Ukraine introducing sanctions to protect its national security

CMS Cameron McKenna, 
Kyiv, Ukraine, Tuesday, September 2, 2014

In the wake of the ongoingpolitical crisis in Ukraine there has been a growth in the implementation ofinternational sanctions regimes throughout the course of 2014.  However,Ukraine, the primary victim of the Russian aggression, had no mechanism inplace to target businesses or officials assisting, facilitating or involved inthe annexation of Crimea and/or the hostilities in Donbas. On 14 August 2014,the Ukrainian parliament adopted a sanctions regime to impose sanctions oncompanies and individuals supporting and financing terrorist activities inUkraine (the “SanctionsLaw”). The Sanctions Law is yet to be signed into law by thePresident.

Overview ofsanctions

Sanctions are defined as targetedrestrictions put in place on those who support and/or sponsor terroristactivities in Ukraine, i.e. foreign states, foreign state owned entities(whereby the foreign state owns (directly or indirectly) at least 10 per centof the entity), a company or individual(s), and Ukrainian companies andindividuals supporting and financing terrorist activities in Ukraine (the “Sanctions”).

The Sanctions generally takethe form of financial restrictions, travel bans and import/export prohibitionsor constraints and have a direct impact on importers and exporters ininternational trade, including the energy industry, public procurement and TMT.The imposition of the restrictive measures by the Sanctions Law will have asignificant impact on trade and commercial dealings with Russia, Crimea andSevastopol, particularly if such commercial arrangements are in the sectorsmentioned above.

Restrictionsin the financial services sector

The Sanctions introduced bythe Sanctions Law have a direct effect on the financial services market inUkraine as they impose restrictions on certain financial instruments inrelation to sanctioned foreign financial institutions, companies andindividuals. The Sanctions that affect the financial sector include:

·               Full or partial prohibition of transactionsrelating to securities issued by companies or individuals subject to theSanctions under the Sanctions Law;

·               Suspension of performance of economic andfinancial obligations;

·               Prohibition of movement of financial assetsoutside Ukraine and freezing of assets or temporary restriction of the assets’use by a sanctioned company and/or individual;

·               Prohibition on the National Bank of Ukrainefrom authorising investments in sanctioned foreign countries and placement ofmonetary values on accounts and deposits in a sanctioned foreign country;

·               Termination of licenses, permits and otherauthorisations allowing import or export of currency values from or intoUkraine and limiting cash advances on payment cards issued by residents of asanctioned foreign country;

·               Prohibition on registration of aninternational payment system participant by the National Bank of Ukraine if itsclearing organisation is a resident of a sanctioned foreign country;

·               Prohibition on increasing the authorisedcapital of Ukrainian commercial companies in which 10 percent or more of theshare capital is owned by a sanctioned foreign individual, legal entity orstate or where a sanctioned foreign individual, legal entity or state have adirect impact on the management of the company or its activities in Ukraine.

Restrictionsin the energy sector

The Sanctions implemented bythe Sanctions Law affect the energy industry in a number of ways. In a broadsense, the Sanctions may take the form of:

·               Restrictions on trade activities;

·               Restrictions to transit resources, operateflights and land transports via the territory of Ukraine;

·               Direct restrictions which annul or suspendlicences and other permits and authorisations for certain types of activities,including annulment or suspension of special permits for subsoil use; and

·               The introduction of additional restrictivemeasures in the environmental, sanitary, phytosanitary and veterinary control.

Restrictionsin the TMT sector

The Sanctions implemented bythe Sanctions Law directly affect the TMT sector in the following ways:

·               Restrictions or suspension on postalservices;

·               Prohibition or restrictions on theretransmission of certain television and radio channels;

·               Prohibition on the use of the radio frequencyresource of Ukraine;

·               Restrictions or termination of mass media,including on the Internet;

·               Restrictions on or prohibition of theproduction or distribution of printed and other informational materials; and

·               Restrictions or termination oftelecommunications services and use of public telecommunication networks.

Restrictionsin the public procurement sector

·               Prohibition on public procurement of goods,works and services in sanctioned foreign state-owned companies and companieswith a foreign shareholding as well as public procurement in other entities,engaged in the sale of goods, works and services, originating from a sanctionedforeign country.

OtherRestrictions

The Sanctions applyrestrictive measures much more broadly across industries and general trade.These include:

·               Termination of trade agreements, jointprojects and industrial programmes in certain areas, particularly in the areaof security and defence;

·               Prohibition on the transfer of technology andintellectual property rights;

·               Termination of cultural exchanges, scientificcooperation, education and sports contacts and entertainment programmes withsanctioned foreign countries and legal entities;

·               Denial of visa applications by residents ofsanctioned foreign countries and the use of other prohibitions to enter theterritory of Ukraine;

·               Denunciation of treaties previously ratifiedby the Verkhovna Rada (Parliament) of Ukraine;

·               Prohibition on participation in privatisationand lease of public property by companies or individuals of sanctioned foreigncountries; and

·               Cancellation of official visits, meetings andnegotiations for the purposes of concluding contracts or agreements.

The list of sanctionedindividuals and entities is constantly expanding, leading to concerns regardingjoint venture partners or supply chain contract partners that appear onsanctions lists or have links to those already listed. To date the SanctionsLaw provides for sanctions against 172 individuals and 65 entities in Russiaand other countries supporting and financing terrorist activities in Ukraine.However, imposition of actual Sanctions would need a decision by the Ukraine’sNational Security and Defence Council implemented by a Presidential Ordinance.

Therefore, foreign companiesand individuals operating in Ukraine must be aware of these newly implementedSanctions and the impact they have upon their commercial arrangements. Theymust also be aware that other jurisdictions, notably the EU, the US, Japan andAustralia, also have sanctions regimes in place affecting trade with Russia. InParticular, the EU measures restricting trade with Russia will apply until 31July 2015. However, these measures are due to be reviewed by 31 October 2014 atthe latest, taking into account their effect on Member States. For moreinformation see our previous Law-Now article.

In all cases, the preciseimpact of the Sanctions on any individual case will always be fact-specific.Therefore, should the Sanctions be of particular concern, specialist advice shouldbe sought.

Sanctions Law:

The draft Law of Ukraine “On Sanctions” N 4453a adopted 14 August 2014(awaiting the President’s signature)

Authors:

Sergiy Gryshko, Senior Associate, sergiy.gryshko@cms-cmck.com

Anna Spichenko, Lawyer, anna.spichenko@cms-cmck.com