E-Bulletin Russian Economic Sanctions: A Long Road Ahead? Russia cannot simply be allowed to invade its neighbours and shift Europe s borders with impunity, the [economic sanctions] measures under discussion in Washington and Brussels should be much tougher than previous sanctions Every member of Russia s craven parliament, security services and government should face visa bans and asset freezes. The off-shore assets of top Russian kleptocrats should be identified and seized. Russia s energy and defence sectors must be squeezed and it sovereign bonds should be shunned. Western lenders should not finance Mr. Putin s warmongering The Economist: The Long Game : Leader of September 6, 2014 While the tone of the above recent editorial comment from The Economist might appear to some to be somewhat extreme, it is an indication of the increasing fear of many in the West that recent Russian belligerence in Ukraine is only a prelude to further aggressive activities by Russian agents in other countries bordering its territory. The evolution of the international political scene since the beginning of 2014 has confirmed once and for all, that the democratic reforms that most in the Western world hoped to see take place in the former Soviet Union have ground to a halt and now show signs of being reversed in many respects. Countries bordering the former Soviet Union, as well as those that were once part of the USSR, ranging from the three Baltic states of Estonia, Lithuania and Latvia to the Central Asian states of Kazakhstan and Mongolia, have been given good cause to worry about future Russian political and military initiatives with regard to their territory. The latest country to experience Russian military aggression is Ukraine, Georgia having been the object of military incursions into its territory 2008. The Ukrainian situation is infinitely more dangerous because of the far greater numbers of people involved and the close ties Ukraine enjoys with its Western European neighbours. The signature of a treaty with the European Union promising closer economic and trading ties was one of the major factors prompting the Russian intervention in eastern Ukraine. Russia s actions have aroused deep concern among Western countries that are members of the NATO alliance. Many NATO members, including Canada, have imposed economic sanctions on Russia in retaliation for its violation of international law in relation to its covert support for secessionist rebels in eastern Ukraine. The apparent unwavering determination, and it must be
said considerable success, of Russia in supporting the continuing unrest in Ukraine points to a longer term struggle. Europe once again seems to be dividing along ideological lines. Growing Russian belligerence will likely engender further strengthening and expansion of the scope of the existing sanctions-related restrictions on exports to Russia and to areas occupied by the Ukrainian rebels. Economic sanctions, whatever their alleged effectiveness, are very likely to be a continuing and perhaps growing factor in international trade relations. Companies doing business in Eastern Europe and elsewhere will have to be fully aware of the scope and application of such sanctions as well as the potentially severe penalties that can apply for violation of sanctions rules. Canadian Sanctions In the case of Canada, the Russian annexation of Crimea and the subsequent covert Russian support of separatist insurgents attempting to secure the secession of parts of eastern Ukraine from the rest of the country, have triggered the imposition by the Government of Canada of various economic sanctions. Such sanctions apply in respect of both the Government of the Russian Federation as well as senior Russian government officials and certain selected Ukrainian and Crimean political figures. These sanctions are contained in three separate regulations. The Special Economic Measures (Russia) Regulations SOR/2014-58 of March 17, 2014, as amended, and the Special Economic Measures (Ukraine) Regulations SOR/2014-60 also of March 17, 2014, as amended, were passed pursuant to the Special Economic Measures Act S.C. 1992, c. 17, as amended. As well, the Freezing Assets of Corrupted Foreign Officials (Ukraine) Regulations SOR/2014-44 of March 5, 2014 was passed to counter the misappropriation of Ukrainian state funds or legal acquisition of property of officials of the former regime of Victor Yanukovych, who was deposed following repressive measures undertaken by his government in 2013 against members of the Ukrainian opposition. The Russian and Ukrainian Regulations both impose asset freezes on "designated persons" whom Canada and its NATO allies have determined to have engaged in activities that "directly or indirectly facilitate, support, provide funding for or contribute to a violation or attempted violation of the sovereignty or territorial integrity of Ukraine or that obstruct the work of international organizations in Ukraine". There are now three separate schedules of such "designated persons" appended to the Regulations, an unofficial consolidation of which is appended as Annex 1 to this Bulletin. Section 3 of the Regulations contains a broad prohibition against dealing in the property of designated persons, facilitating such dealings, providing or acquiring financial services to or for
the benefit of citizens and persons and making "any goods, wherever situated" available to a designated person. This section then is a relatively complete prohibition on selling to or buying from such designated persons. Section 5 amplifies the application of the provisions in section 3 by prohibiting "any person in Canada and any Canadian outside Canada" to do anything that quote causes, assists or promotes or is intended to cause, assist or promote" any act prohibited under section 3. Subsections 3.1 contains a prohibition on new debt financing of longer than 90 days maturity in relation to Gazprombank and Vneshekonombank which are listed as designated persons for purposes of this subsection. Similarly, subsection 3.2 prohibits new equity financing in relation to ownership interests, and property or rights and interests in their property of Gazprombank and Vneshekonombank. The Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations, SOR/2014-44 came into effect on March 5, 2014. These Regulations provide for the freezing of funds and economic resources of former President Viktor Yanukovych and 17 other prominent former Ukrainian government ministers, senior officials and businessmen. The Regulations freeze the assets of these 18 individuals by prohibiting the following actions by any person in Canada, or by any Canadian outside of Canada: dealing, directly or indirectly, in any property, wherever situated, of a politically exposed foreign person; entering into or facilitating, directly or indirectly, any financial transaction related to a dealing with any property of a politically exposed foreign person; or providing financial or other related services in respect of any property of a politically exposed foreign person. There is also an obligation under the Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations to disclose to the Commissioner of the Royal Canadian Mounted Police any property, or information about a transaction in relation to property, that is believed to be the property of a politically exposed foreign person. The Minister of Foreign Affairs may issue a permit to carry out an activity or transaction that would otherwise be prohibited under the Russian and Ukraine SEMA Regulations or the Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations. There are two sets of due diligence requirements under the Regulations. Section 6 provides that virtually all financial institutions in Canada must determine "on a continuing basis" whether or not they are in possession or control of property owned or controlled by any of the designated persons. All other persons are not under this continuing due diligence requirement.
However under section 7, "every person in Canada and every Canadian inside Canada" must disclose "without delay" to the RCMP the existence of property in their possession or control that they have" reason to believe is owned or controlled directly or indirectly by designated persons or an entity owned or controlled by such persons as well as any information about transactions or proposed transactions in respect of such property. The practical effect of this is that any employee of a company based in Canada and any Canadian employees of that company outside Canada are under an affirmative obligation to disclose any information may have regarding any property in their possession or control that they reasonably believe to be owned or controlled by a designated person. Export Control List There is another aspect to the Canadian sanctions program however that is not covered by the above Regulations but which nonetheless is of equal concern. That is the apparent extension of certain prohibitions under Canada's export control legislation under the Export and Import Permits Act R.S.C., 1985, c. E-19 and the Export Control List published pursuant to that Act. Interestingly, the Canadian government, unlike its US and European Union allies, has refrained from publicizing the increased scope of prohibitions under this aspect of its Russians sanctions program to any significant extent. There is no "Notice to Exporters" on the DFATD website. On August 6, 2014, Prime Minister Stephen Harper announced additional economic sanctions and travel bans against designated individuals. The relevant section of his Statement provides: "Export restrictions announced by the European Union with respect to military and military dual use goods destined the Russia, are already in place in Canada. We are also committed to imposing the necessary regulations to enact export restrictions on technologies used in Russia's oil exploration and extraction sector. Those will be implemented in parallel with our allies." What this indicates is that there are already Canadian export restrictions in place in relation to military and military dual use goods destined to Russia. However the second sentence indicates the Canada is "committed" to imposing necessary regulations to enact export restrictions on technologies used in Russia's oil exploration and extraction sector. Those will be implemented in parallel with our allies." This statement was made on August 6, 2014. On September 16, 2014, the Canadian government announced asset freezes and travel bans against four additional Russian individuals and economic sanctions against five Russian defence product manufacturers and one financial
institution. However, as of this date there is still no notice as to the actual imposition by the Government of Canada of controls on exports of oil exploration and extraction technology. US and EU Sanctions As noted above, the Canadian government has committed to imposing export restrictions on technologies used in Russia's oil exploration and extraction sector "in parallel with our allies". The already-published sanctions programs of both the EU and the US provide useful guideposts as to future Canadian government action in this area. Given the commitment by Canadian Prime Minister Harper to imposing export restrictions in parallel with Canada's NATO allies, it would seem to be only a matter of time before the scope of existing Canadian economic sanctions is expanded, particularly in relation to goods controlled under the Export and Import Permits Act. As noted above, US sanctions appear to cover both oil and gas technology and equipment for use in deep-water (more than 500 feet), Arctic offshore or shale formations in Russia effective August 1, 2014. On September 12, 2014, pursuant to Executive Order 13662, the US government extended the scope of its export controls to cover the Russian defense production sector as well as additional parties and additional activities in the Russian energy sector. Similarly, the EU announced the imposition on September 12, 2014 of further restrictions on dual use goods and technology destined for specified entities in Russia, the provision of services in relation to projects for deep-water exploration and production, Arctic oil exploration and production and shale oil projects, services related to goods and technology listed in the "common Military List" and access to capital markets. As well, EU has expanded the list of designated parties subject to sanctions. The EU sanctions cover the same type of technology and equipment destined for the same applications but they exclude gas-related technology and equipment. The expansion of the scope of US and European Union sanctions will also be of interest to any Canadian company with operations in either the US or the EU. As well, any persons located in the jurisdiction of the US will be fully subject to the application of US sanctions legislation in relation to any activity relating to exports to Russia. The above material is provided for information only and does not constitute legal advice in relation to any of the matters discussed. Sills Egsgard LLP is a Toronto-based law firm specializing in international trade and investment and related regulatory compliance issues. We would be happy to discuss specific legal issues in this area with interested parties. Visit for more information.