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“The team was recently visible advising on a number of pharmaceutical cases. Sources agree that the team is “moving in the right direction” and are particularly impressed by its work in the pharmaceutical sector”.

 

Overview of sanctions regime in 2018

10.01.2019

Olena Omelchenko, Partner, Head of International Trade Practice

Ivan Bozhko, Attorney at Law

The application of sanctions, both to individual persons or legal entities, as well as to entire sectors of the economy of certain countries, recently come as no surprise to anyone. A separate attention in the sanction regimes is given to restrictions affecting the trade and economic growth, and 2018 was no exception.

US SANCTIONS

The United States of America remains a traditional leader among the countries applying this rather common instrument of trade and economic constraints. The United States launched its sanctions activities in 2018 from imposing its restrictions onto Venezuela on March 19 when the US President, Donald Trump, signed a decree by which US residents and other persons subordinate to US jurisdiction were prohibited from carrying out any transactions with the digital currency, coins and tokens, which were issued by the Government of Venezuela. In addition, this decree froze the assets of four officials of the Venezuelan Government and prohibited US residents from establishing any business ties with them. The said sanctions were triggered by the attempt of Venezuelan authorities to bypass the previously applied US special economic restrictions by issuing a national cryptographic currency entitled “Petro”, which was, even as of today, quite an unordinary method of action. During the course of the year, the US sanction list was also extended by adding the names of officials close to the Venezuelan President – Maduro.

Sanctions against Iran, which can be considered a logical continuation of the US withdrawal from the “nuclear deal”, were one of the toughest restrictive measures introduced in 2018. In fact, the United States has not only reinstated the previous sanctions, which covered more than 900 Iran-related subjects, but significantly boosted them. In particular, the new sanctions affected 50 Iranian banks and persons related to them, more than 200 persons and vessels related to the transport and energy sectors, Iranian air companies and their civilian air fleet (67 aircraft), as well as almost 250 people and their related assets to be blocked and mentioned in a special sanctions list, the validity of which had been suspended due to the execution of the Joint Comprehensive Plan of Action on Iran (the “Nuclear Agreement”). However, sanctions concerning restrictions on the purchase of Iranian petroleum products are considered to be the most serious. In particular, the risk of falling under the US sanctions is borne by any country that has not implemented a “significant reduction” in the purchase of Iranian crude oil. The assessment of whether a “significant reduction” has taken place will be provided by the Secretary of State subject to the coordination with the Minister of Finance, the Minister of Energy and the Director of National Intelligence. At the same time the special attention will be paid both to the percentage reduction, as well as the termination of contracts for the future supplies, etc. The consequences of violating these sanctions can be considered as really catastrophic, as soon as foreign financial institutions intending to take part in major financial transactions with Iranian financial institutions will risk losing access to their correspondent and transit accounts in the United States, which, in turn, will make normal functioning of such “perpetrators” practically impossible. Sanctions against Iran, in their updated form, are posing significant risks to suppliers of goods, services and creditors of Iranian counterparties, including under the pre-contracted contracts.

The year 2018 did not become an exception also regarding the subsequent extension of US sanctions against the Russian Federation. The extension of the sanctions lists continued throughout the year, by including the names of new persons (public figures, companies and banks) into the SDN-list. The same package of sanctions provides for a prohibition of the alienation or transfer of debts, capitals and other assets associated with Specially Designated Nationals, the export of goods from the United States, as well as of making any payments in their favor (except in cases provided for by special licenses).

The poisoning of the Skripal family led to the introduction of new sanctions in August. The restrictions related to the said case are implemented in two stages, the first of which is represented by the termination of provision of any foreign-based financing to the Russian Federation, which is subject to the regulation of the Law On Export Control of Armaments, denial of any loans, credit guarantees or other financial assistance provided by the US government, and imposing a ban on exports to the Russian Federation of goods and technologies which are of importance from the point of view of national safety. The second stage, the introduction of which can be expected later this year, appears to be more stern – the US Government is considering several options that may include a prohibition to the US banks to loans to the Government of the Russian Federation, except for the operations related to the purchase of food and agricultural products, a significant restriction of trade and diplomatic relations between the countries, as well as the ban on aviation communication carried out by the companies owned or controlled by the state. However, this option of the second stage of sanctions cannot be considered final, since the sanctions may be both postponed and softened, as well as, on the contrary, tightened to a considerable extent.

The analysis of sanctions imposed by the United States in 2018 confirms once again the existence of an extremely wide range of instruments that can be applied in the economic and other spheres of relations with other states and individual persons and legal entities. The significant development of institution of sanctions, as well as the severity of the possible consequences of coming under certain sanctions resulted in US residents’ conducting a detailed analysis (prior to carrying out transactions) of their compliance with sanction legislation, and including particular sections in economic transactions that ensure the parties’ warrantees and assurances regarding their compliance with the requirements of the current sanction regime. The foregoing is connected with the fact that US sanctions are extremely wide (comprehensive), extend to any transactions with the persons included into sanctions lists, are subject to be applied both to new legal relations with them, as well as to legal relations which were established earlier (including previously concluded contracts, orders for the supply of goods and services). In addition, unlike any other sanctions (with the exception of perhaps the sanctions imposed by UN Security Council), US sanctions are of extraterritorial nature and apply not only to US residents, but also to any other entities that are specifically associated with the subjects from the sanctions lists, for example, those entities which carry out economic operations with them, provide financial, technological and other types of support, are under their control or affiliated with them etc.

EU SANCTIONS

Against the background of the US sanctions the list of restrictive measures imposed by the EU looks rather modest. The said list mainly consists of the previously imposed sanctions rather than the new ones. It is worth noting that EU sanctions are mainly based on the decisions upheld by the UN Security Council, and are valid concurrently with them. However, the EU also has 24 fully autonomous valid sanctions programs. It is the analysis of these programs that, as a rule, receives more attention from the European companies before they decide to establish new business connections.

Among EU autonomous sanctions programs introduced in 2018 the following may be singled out.

The year commenced by supplementing the lists of sanctions introduced against the DPRK, which included 17 individuals associated with illegal trade activities aimed at evading UN sanctions (the list of EU self-sanctions against the DPRK includes 58 individual persons and 10 legal entities). On the same day the EU Council introduced sanctions against 7 officials from Venezuela. Subsequently, on June 25, the lists were extended through the introduction into the said lists another 11 individual persons whose activities were related to violations that occurred during the May elections in Venezuela.

The 2018 did not become an exception in the sense of EU sanctions introduced against the Russian Federation. In particular, March saw the extension of the previously adopted sectoral and personal restrictive measures which covered, in total, 150 individual persons and 38 legal entities at that time (the said sanctions have been recently extended till 15 March 2019).

In May the list of the mentioned sanctions was supplemented by the names of five persons involved into the organization of presidential elections at the territory of the annexed Crimea, and in June the names of six companies participating in the construction of Kerch Strait Bridge were added.

In addition, on June 18 the EU Council extended the validity term of sanctions related to the annexation of the Crimean Peninsula for another year. The validity of these sanctions is actually limited only to the territory of Crimea and includes bans on the import of goods originating from the Crimea, the purchase by European companies of real estate and economic entities in the Crimea, their funding or providing them with related services, the entry of cruise liners to the Crimean ports and the supply of goods and technology to the Crimean companies.

The EU sectoral sanctions, which restrict access of the major Russian state financial institutions to the EU capital markets, prohibit making import-export transactions with weapons and dual-use products and reduce access to technologies that can be used during oil exploration and production have also been extended till 31January 2019.

As it has been noted above, the EU sanctions activity in 2018 was focused on the extension of validity the previously imposed restrictions. In particular, on October 25, subject to the separate decisions of the EU Council, the sanctions Pridnestrovian Moldavian Republic Moldavian Republic) were extended for a year. A little later, in November, the EU extended the sanctions validity against Venezuela for another year.

The said reveals one of the features of the functioning of the EU sanctions institution and its difference from the US sanctions mechanism. In particular, the US sanctions, for the most part, are valid until a special decision is made to cancel them, while the EU restrictive measures are temporary in nature and automatically terminate if they are not renewed after the expiration of their term. That is why every year one can observe the situations related to certain discussions in the middle of the EU regarding the future fate of certain special restrictions. This characterizes the EU sanctions as more flexible and more accurately matching the current situation in the international arena.

SANCTIONS OF THE RUSSIAN FEDERATION

The introduction by the Russian Federation on November 1 of personal sanctions on the basis of the Government Decree No. 1300 caused quite a stir. The list approved by the Government of the Russian Federation includes 322 individuals and 68 companies, which mainly have Ukrainian residency, towards which the special restrictions were applied in the form of freezing their non-cash funds, non-documentary securities and property in the territory of the Russian Federation, as well as in the form of the ban the withdrawal of monetary assets outside the territory of the Russian Federation.

The mentioned sanctions are subject to application not only towards the persons expressly indicated in the Resolution No. 1300, but also towards the legal entities controlled by the persons from the sanctions lists.

Worth noting is the fact that the valid sanctions are based on the provisions of the Law On Measures (countermeasures) in Response to Unfriendly Actions of the USA and other Foreign States, which was adopted this year, stipulating for the possibility of introducing a rather broad list of restrictive measures. The fact that the sanctions against Ukraine were adopted in the form existing to date indicates that their introduction was not meant to completely terminate any economic operations between the business companies of the countries.

Analyzing the Resolution No. 1300 adopted by the Government of the Russian Federation, it can be said that, in general, the personal sanctions of the Russian Federation are quite similar to the sanctions introduced by Ukraine, as they are narrowly targeted, unlike US sanctions. Moreover, the sanctions adopted in the current form do not in fact interfere with conducting business operations through intermediaries. However, given the insignificant amount of time that has elapsed since the date when the Russian Federation introduced personal sanctions, it is early now to talk about their effectiveness.

UKRAINIAN SANCTIONS

The Ukrainian sanctions system is also undergoing further development. It may be said that since 2015 it has become a tradition to introduce new personal economic and other restrictive measures against individuals associated with armed aggression of the Russian Federation. This year saw a fairly significant increase – up to 1759 individual persons and 768 legal entities were introduced into the sanctions list, whereas, in comparison, in 2017 these numbers were 1228 and 468, respectively.

It did not do without certain innovations. In particular, a specific type of sanctions was applied on the basis of the Decision upheld by the National Security and Defense Council of Ukraine on March 1 to four Ukrainian subsidiaries of Russian banks (Sberbank, Joint Stock Commercial Industrial Investment Bank, VTB Bank, BM Bank) in the form of prevention of withdrawal of capital for the limits of Ukraine in favor of the related persons. The specific feature of this type of sanctions is that, along with a few exceptions, it can be applied to a wider range of persons than other similar measures, since its validity is not actually limited to the lists of individual persons and legal entities approved by the decisions of the NSDC of Ukraine.

Subsequently, the National Bank of Ukraine, by amending its Resolution No. 654 On Ensuring the Implementation and Monitoring of the Effectiveness of Personal Special Economic and Other Restrictive Measures, clarified the type of banking operations falling within the scope of the said type of sanction.

Among other things, it should be noted that the attempts of the court protection from the imposed sanctions have not been exhausted (precedents for satisfying such claims are still to be amassed in Ukrainian judicial practice). In such way, under its consideration the Cassation Court is currently having several cases at the stage of examination of the materials that served as the basis for imposing sanctions. The distinguishing characteristic of considering such cases is represented by the fact that such information may constitute a state secret, and, therefore require the permit from the process participants to getting the access to the information of the particular level of sensitivity.

It is also possible to highlight the specific nature of the introduction of Ukrainian and Russian sanctions, as opposed to the US and EU sanctions, which is represented by the protection of the domestic market by using this instrumentarium: for example, Russia’s embargo on the import of food products from some countries, as well as the application by the Government of Ukraine of a ban on the import of goods originating in the Russian Federation into the customs territory of Ukraine.

CONCLUSIONS

In general, in 2018 the tendency to expand sanctions lists, especially those consisting of individual persons, has remained steady. This indicates that this type of restrictive measures is becoming increasingly relevant and is representing an alternative to such means of massive impact as an embargo, since it allows to exert the maximum impact on those persons who are directly responsible for the events that become the basis for their adoption.

The next year is promising to be also eventful: among other things, the withdrawal of the UK from the EU will lead to the formation of a separate independent sanction policy, which, will obviously have a fairly serious impact on the situation on the international arena. Personal sanctions have no less serious influence onto the private law sphere. In today’s context, reckless business practices may result in losing by the companies not only of significant sums of money, but also of the opportunities to enter markets in individual world regions, that is, the loss of all or a significant number of existing and potential clients and/or access to lending sources. In connection with this, resorting for receiving the specialists’ services on analyzing the risks accompanying a particular economic transaction are becoming the ordinary business practice not only abroad, but also in Ukraine.

 
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