Sanctions—The Carrot or the Stick? In Most Recent Changes, A Bit of Both

The EU and the US both made significant changes to their sanctions just prior to the Christmas holidays, ranging from a brand-new EU sanctions programme against Yemen to the history-making reduction of US sanctions against Cuba.

Perhaps the most noticeable impact of sanctions on day-to-day life in Finland, has come from the sanctions imposed by the EU and the US in response to the crisis in Ukraine. The EU and US also made changes in their respective Ukraine-related sanctions programmes during the holidays.

Sanctions are naturally designed to discourage behavior which would otherwise naturally occur. However, it may be fair to refer to certain exemptions, exceptions and the grant of licenses to continue business that would otherwise be prohibited as the “carrots” which are meant to ease the burdens of the sanctions world.

New Carrots in the Form of General Licenses to Continue Business

During the last month of 2014, the US authorities announced the offer of two particularly significant “carrots”. Specifically General License No. 4 which authorises the export and re-export of certain medicines, medical supplies, replacement parts for medical supplies and certain agricultural products to the Crimea region of Ukraine.

Even more significantly, the US granted General License No. 5 to allow the performance of any activities necessary to the winding down or divestiture or transfer of a U.S. person’s share of ownership in investments located in Crimea, of operations, contracts, or other agreements involving the importation of any goods, services, or technology from Crimea into the United States. It also allows activities necessary for the winding down of operations, contracts, or other agreements involving the exportation, re-exportation, sale, or supply of goods, services, or technology to Crimea.

This grace period for winding down activities expires at 12:01 a.m. eastern daylight time, February 1, 2015. All of the General Licenses granted by the US authorities are available for use by any individual or entity that is required to obey the US sanctions and General License No. 5 in particular may grant significant relief to those facing the sudden end of existing business in the Crimea.

However, this relief also comes with certain restrictions. General License No. 5 does not allow transactions with sanctioned individuals or entities and also does not allow any continuation of performing the contracts by exporting, re-exporting or importing goods between the US and Crimea. Also, a report on the activities conducted to wind-down the existing business activity must be submitted to OFAC no later than 10 days after the winding down activities have been completed.

New Sticks Imposed by the US and the EU

US new sanctions 

While the US has provided some measure of relief for certain market participants, it also enacted during December 2014 new restrictions via new and expanded sanctions against Crimea. These new US sanctions came in the form of the new Ukraine Freedom Support Act, which became effective on 18 December, and a new Executive Order issued by President Obama on 19 December 2014.

The Ukraine Freedom Support Act may have only a limited impact initially, as most of its provisions are discretionary and grant the US President expanded power to impose sanctions, but no obligation to impose sanctions in most cases. One exception is the new sanctions on the Russian state arms company, Rosoboronexport. The new Act requires President Obama to impose sanctions on Rosoboronexport on or around 17 January 2015, which must be chosen from a list of possible sanctions included in the text of the new Act. Furthermore, the new Act authorises sanctions against Gazprom, the Russian energy giant, if the US President determines that Gazprom is withholding significant natural gas resources from Ukraine, Georgia or Moldova.

The Executive Order of 19 December also significantly expanded the existing US sanctions against the Crimea region of Ukraine and persons obliged to obey the US sanctions are now prohibited from making investments in, exporting to or importing from Crimea, providing financing for such activities and more. Indeed, the US sanctions against Crimea are so extensive that it may be fair to generalize by saying that most activities in Crimea or intended for Crimea are now prohibited by the US sanctions.

EU new sanctions

The EU also enacted new sanctions against the Crimea during the holiday season. The new EU sanctions greatly expanded the scope of the existing sanctions against the Crimea. Before the December changes, the business prohibited formerly included only the Crimean infrastructure industries of transportation, telecommunications and energy. The scope has been greatly expanded such that now most business activities connected to Crimea are prohibited by the EU sanctions.

The industries of tourism and real estate have been directly affected as it is now illegal to carry out tourism operations or real estate transactions in the Crimea and tourist ships are no longer to stop in Crimean ports. Furthermore, the new EU sanctions include an extensive list of more than 150 different categories of goods, technologies and services which can no longer be provided to the Crimea.

Fortunately for businesses who have existing business in Crimea, the new EU sanctions do include some automatic extensions of the deadline for compliance, to soften the economic blow on EU companies which must now face the loss of their existing business in the Crimea.

In some cases, contracts entered into before 20 December 2014 may in some cases be continued for as long as necessary to complete the obligations under that contract, so long as the parties notify the appropriate authorities at least 5 days before taking any actions under that contract. While in other cases, contracts entered into before 20 December 2014 can be continued only until 21 March 2015 and the proper authorities still must be notified 5 days in advance of any actions taken to fulfill the contract. Additionally, tourist ships may still stop in Crimean ports in case of emergency, so long as the appropriate authorities are notified of the port visit not less than 5 days after the port visit took place.

Knowledge is Power

As the recent changes to the sanctions regime illustrate, the exact nature of the sanctions and precisely what is and is not prohibited tends to change over time. Companies that remain alert to changes in the sanctions programmes are best able to both protect themselves from the loss of important business and to identify business opportunities not affected by sanctions restrictions.

Educating yourself about the sanctions, and consulting with legal advisors in complex matters, can help ensure that your business can adapt quickly to the changing business environment and continue to do business with confidence.