EU imposes a first package of new sanctions against Russia in the Ukrainian crisis

Background

Late on 23 February 2022, and just a few hours before President Putin of Russia effectively declared war against Ukraine and launched missile attacks across the country earlier today as part of what may be but the first step in a full-scale invasion of Ukraine, the European Union formally imposed additional measures and sanctions against Russia and specific individuals. The measures which will no doubt be followed by additional ones after Russia’s most recent acts of aggression against Ukraine and related outright violations of international law, have already been published in the Official Journal of the EU and have entered into force with immediate effect.

This first set of new measures was taken after President Putin’s decision to recognise as independent entities two separatists regions in eastern Ukraine, the non-government controlled areas of Donetsk and Luhansk, and to send Russian troops into these areas. See our related News Alert here. Right after Putin’s TV message on the evening of 21 February 2022, the President of the European Commission, Ursula von der Leyen, and the President of the European Council (“Council”), Charles Michel, released a statement condemning in the strongest possible terms the decision by the Russian President as a violation of the territorial integrity and sovereignty of Ukraine as well as of the Minsk Agreements of 2014 and 2015 (a series of international agreements concluded to end the war in Ukraine’s Donbas region).

Few hours before Putin’s TV message on 21 February, the Council imposed restrictive measures on additional five individuals (members of the Russian State Duma elected in September 2021 to represent the Crimean peninsula and the City of Sevastopol together with the head and deputy head of the Sevastopol electoral commission) for actively supporting actions and policies undermining or threatening the sovereignty and independence of Ukraine (see Council Implementing Regulation 2022/236 and Council Decision 2022/241).

The new measures just adopted by the EU

The adopted package of new EU sanctions against Russia targets (i) those who were involved in Russia’s decision to formally recognise the two Ukrainian regions Donetsk and Luhansk as independent; (ii) the banks that are financing Russia’s military and other activities in those territories; (iii) the ability of the Russian state and government to access the EU’s capital and financial markets and services; and (iv) annuls any benefits that the Donetsk and Luhansk regions would otherwise enjoy as integral parts of Ukraine in their trading relationships with the EU.

Specifically, the EU has adopted several Regulations imposing the following new measures:

• Restrictive measures (asset freeze, prohibition from making funds available to them and travel ban) for all the members of the Russian State Duma (351 members), who voted on 15 February in favour of the recognition of the independence of the self-proclaimed republics;
• Restrictive measures for 27 high profile individuals and entities (including banks and businesspeople) for their role in undermining or threatening the territorial integrity, sovereignty and independence of Ukraine;
• An import ban on goods from the non-government controlled areas of Donetsk and Luhansk oblasts; restrictions on trade and investments related to certain economic sectors;
• A prohibition to supply tourism services;
• An export ban for certain goods and technologies;
• A sectoral prohibition to finance the Russian Federation, its government and Central Bank.

For the legal acts spelling out each measure in detail, including the full names of the sanctioned individuals, please refer to the relevant parts of the Official Journal of the EU here.

What companies need to know and need to do now

Ensure a clear distribution of competencies and coordination in the company

The person responsible for exports in the company should coordinate the further procedure centrally as the competent member of the management board. It should be ensured that all potentially affected company departments act in a coordinated and consistent manner. Depending on the internal company structure and the nature and depth of your business relationships with Russia / Ukraine, the new sanctions could be directly or indirectly relevant for the purchasing, sales, export control, contract management, general compliance and legal departments. The clearer the coordination and distribution of tasks when dealing with the challenges arising from the new Russia sanctions, the easier it should be to keep the risk of sanctions violations as low as possible.

Conduct a detailed screening of all business contacts in the light of the new sanctions regulation

As detailed above, the new EU sanctions contain lists of people, companies and institutions, including financial institutions, with whom any transactions and business dealings are prohibited until further notice. It is every individual company’s responsibility to verify immediately whether any of the listed individuals or entities are part of its business relationships.

Ideally, all business contacts from all relevant companies departments should be subject to an immediate screening. It is best to use up-to-date and powerful screening software for this purpose. Seek professional advice for any instances which are not clear beyond any doubt. In this context, it must not be overlooked that indirect transactions with sanctioned companies or individuals are generally also prohibited. Companies must therefore also clarify whether a given business partner is, for example, a group company of a listed parent company or is controlled by a listed natural person.

Stop any relevant exports, payments and pending contract negotiations

If, based on a thorough screening, you cannot rule out with certainty that your Russia/Ukraine business will be affected by the new sanctions, you should temporarily stop export processes, payments and sign no new contracts, purchase orders or order confirmations. Seek professional advice to fully assess the impact of sanctions on your business. Keep in mind that violations of sanctions regimes can amount to criminal or administrative offenses. Both companies and company personnel involved, from management to the export control department, can be subject to severe penalties in the event of violations.

Some companies may have protected themselves against the situation at hand by means of far-reaching sanction clauses in their commercial contracts. Often, these clauses provide the right to immediately sever contractual ties if doing business would violate the new sanctions regime. Companies are well-advised, however, to seek legal advice before actually invoking the relevant clauses, which in certain scenarios may be questionable as regards legal validity and enforceability. In case the relevant contracts do not contain sanctions clauses, our recommendation is that companies seek legal advice early on how to defend themselves against potential threats of claims for damages from their business partners and to gain an informed understanding of what the actual risks are.

Final remarks

For obvious reasons, the political and legal situation around the Ukraine crisis is currently extremely dynamic. In a press statement issued in the morning of 24 February 2022, President Michel of the European Council announced that he has convened an extraordinary meeting of the European Council for later today “to discuss the crisis and further restrictive measures that will impose massive and severe consequences on Russia for its action, in close coordination with [the EU’s] transatlantic partners.” He also noted that Commission President von der Leyen “will outline a further sanctions package being finalised by the European Commission and which the Council will swiftly adopt.” We will continue to have a close eye on any new developments