside of the EU. The entities most directly and evidently concerned by any asset freezes are financial and credit institutions, because the assets in question will in all likelihood be in their custody. This obligation covers not only financial and credit institutions that operate within the European Union or are established or incorporated under the laws of a Member State. It also covers such institutions that have any business dealings in the EU, or any such institutions that have a " nexus" to the EU as may be specified by respective sanctions instruments. As a general matter, financial and credit institutions dealing in the Euro currency are also covered. Very often economic sanctions adopted by the EU are also followed by the European Free Trade Association states, including Norway, Iceland, Switzerland and Liechtenstein.

The EU frequently resorts to economic and financial sanctions, which could consist of export and/or import bans (on specific products, payments, transfers or services), travel and entry bans, prohibitions on investment and other measures. The adoption of EU autonomous sanctions should conform to the provisions and general principles of EU Law, including the EU Charter for Fundamental Rights, and the international obligations of the European Union and its Member States, in particular the GATT and GATS exceptions provided in the WTO Agreements. Therefore, whatever the scope of the further sanctions, a scrutiny of their consistency with EU law and the international law provisions and, specifically, their consistency with the EU's multilateral, bilateral or other obligations may be warranted.

CONCLUSIONS

The authorization of US and EU sanctions is one component of an exceptionally complex and fluid legal and political dynamic. Events on the ground are unfolding at a rapid pace, and Russia has already responded by imposing sanctions on nine US individuals.⁹

Given the potential for rapid changes to the legal landscape without advance notice, active monitoring of the policy landscape is critical to identifying and addressing risk.

Footnotes

1 An Executive Order is a directive issued by the President of the United States which carries the force of law.

2 See Executive Order 13660.

3 See Executive Order 13661.

4 See Executive Order 13662.

5 View the list of persons sanctioned under the Ukraine-related sanctions as of March 17th.

6 View the expanded list of persons announced on March 20th.

7 Council Regulation (EU) No 269/2014 of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ L 78, 17/03/2014, p. 6-15 and Council Decision 2014/145/CFSP of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ L 78, 17/03/2014, p. 16-21.

8 Council Implementing Regulation (EU) No 284/2014 of 21 March 2014 implementing Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ L 86, 21/03/2014, p. 27-29 and Council Implementing Decision 2014/151/CFSP of 21 March 2014 implementing Decision 2014/145/CVSP concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ L 86, 21/03/2014, p. 30-32.

9 See List of officials and members of the US Congress, who are banned from entering the Russian Federation on a reciprocal basis due to US sanctions against Ukraine and Crimea (English version).

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.