The Russian Federation’s decision to recognize the Donetsk and Luhansk “oblasts” as independent republics of Ukraine and the subsequent Russian military forces’ invasion of Ukraine with the support from Belarus has led to widespread resentment in the western countries. Besides the administrative measures that have been adopted and the condemnations that have been declared from all over the world, non-governmental bodies such as UEFA, FIFA, IIHF, IHF, Euroleague Basketball, and many others, have all agreed to exclude Russian and Belarusian entities from their respective activities.
For the time being, the measures from various states and international organization are still limited to the imposing of sanctions and restrictions, mainly of an economic nature, that target persons and entities of the inner circle and elite positions of power in Russia and Belarus. For the European Union, these measures have been adopted in the form of an extensive package of provisions that were published in the Official Journal of the European Union as from 23 February 2022, which have broadened the existing restrictions that were agreed upon in 2014 in response to Russia’s (illegal) annexation of Crimea. Several new and supplementary measures have also been adopted.
The scope and particularly the specific effects of these measures are still difficult to assess. The developments will determine whether the package of measures adopted so far will be maintained or whether the EU institutions will decide to expand them, as already announced. We will try to summarize the most important issues below from the perspective of the factual consequences they have on the functioning and the activities of EU citizens. There will have to be continuous monitoring of updates and any new measures as they become adopted.
Given the diversity and scope of the sanctions imposed by the EU authorities, it would be useful to break down the summary of them into individual sections to facilitate the reading and understanding of the measures. This Part One talks about the general aspects of the restrictions imposed, such as the territorial and personal scopes of application, the addressees’ obligations to inform and their liability, and the penalty system for non-compliance.
Territorial scope of application
In this Part One, the territories where the measures have an effect are distinguished from the territories to which some of the measures refer. As you will see in the following paragraphs, some restrictions are targeted at goods that originate from or destined for certain areas (mainly the areas of Donetsk and Luhansk), and we will analyze these situations from one case to another.
The EU bodies cannot take any measures, at least directly, that have consequences outside the territory of their Member States, as they have no jurisdiction in those areas. Nevertheless, the scope of application is kept as broad as possible. Generally speaking, the restrictive measures adopted by the EU bodies apply:
- in the territories of the EU (including its airspace),
- on board each aircraft or vessel that falls under the jurisdiction of a Member State,
- to any person, within or outside the EU territory, who is a citizen of a Member State,
- to every legal person, entity or body, within or outside the EU territory, that is registered or incorporated under the laws of a Member State, and
- to legal persons, entities or bodies with respect to all business transactions conducted entirely or partly in the EU.
As this illustrates, all financial institutions, companies, and persons who are EU citizens, who have the nationality of a Member State, or that conduct its business as usual on EU territory must adhere to the rules set out below. This means that they can be penalized if they breach the restrictive measures imposed.
Personal scope of application
The different measures adopted are targeted generally at persons and entities that are expressly named in the annexes to the EU decisions and regulations (which are called “black lists” in these instruments). It concerns mainly the following categories of persons:
- natural persons who are responsible for actions or policies that undermine or threaten the territorial integrity, sovereignty and independence of Ukraine, or the stability or security in Ukraine, or that support or execute actively such actions or policies, or that obstruct the work of international organizations in Ukraine,
- legal persons, entities or bodies that give material or financial support to actions that undermine or threaten the territorial integrity, sovereignty and independence of Ukraine,
- legal persons, entities or bodies in Crimea or Sevastopol whose property is transferred in contravention of Ukrainian law, or legal persons, entities or bodies that have profited from such property transfer,
- natural persons or legal persons, entities or bodies that actively support Russian politicians, materially or financially, who are responsible for the (illegal) annexation of Crimea or the destabilization of East Ukraine or who profit from it, and
- natural persons or legal persons, entities or bodies that conduct transactions with separatist groups in the Donbass region.
In Council Decision (CFSP – Common Foreign and Security Policy) 2022/265, Council Regulation (EU) 2022/259, and Council Implementing Regulation (EU) 2022/260, all of which are dated 23 February 2022, 22 persons and 4 entities (Internet Research Agency, Rossiya Bank, Promsvyazbank, VEB.RF) have been added to the original black list of persons, entities, and bodies that are subject to the restrictive measures that were drawn up in 2014.
On the same date, 23 February 2022, Council Decision (CFSP) 2022/267 and Council Implementing Regulation (EU) 2022/261 added the 336 members of the Russian State Duma to the list of persons, entities, and bodies that are subject to the restrictive measures because they have voted for the recognition of the regions of East Ukraine (Donetsk and Luhansk) as independent states.
Subsequently, another 26 persons and the gas insurance company SOGAZ were added on 28 February 2022 according to Council Decision (CFSP) 2022/337 and Council Implementing Regulation (EU) 2022/336.
Obligation to report
The EU regulation imposes on its addressees the obligation to cooperate and to provide information to the authorities so that they can continue to monitor the implementation of the measures. Without prejudice to the applicable rules regarding public notices, confidentiality, and professional secrecy, natural or legal persons, entities or bodies, which must comply with the restrictions, must provide mandatory information, such as information about bank accounts and frozen sums of money, to the competent authorities of the Member States where they are domiciled or established. They must also provide this information to the European Commission and cooperate with the competent authorities in verifying this information.
Responsibility of EU market operators
In general, the EU legislation on sanctions forbids those individuals who are bound by it from knowingly and intentionally engaging in acts whose aim or effect is to circumvent the restrictive measures.
Recognizing the complexity of the entire set of rules, the EU legislature determined that the market operators are exempt from liability if the restrictions are applied incorrectly.
In particular, the freezing of credits/assets and economic resources or the refusal to make credits or economic resources available, which is executed in good faith in the belief that such action complies with EU law, does not give rise to liability of the natural person or legal person,
the entity or body, or liability of their directors or workers, that applies this measure unless evidence is produced showing that the credits and economic resources are frozen or withheld as a result of negligence.
On the other hand, acts of such persons and entities will not give rise to any liability on their part if they did not know and had no reasonable grounds to assume that their acts would be in breach of the measures laid down in the sanction legislation.
In this way, the market operators are protected against any liability of the persons concerned. Logically speaking, the potential liability in each case must be assessed separately, given the level of prudence that is required of each market operator, depending on their nature (e.g., one can invoke that the level of prudence and knowledge that is required of a financial institution is higher than that of a small or medium-sized enterprise that coincidentally has anything to do with Russia.)
Prohibition to satisfy claims
As one can imagine, those who are affected by the sanctions will most likely completely disagree. The situation can be that, by trying to fulfill the restrictions under EU legislation, market operators will not fulfill their contractual obligations towards the persons affected by the sanctions. This can lead to disputes whereby the persons affected bring damage claims seeking compensation for the harm they suffered, which means the disputes can be made pending in courts outside the EU.
To prevent the adverse consequences that these kinds of disputes can have on EU market operators, the applicable legislation stipulates that it may not give any effect to claims concerning a contract or a transaction whose direct or indirect performance is entirely or partly affected by the sanction measures of the EU legislature and that are brought by persons who are on the black list. This includes in particular indemnity claims and similar types of actions, such as claims for compensation or collateral, namely claims that seek the extension or payment of a security deposit sum, a financial guarantee or an indemnity, especially financial in nature, regardless of the form they are in.
Finally, it should be pointed out that the EU legislation states that it is up to the Member States to devise a penalty system that applies to any breaches of the restrictive measures.
In Spain, this system is spread out over different regulations, such as the Act of 10/2020 on the prevention of anti-money laundering, the Organic Act of 12/1995 on combating smuggling operations, and the Act of 21/2003 on aviation security.
It should be pointed out that the sanctions that are set out in these rules can be significant and that for companies, there is even a possibility that their directors and managers can be held personally liable. It is therefore strongly recommended that the consequences of transactions that can be considered to fall under the restrictions laid down by the EU legislature be analyzed thoroughly.
In the next chapters, we will discuss the sanctions that are imposed in relation to the freezing of assets of persons who are on the black lists, restrictions on financial instruments and transactions, a prohibition on the sale of weapons and goods for dual use, restrictions on the sale of oil-exploration products and other goods, a prohibition on the purchase of immoveable property, the closing of the Russian airspace, restrictions on providing tourism services, etc.
PART TWO – COMMERCIAL ASPECTS
We continue with our series of commentaries that aim to give you an overview of the most important sanction measures that the EU institutions have adopted against the Russian Federation in response to its military invasion in Ukraine. In this chapter, we focus on the trade-restricting measures that have been added to the measures that were already in force since 2014, as a result of the (illegal) annexation of Crimea.
Tourism activities in the regions of Donetsk and Luhansk
In Council Decision (CFSP) 2022/266 of 23 February 2022, it was agreed to ban services that directly relate to tourism activities in the non-Ukraine-government-controlled areas (i.e., the regions of Donetsk and Luhansk) that are provided by Member State nationals or provided out of Member State territories, or that use vessels or airplanes that fall under the jurisdiction of Member States. Consequently, European travel agencies cannot promote these areas as tourism destinations or offer services such as booking of flights, hotel reservations, etc. in those areas.
Closing of European airspace to Russian airplanes
One of the measures that has attracted the most attention in the media is the European Union’s announcement that it bans Russian aircrafts from landing, taking off, or flying over the EU territory. The United States of America, Canada, the United Kingdom, and other countries have adopted similar measures.
This restriction was formalized on 28 February 2022 in Council Decision (CFSP) 2022/335 and Council Regulation (EU) 2022/334, which bans aircrafts operated by Russian airline companies (also in the context of airline code-sharing or capacity utilization), aircrafts that are registered in Russia, or aircrafts that are not registered in Russia but are property of Russian natural persons or legal persons, entities or bodies, or those that are chartered by them or controlled by them in another way, from landing, taking off, or flying over the EU territory.
As an exception, and as prescribed in international aviation rules, the ban does not apply to situations in which an aircraft must make an emergency landing or must fly over in an emergency. Moreover, the Member States have the power to authorize flights that are necessary for humanitarian purposes.
Flights from Russian airline companies that have Europe as their most important market are therefore banned until the measure has been lifted. Russia has responded by closing off their airspace to three countries, with Spain being one of them.
Sale of weapons and dual-use items
The measure enacted in 2014 already bans the direct or indirect sale, supply, transfer or export to Russia any weapons and all sorts of related equipment, including weapons and ammunition,
military vehicles and military and paramilitary equipment, and reserve parts for these types of equipment. A similar measure relating to the sale of weapons to Belarus was introduced in 2012.
Also, the direct or indirect purchase, supply, transfer, or export of dual-use products and technology that are destined for Russia for military use or for a military end-user in Russia have been banned since 2014. This ban was expanded even more to apply to persons and entities in Russa who are mentioned on a list. However, the sale of certain dual-use products and technology for the aviation and aerospace industries, for non-military use, and to non-military end-users was exempt from this prohibition.
Our experience tells us that it is very difficult to determine whether a product or technology is considered a dual-use item. Dual-use products are defined in the broadest sense as products, including software and technology that can be used for civil as well as for military or nuclear purposes. It is primarily important that the consolidated list in Schedule 1 of Council Regulation (EU) 428/2009, as amended by the Commission Delegated Regulation (EU) 2019/2199, be checked, as it is updated regularly. It should be pointed out that the list mentions products and equipment that, in theory, can appear to be harmless, such as software programmes, microcircuits, telecommunication equipment, certain types of drones, etc.
Sale of products and services relating to oil exploration, and expansion to other sectors
Similarly, a prior authorization from the executing Member State is required since 2014 for the direct or indirect sale, supply, transfer, or export of certain oil-exploration and oil-production equipment to Russia. This restriction concerned the following categories of projects, whose services were also banned:
- oil exploration and oil production in waters deeper than 150 meters,
- oil exploration and oil production in waters north of the Arctic Circle,
- projects that offer the possibility to produce oil from shale-forming sources by means of hydraulic fracturing, except for exploration and production through shale formations with the view to localizing or extracting oil from non-shale reservoirs.
The abovementioned restriction was expanded on 23 February 2022 by Council Decision (CFSP) 2022/266 and Council Regulation (EU) 2022/263. These rules put in place a ban on the sale, supply, transfer, or export of certain goods or types of technologies (listed in an annex) to natural persons or legal persons, entities or bodies in or to be used in the areas of Donetsk and Luhansk that are not Ukraine-government-controlled, in the following sectors: transport, telecommunication, energy, prospection, oil exploration and production, gas and mineral resources. Technical assistance, intermediary trade, training, and other services in these goods and financing or financial assistance are also prohibited. It should be noted that this ban applies regardless of whether the goods originate from the EU territory.
Similarly, the new restrictions prevent the providing of technical assistance or services to brokers/intermediaries, builders or engineers, who relate directly to infrastructure in the areas of
Donetsk and Luhansk, whatever the goods or technology. There is no doubt that this restriction can become a major obstacle in the efforts to reconstruct buildings and infrastructure that have been damaged as a result of the armed conflicts.
Import of goods originating from conflict areas
Whereas the restrictions so far applied to the sale of certain types of goods and services to Russian entities and persons, the new package of measures extends the restrictions to the import of goods originating from the conflict areas.
Ever since 23 February 2022, in Council Decision (CFSP) 2022/266 and Council Regulation 2022/263, there has been a general ban on the import of goods originating from the non-Ukraine-government-controlled areas of Donetsk and Luhansk into the European Union. Any direct or indirect financing or financial assistance, as well as insurances or reinsurances relating to the import of goods originating from the abovementioned areas are also banned.
Under this general ban, exceptional goods that the Ukraine authorities have made available for research are checked by the Ukraine authorities and a certificate of origin is issued by the Ukraine government. The purpose of this is to prevent that the goods originating from the abovementioned areas become eligible for the favourable pricing treatment under the EU-Ukraine Association Agreement and to prevent products from neighbouring countries of Ukraine, namely Russia and Belarus, from being imported into the EU.
Realizing that the armed conflict is taking place at the time of writing, which can make it difficult for the Ukraine authorities to carry out the appropriate inspections, the EU institutions publish communications regularly that are addressed to European importers, which should be taken into account. Up to now, according to the communications, the market operators in the EU are advised to not demand any favourable treatment for the import of goods that are produced in the conflict areas and to inspect very carefully the actual origin of the goods that they indicate (namely coal and steel products). In this respect, the EU authorities have explicitly pointed out that bringing into free movement the goods imported from Russia and Belarus can be made conditional on the presenting of sufficient evidence to customs showing that these goods do not fall under the ban on import of goods originating from conflict areas.
Ban on broadcasting
Despite repeated calls from the international community to cease hostilities, the EU institutions have observed that the Russian government uses certain Russian media as propaganda instruments, which contravene the obligation to respect the fundamental rights, freedoms, and principles that are recognized in the EU.
With this background in mind, in Council Decision (CFSP) 2022/351 and Council Regulation (EU) 2022/350 of 1 March 2022, a ban was introduced whereby all EU market operators are prohibited from broadcasting, authorizing, facilitating, or otherwise contributing to the dissemination of any contents from the Russia Today- and Sputnik networks on whichever channel. This includes the
transmission or distribution using all means, such as cable, satellite, IP-TV, internet service providers, platforms or applications for sharing videos via the internet, regardless of whether these are new or have already been installed. Moreover, all broadcast licenses and broadcast authorizations and all transmission and distribution agreements that have been concluded with Russia Today and Sputnik have been suspended.
In the next chapter, we will analyze in detail the financial sanctions that have been imposed in relation to the freezing of assets of persons who are on the black lists, the restrictions on financial instruments and transactions, and some of the effects that have already happened.
Partner – Commercial Department