News / 13-04-2015

2014 was a busy year for EU sanctions and once again, as was seen with the Iranian sanctions, the energy industry is a key target of the new restrictions. In this article, we give an overview of the various sanctions imposed on Russia / Crimea over the last 12 months which are likely to impact the energy industry and projects involving these regions.

Background

Over the course of 2014, the sanctions that were imposed by the international community and EU authorities increased, particularly following the tragic shooting down of Flight MH17 in Ukrainian airspace on 17 July 2014. Whilst a ceasefire agreement has been concluded, there is no guarantee that this will hold, and there is no indication that the sanctions implemented to date are going away. Indeed, EU foreign ministers have agreed to extend existing sanctions against Russia until September 2015 and further names were added to the list of individuals subject to EU asset freezes and travel bans as recently as 16 February 2015. Sanctions will undoubtedly continue to play a role in 2015, with the potential for further measures to be introduced if no lasting solution is found to the crisis.

Application of the EU sanctions

The jurisdictional reach of the EU sanctions regimes in respect of Russia and Crimea is the same as that found in other EU sanctions regimes such as Iran and Syria. As such, the sanctions apply as follows:

• within the territory of the EU; 

• on board any aircraft or vessel under the jurisdiction of an EU country; 

• to any EU national wherever located;

• to any legal person, entity or body incorporated or constituted under the law of an EU country; and

• to any legal person, entity or body in respect of any business done in whole or in part within the EU. 

Those with EU connections should remain vigilant when transacting any business with a Russian or Ukrainian element (including Crimea / Sevastopol). Even if you consider that neither you nor your business is subject to the sanctions, there could be restrictions on those providing financing or insurance to any projects you are involved in. Even if not a concern for you, it may be a requirement that your counterparty ensures that they comply with the EU sanctions in any transactions with you.

Leaving aside the restrictions that have been imposed on certain Ukrainian individuals and entities, the EU sanctions

affect two geographical regions: (A) Crimea / Sevastopol and (B) Russia. We discuss the restrictions on the energy industry in each of these regions as below:

(A) Crimea / Sevastopol

Pursuant to UN General Assembly Resolution 68/262 of 27 March 2014, Crimea and Sevastopol continue to be

considered part of Ukraine. The EU authorities have continued to condemn what is considered the illegal annexation of Crimea and Sevastopol and restrictions have been introduced in response to this annexation, effectively trying to restrict trade and assistance to the region, including assistance to the energy industry in the territory. In summary, the restrictions implemented on the energy industry can be broken down as follows:

I. Sale or supply of goods and technology

It is prohibited to sell, supply, transfer or export certain goods and technology to any natural or legal person, entity or body in Crimea / Sevastopol or for use in Crimea / Sevastopol.

These are goods and technologies that relate to the following key sectors:

• transport;

• telecommunications;

• energy; and

• the prospection, exploration and production of oil, gas and mineral resources.

Prohibited goods include, amongst others, pumps, boilers, ships’ derricks, machine tools, electric motors, mineral fuels and oils, iron and steel, motor vehicles for the transport of people and goods, ships, boats and floating structures. The list is extensive and includes various items which may be used in fulfilling energy projects in the region.

There is a limited exception to this restriction relating to the execution, until 21 March 2015, of obligations arising from contracts (or ancillary contracts) concluded before 20 December 2014, provided that certain formalities with the relevant EU Member State authorities are complied with.

It is also prohibited to provide technical assistance, or brokering, construction or engineering services directly

relating to infrastructure in Crimea / Sevastopol to the industry sectors outlined above.

Ii. Investment in Crimea

There are also a number of restrictions that curtail investment in Crimea / Sevastopol. It is prohibited to:

• acquire any new or extend any existing participation in ownership of real estate located in Crimea / Sevastopol or of an entity in Crimea / Sevastopol;

• grant or be part of any arrangement to grant any loan or credit or otherwise provide financing to any entity in Crimea / Sevastopol; and

• create any joint venture in Crimea / Sevastopol or with an entity in Crimea / Sevastopol.

The above restrictions, are likely to have an impact on any energy projects where the involvement of a local entity is

required as part of the licensing requirements for the development to proceed.

(B) Russia

EU Regulation 833/2014 came into force on 31 July 2014 in response to Russia’s failure to comply with EU demands

regarding the annexation of Crimea and Sevastopol. This Regulation targeted the military, oil and financial services

industry and was further amended by EU Regulation 960/2014, which entered into force on 12 September 2014,

and EU Regulation 1290/2014, which entered into force on 5 December 2014. A summary of the restrictions imposed to date are as follows:

I. Military

It is prohibited to make available dual-use goods and technology, originating inside or outside the EU, to anyone in

Russia or for use in Russia, if those items are for military use or for military end users, such as the Russian army. We do not consider that such a restriction should impact on the energy industry but we highlight it here in case there are items to be exported to Russia which could be considered of a dual-use nature.

Ii. Technology

The Regulation prohibits making available, directly or indirectly, a wide range of technologies originating inside or

outside the EU, to anybody in Russia or to anyone outside Russia for use in Russia, without prior authorisation.

If the authorities have reasonable grounds to determine that the technologies will be used in deep water or Arctic oil

exploration / production and shale oil projects in Russia, no authorisation will be given, save that authorisation may be granted if a contract was entered into before 1 August 2014.

The types of technology that are prohibited include, amongst other items, drill pipes, mobile drilling derricks, floating or submersible drilling or production platforms and sea-going light vessels. Again, there are a number of key items which will be used in energy projects and care should be taken to ensure that those transacting such business in Russia fully evaluate whether any aspect of their project is affected by these restrictions.               

Oil exploration

It is prohibited to provide, directly or indirectly, associated services necessary for the following categories of exploration and production projects in Russia (including its Exclusive Economic Zone and Continental Shelf):

• Oil exploration and production in waters deeper than 150 metres or in the offshore area north of the Article Circle; or

• Projects that have the potential to produce oil from resources located in shale formations by way of hydraulic fracturing (excluding exploration and production through shale formations to locate or extract oil from non-shale reservoirs).

Associated services means:

• drilling;
• well testing;
• logging and completion services; and
• supply of specialised floating vessels.

The prohibition does not apply if an obligation arises from a contract (or ancillary contract) entered into before 12

September 2014, or where the services are necessary for the urgent prevention or mitigation of an event likely to have a serious and significant impact on human health and safety or the environment. Provided in both cases that certain steps have been taken with the relevant EU Member State authority.

Over recent times, Russia has been looking to expand its energy output, particularly through drilling in the northern

region. With this in mind, anyone involved in such projects, or considering tendering for this type of work, should consider how sanctions may impact on the logistics and evaluate any current arrangements to see whether they are potentially caught by the latest restrictions.

Sanctioned persons

The Crimean / Russian sanctions also include restrictions on providing funds and economic resources, directly or indirectly, to designated persons. These persons are commonly referred to as ‘sanctioned persons’. It is worth highlighting that a number of commercial enterprises in Crimea and Russia are subject to these designations, including among others, the Crimean ports of Sevastopol and Kerch.

In addition, the EU authorities have designated various Russian entities as subject to certain sectoral sanctions. These sectoral sanctions are designed to prevent specific business dealings with the entity involved. They restrict, for example, financial investment involving these persons, but notably fall short of listing that entity as a sanctioned person and the wider restrictions that would be imposed by such a designation, not least an asset freeze.

With the varying levels of restrictions, checks should be undertaken on any business involving such entities to ensure that the relevant EU sanctions are complied with.

Comment

The EU has, in particular, targeted the energy sector in Crimea and Russia. The US has introduced similar restrictions. Given the uncertain situation in Ukraine there could be an introduction of further sectoral or other sanctions against Russia by the EU and US. Given the importance of the energy industry to the Russian economy, it is highly likely that it will be targeted again if future sanctions are introduced.

As such, we recommend that contracts related to these areas be kept under review and that legal advice be sought where necessary. Those subject to the EU sanctions would do well to ensure rigorous due diligence on existing projects or new business connected to Russia or Crimea. In respect of any future projects, thought should be given to appropriate sanctions exclusion clauses or other contractual protection to protect a party from existing or future sanctions against Russia and/or Crimea.

We have significant experience of advising on a range of EU sanctions matters for clients in the energy, shipping and trade sectors. In particular, this has included evaluating risks that may arise under a particular contract / project. This evaluation can include due diligence checks on parties to the transaction to ensure that they are not listed as sanctioned entities by any government authorities; advice on the steps that should be taken both pre- and post- contract stage; and drafting wording in contractual documents such as warranties and sanctions exclusion clauses to help guard against some of the pitfalls that may arise as a result of sanctions.