Lending To Russian And Ukrainian Borrowers: Financial Sanctions

The current crisis in Ukraine and worsening relations between the West and Russia make it timely to review how the financial sanctions recently imposed may affect finance transactions. While, at the time of writing, there has been a slight easing in tensions, the position remains highly volatile.

In this note we outline the sanctions imposed by the EU and US, consider what steps might be available to lenders, and what effect the sanctions may have on existing facilities and on documentation. With financial sanctions, however, "the devil is in the detail". It is important to establish exactly which sanctions are applicable, who is affected by them, and their exact terms.

Sanctions arising from events in the Ukraine

EU sanctions were first imposed on 6 March 2014 against former President Yanukovych and a number of former ministers and senior officials identified with his regime. On 17 March the EU imposed sanctions against a number of Russian and other officials deemed by the EU to be directly associated with events in Ukraine.

The sanctions require funds and economic resources of those named to be frozen, and prohibit their being made available to them or for their benefit, whether directly or indirectly, without a licence from the relevant authority. This extends to assets owned, held or controlled by these individuals and EU guidance indicates that an interest of 50% or more amounts to ownership. The restrictions apply to steps taken both within the EU and elsewhere, and an EU institution may find that this conflicts with its legal obligations outside the EU, causing potential difficulties. Breach of these sanctions is a criminal offence, but liability is not strict: it is a defence if the institution or person concerned did not know and had no reasonable cause to suspect that it was dealing with a designated person. Institutions acting in good faith and without negligence when freezing assets will not face civil claims from parties affected.

A number of other jurisdictions, including a number heavily exposed to investment into Russia, have followed suit, or are within the scope of these sanctions. Cyprus and the BVI, for example, are reported to have been, respectively, the first and third largest foreign direct investors into Russia in 2012, with Cyprus much favoured by high-net-worth Russian and Ukrainian clients. Both jurisdictions are subject to the EU sanctions, Cyprus as a member state, and BVI as a British dependency.

A US executive order of 6 March 2014 authorised an asset freeze and visa ban on individuals and certain entities associated with the situation in Ukraine, and sanctions have followed. The...