By Aki Corsoni-Husain and Peter Tarn from Harneys

Publication Date:18 September 2014

Note: This is an update to our last bulletin on this subject of 13 August 2014. The new measures are relevant to Harneys’ core jurisdictions: Cyprus, the British Virgin Islands and the Cayman Islands.

Concurrent with the conclusion of the NATO Summit meeting in Wales on 5 September 2014, the President of the Council of the European Union, Herman Van Rompuy, announced that the EU would implement a number of new restrictive measures on Russia in response to its perceived on-going actions in destabilising eastern Ukraine.

Whilst there was some ambiguity as to the precise implementation date for the new regime they were eventually adopted on 8 September 2014, with the publication date in the Official Journal being 12 September 2014. They come into force one day following publication in respect of the capital market restrictions and for all other restrictions on the publication date itself.

In summary, the new measures further enhance the EU sanctions regime on Russia in the following ways:

• Strengthening restrictions on Russia’s access to EU capital markets by imposing a ban on EU nationals and companies providing loans and credit to five major Russian state-owned banks, and increasing restrictions on trade in bonds, equity or similar financial instruments, issued by the same banks, with restrictions extended to some major Russian defence and energy companies.
• Adding 24 persons to the designated persons list of those subject to travel bans and asset freezes, bringing the total to 119 individuals and 23 entities.
• Implementing new restrictions on cooperation by EU persons and companies with Russian industries involved in the oil and gas exploration and production, principally deep water and arctic oil exploration.
• Adding a new sectoral sanction prohibiting the export of dual-use goods and technologies to certain designated persons and entities and restrictions on the insurance and reinsurance of Russian items on the EU ‘Common Military List’.

These new restrictive measures are in Council Regulation (EU) 959/2014, Council Regulation (EU) 960/2014 implementing Council Decision 2014/659/CFSP and Council Regulation (EU) 961/2014 implementing Council Decision 2014/658/CFSP.

As far as United Kingdom and United Kingdom Overseas Territories legislation is concerned the new and pre-existing EU rules have been further implemented, since our last bulletin, by The Export Control (Russia, Crimea and Sevastopol Sanctions) Order 2014 of 2 September 2014 and The Ukraine (European Union Financial Sanctions) (No. 3) (Amendment) Regulations 2014 of 17 September 2014, these latter two being relevant to varying degrees to the British Virgin Islands and the Cayman Islands.

In Cyprus, the Cyprus Securities and Exchange Commission has issued a revised Circular Cl144-2014-10 of 17 September 2014 instructing all Cyprus regulated financial institutions to take note of, and comply with, these new sanctions.

Further restrictions on access to EU capital markets

Most importantly to the financial services sector, the new restrictions on access to EU capital markets increase and supplement the prior regime in two significant ways:

Firstly, by restricting the grant of new loans or the extension of credit arrangements with a maturity in excess of 30 days to (but not from):

• Five major state-owned Russian banks, being: Sberbank, VTB, Gazprombank, Vnesheconombank (VEB) and Rosselkhozbank and their non-EU based affiliates and subsidiaries;
• Three major state-owned Russian gas producers, being: Rosneft, Transneft and Gazprom Neft and their non-EU based affiliates and subsidiaries; and
• Three major Russian defence firms, being: OPK Oboronprom, United Aircraft Corporation and Uralvagonzavod.

Secondly, the maturity period for the prohibition under the prior regime (covering transferable securities and money market instruments) has been reduced from 90 to 30 days. This means that it is now prohibited to deal in, or provide investment services in respect of, transferable securities or money market instruments with a maturity in excess of 30 days issued by Sberbank, VTB, Gazprombank, Vnesheconombank (VEB) and Rosselkhozbank and their non-EU based affiliates and subsidiaries. Additionally this restriction has been extended to the gas firms Rosneft, Transneft and Gazprom Neft and their non-EU based affiliates and subsidiaries; and the defence firms, OPK Oboronprom, United Aircraft Corporation and Uralvagonzavod.

Helpfully, the new amendments clarify the meaning of “transferable securities” for these purposes, in doing so negotiable securities giving rise to a cash settlement have been excluded from scope. It also jettisons the phrase “brokerage services” in preference to “investment services”, the latter term being more consistent with EC terminology for the financial services industry, as used in the Markets in Financial Instruments Directive (MiFID), for example.

It should also be emphasised that whilst loans and credit provided to these institutions are now restricted, loans and credit from these institutions are not restricted in any way by these measures. Equally deposit taking services or other financial services offered by them to EU customers remain unaffected. Lastly, loans or credit which have a specific and documented objective to provide financing for non-prohibited imports or exports or in respect of non-financial services are excluded from scope.

Nevertheless, complex corporate finance transactions often comprise of various related or interweaving transactions and can require counterparties to act in a diverse array capacities. It will be very important for EU firms to assess whether transactions involving such Russian credit institutions may be caught, especially in respect of collateral arrangements which may be structured as back to back loan arrangements, subordinated debt arrangements, intragroup lending or stock lending arrangements where these credit institutions are classed borrowers.

The amended regime comes into force one day following publication of Council Regulation (EU) 960/2014, i.e. from 13 September 2014 onwards. The prior regime first implemented under Council Regulation (EU) 833/2014 continues to apply for the transitional period after 1 August 2014 to (and including) 12 September 2014.

EU capital markets restrictions: Implementation in Cyprus

Cyprus is a member state of the European Union and consequently the Council Regulations referred to above are directly applicable to all persons and businesses based in the jurisdiction as well as to Cypriot-domiciled companies carrying on business anywhere in the world and to Cypriot and all EU nationals based anywhere in the world. In addition national law in Cyprus provides for criminal liability in the event of a breach of such sanctions.

Further, the Cyprus Securities and Exchange Commission has instructed all Cyprus regulated financial institutions to take note of, and comply with, these new sanctions under Circular Cl144-2014-10 of 17 September 2014. It can therefore be expected that banks and other financial services providers in Cyprus will be on heightened watch for activities which may contravene these restrictions.

EU capital markets restrictions: Implementation in the British Virgin Islands and the Cayman Islands

The British Virgin Islands and Cayman Islands are Overseas Territories of the United Kingdom. Although the UK is a member state of the EU, its Overseas Territories are not. As such express UK legislation, known as Orders in Council, is required in order to implement the Council Regulations referred to above in the jurisdictions. At present such legislation has not been implemented but will likely be implemented in October 2014. However it should be recalled that the Regulations above are applicable to EU nationals based anywhere in the world (including in the Overseas Territories).

Furthermore under constitutional arrangements between the UK and its Overseas Territories as well as the application of British nationality law to them mean that many residents of the British Virgin Islands and the Cayman Islands will be British citizens and as such the regimes above will apply to them as individuals.This position has been further strengthened through the application of The Ukraine (European Union Financial Sanctions) (No. 3) (Amendment) Regulations 2014, implementing Council Regulation (EU) 833/2014 as a matter of UK law and The Ukraine (European Union Financial Sanctions) (No. 3) (Amendment) Regulations 2014, implementing Council Regulation (EU) 960/2014 as a matter of UK law.

Additions to the asset freezing and travel ban list

Independent to the sectoral sanctions on access to EU capital markets mentioned above, the annexation of Crimea by Russia in March 2014 caused the EU to impose asset freezing and travel ban restrictions on various Russian and Crimean individuals and companies. This regime was implemented initially under Council Regulation (EU) 269/2014. A separate asset freezing and travel ban regime applies with respect to officials close to former President Yanukovych.

As relevant to financial services firms and their advisors these restrictions effectively prohibit all dealings or arrangements between EU persons and the funds or economic resources of such persons. Under Council Regulation (EU) 961/2014 various separatist rebels, Russian politicians and the Chairman of the Rostec Conglomerate have been designated. The total number of designated persons now comprises 119 individuals and 23 entities.

This list is fully implemented and in force in Cyprus, the British Virgin Islands and the Cayman Islands. In the latter two jurisdictions this is ensured through the following UK Orders in Council: The Ukraine (Sanctions) (Overseas Territories) (No. 2) Order 2014 and The Ukraine (Sanctions) (Overseas Territories) (No. 3) Order 2014, both of 28 April 2014.

Other changes

Outside of financial services, three industries are targeted for renewed restrictive measures:

• Oil and gas exploration — In particular, services necessary for deep water oil exploration, arctic oil exploration and shale oil projects in Russia including drilling, well testing, logging and completion services and the supply of specialised floating vessels. The new measures are in Council Regulation (EU) 960/2014 and supplement Council Regulation (EU) 833/2014. These restrictions are fully implemented in Cyprus. As far as the British Virgin Islands and Cayman Islands are concerned please refer to our commentary above under “EU capital markets restrictions: Implementation in the British Virgin Islands and the Cayman Islands”.
• Dual use goods and technologies — It is now prohibited for an EU national to sell, supply, transfer or export “dual use” goods and technologies to any of the following: JSC Sirius, OJSC Stankoinstrument, OAO JSC Chemcomposite, JSC Kalashnikov, JSC Tula Arms Plant, NPK Technologii Maschinostrojenija, OAO Wysokototschnye Kompleksi, OAO Almaz Antey and OAO NPO Bazalt. However a number of exemptions are available. The new measures are in Council Regulation (EU) 960/2014 and supplement Council Regulation (EU) 833/2014. These restrictions are now fully implemented in Cyprus. As far as the British Virgin Islands and Cayman Islands are concerned please refer to our commentary above under “EU capital markets restrictions: Implementation in the British Virgin Islands and the Cayman Islands”. In addition it should be noted that the UK Export Control Act 2002 applies to the Overseas Territories and subsidiary legislation issued under that Act, The Export Control (Russia, Crimea and Sevastopol Sanctions) Order 2014, further implements Council Regulation (EU) 833/2014 in this respect in the Overseas Territories.
• Items on the Common Military List — Council Regulation (EU) 833/2014 implemented significant restrictions on the export of military items to Russia back in July 2014. Council Regulation (EU) 960/2014 further enhances these restrictions by prohibiting the provision of insurance and reinsurance on such items. For commentary on its application in Cyprus, the British Virgin Islands and the Cayman Islands please refer to the prior bullet point covering dual use goods and technologies.