In July 2014 there was a turning point in the West's response to the political situation in Ukraine. Both the US and EU previously focused on imposing limited asset-freezing measures on Russian and Ukrainian individuals. Within weeks, however, they had dramatically extended their sanctions regimes, targeting specific sectors of the Russian economy.

On 16 July, the US Treasury's Office of Foreign Assets Control (OFAC) imposed restrictions on certain Russian state-owned banks and energy companies to limit their access to capital markets. The sanctions prohibit dealing in debt with a maturity of greater than 90 days issued by the listed companies on or after 16 July 2014. The restrictions also extend to 'new' (ie post-16 July) equity issued by a number of state-owned energy companies.

The EU followed suit on 31 July, introducing its own sectoral sanctions which do not correspond precisely with the US sanctions. When introduced, they applied to a different list of Russian state-owned banks and prohibited transactions in 'new' (post-1 August) "transferable instruments and money market securities" with a maturity of greater than 90 days. 

The EU sanctions were expanded on 12 September to impose restrictions on transferable securities with a maturity exceeding 30 days, and apply the same restrictions to certain military and oil companies. Restrictions were also introduced on loans to those companies with a maturity of over 30 days. Although these changes bring the EU regime closer to the US sanctions, the two sets of sanctions still apply to a slightly different set of entities and debt/equity instruments, causing some compliance headaches.

No guidance

So far the EU and national authorities have failed to publish any helpful guidance to assist in the interpretation of the capital markets restrictions. In this initial 'teething' period, regulators, law firms and companies alike are all attempting to establish precisely what is and is not permitted. 

For example, there are difficulties in determining what should be regarded as new or old debt/equity/transferable securities: if a listed company carries out a share split, are the shares created as a result old (because they are derived from pre-existing shares), new (because they came into existence after the relevant effective date) or a mixture? Can it be safely assumed that letters of credit are 'instruments of payment'? In what circumstances is it safe to trade a derivative referencing the shares of an entity which is subject to the sectoral sanctions? There are likely to be many requests for clarification addressed to the relevant authorities over the coming months.

Understanding the scope of the restrictions is important not only for EU law firms and lawyers advising clients, but also in ensuring that the firm itself is not in breach of sanctions by, for example, advising on prohibited transactions.

Trade targets

In addition to its capital markets restrictions, the EU has introduced trade sanctions designed to target particular areas of the Russian economy. Briefly, these include (among others) prohibitions on:

• investment in infrastructure projects in the areas of transport, telecommunications or energy or the exploitation of oil, gas or mineral resources in Crimea and Sevastopol;

• the sale or supply of specific equipment, technology, services or financing related to the areas listed above;

• oil and gas equipment for Russia and related technical and financial assistance, unless licensed; and

• the provision of dual-use goods, technology or related services to Russian military end-users or listed defence companies.

How offshore firms are affected

The US and EU sanctions can impact offshore law firms and entities in a number of ways. 

First, they apply to any acts done in the territory of the US/EU, meaning that caution should be exercised when travelling to these jurisdictions to work on potentially restricted projects. Secondly, the US sanctions effectively restrict any transactions in US dollars, since such transactions necessarily involve the participation of a US correspondent bank. Thirdly, the sanctions apply extra-territorially on a nationality basis; so individual lawyers who are nationals of EU member states or of the US will be subject to the sanctions in their personal capacities.

Finally, the UK is expected to enact an Overseas Territories Order, extending to the British Overseas Territories restrictions equivalent to those imposed by the EU regulations. 

Offshore law firms which are part of a broader firm network will also need to consider the impact of any firm-wide sanctions compliance policy. 

Dealing with future developments

As the sanctions situation can change rapidly, managing the uncertainty can be a significant challenge. 

The most recent EU sanctions are a good example. The EU agreed new measures last Monday (8 September) but they were not implemented until the Friday of that week (12 September) while member states waited to see how effective the Ukrainian ceasefire would be – leaving those with business interests in Russia on tenterhooks. 

While the EU or press may give an indication of proposed new sanctions, until the relevant legislative instruments are published it is impossible to properly assess the impact on their business. Unlike many other legal instruments, sanctions can be imposed with little or no warning and are generally effective immediately. A transaction that was permissible one day can become illegal overnight. 

Companies and law firms should think carefully about what contractual provisions can be included in transactions that may fall within the scope of sanctions if they are expanded. Contracts increasingly include specific sanctions language, with a view to avoiding the need to rely on illegality clauses – which can be difficult to rely on when the sanctions are not clear and/or licences may be available. A key consideration in drafting such provisions is the extent to which they cover sanctions regimes to which the parties are not, jurisdictionally, subject. 

One might expect a period of stability after so much rapid change in the past few months but this will entirely depend on the situation in Ukraine; it is entirely possible that uncertainty will continue to dominate. Indeed, at the time of writing, the US had announced it was considering expansions – of an as yet unspecified nature – to its existing sanctions. 

Susannah Cogman is a partner and Elizabeth Head is an associate at Herbert Smith Freehills.

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