Belarus Sanctions: EU introduces a new sectoral sanctions regime

• United Kingdom

• Financial services disputes and investigations
• Litigation and dispute management
• Sanctions

30-06-2021

Introduction

On 24 June 2021, the European Union introduced a raft of new restrictive measures in respect of the Belarusian regime. The scope of these targeted or “sectoral” sanctions is broad and impacts a number of sectors including financial services, insurance, telecommunications, technology, oil and gas, shipping and maritime, mineral and mining, agriculture and tobacco.

This package of measures represents a ramp up of sanctions which have been progressively imposed by the EU since October 2020 in response to human rights and internal repression concerns, including the forced landing of a Ryanair flight on 23 May 2021. Measures imposed prior to 24 June 2021 were largely targeted at President Alexander Lukashenko and those associated with his regime, including:

• a ban on Belarusian carriers from EU airspace and airports; and
• asset freezes and travel bans for designated Belarus individual and entities.

In a rare show of unified foreign policy objectives not seen since the sectoral sanctions in respect of Russia in 2014, on 21 June, the UK, Canada, the US and the EU issued a joint statement regarding blocking sanctions imposed on individuals and entities connected with the Ryanair diversion. At the time of this publication, only the EU has taken further action in respect of a more comprehensive programme of restrictive measures and it remains to be seen whether other members of the G7 will follow suit.

We have summarised the key features of the new Belarus sectoral sanctions below, as well as the position in respect of UK measures. In light of the raft of new measures and the current dynamic nature of this space, businesses should consider whether it would be appropriate to carefully review transactions and supply chains for any Belarusian-nexus to ensure compliance, specifically those operating in the affected sectors.

EU Sanctions and Trade Restrictions

As of 24 June 2021, a total of 166 individuals and 15 entities have been designated as subject to restrictive measures including asset freezes and travel bans.

In addition, Regulation (EC) No 765/2006 concerning restrictive measures in respect of Belarus has been amended by Regulation (EU) 2021/1030 (the “Regulation”) and the following additional measures have now been imposed. The EU regime has targeted those sectors of the Belarusian economy which appear to provide the greatest profit to the Lukashenko regime, including areas where the EU has notable business activities.

• Export restrictions in respect of certain equipment, technology or software, including that which is intended primarily for use in monitoring or intercepting internet or telephone communications.

In addition to relatively standard prohibitions on the export of military and dual-use equipment, technology and software, the new sanctions measures prohibit the export of certain equipment, technology or software (as set out in Annex IV) without a licence.

The measures also include restrictions in respect of providing, directly or indirectly, the following: 

- technical assistance or brokering services related to the equipment, technology or software identified in Annex IV to any person in Belarus or for use in Belarus;

- any technical assistance or brokering services related to the installation, provision, manufacture, maintenance and use of the equipment and technology identified in Annex IV to any person in Belarus or for use in Belarus;

- financing or financial assistance related to those goods which are the subject of the export restrictions to any person in Belarus or for use in Belarus; and

- any telecommunication or internet monitoring or interception services of any kind for the Belarussian Government, the public sector or entities/agencies acting on their behalf or at their direction.

The impact of such restrictions on the telecommunications sector appears to have been limited to some extent due to the fact that Annex IV specifically carves out ‘software designed for installation by the user without further substantial support by the supplier and which is generally available to the public by being sold from stock at retail selling points […]’. As such, it appears to be the case that business to consumer activities should not be significantly impacted.

In addition, the EU has imposed export restrictions on the sale of goods for production or manufacturing of tobacco products including filters, papers for cigarettes, flavours for tobacco and machinery for preparing or making up of tobacco.

The export-related provisions, amongst others, contain a ‘grandfathering’ provision, under which the prohibitions do not apply to any contracts executed before 25 June 2021, or to ancillary contracts necessary for the execution of such contracts. As such, to the extent that businesses have entered into framework agreements for the supply of any equipment, technology, software or services prior to 25 June 2021, careful consideration should be given to whether any ‘call off’ contracts would be considered ‘ancillary contracts necessary’ for the execution of any framework agreement.

• Prohibitions in respect of the import of Belarusian petroleum products

The Petroleum product restrictions prohibit:

 

- the import of petroleum products that originate in Belarus or have been exported from Belarus;

- the purchase of petroleum products which are located in or which originate in Belarus;

- the transport of petroleum products if they originate in Belarus or are being exported from Belarus to any other country; and

- the provision of, directly or indirectly, technical assistance, brokering services, financing or financial assistance, including financial derivatives, insurance and re-insurance, relating to the above-mentioned activities.

The relevant petroleum products are listed in Annex VII, by reference to their commodity code. For the purposes of the Regulation, ‘petroleum products’ includes: 

- 27 10 being petroleum oils and oils obtained from bituminous minerals (excluding crude); preparation containing >= 70% by weight of petroleum oils or of oils obtained from bituminous minerals, these oils being basic constituents of the preparations, n.e.s.; waste oils containing mainly petroleum or bituminous minerals;

- 27 11 being petroleum gas and other gaseous hydrocarbons;

- 27 12 being petroleum jelly, paraffin wax, micro-crystalline petroleum wax, slack wax, ozokerite, lignite wax, peat wax, other mineral waxes, and similar products obtained by synthesis or by other processes, whether or not coloured;

- 27 13 being petroleum coke, petroleum bitumen and other residues of petroleum oil or of oil obtained from bituminous minerals, n.e.s; and

- 27 15 being bituminous mastics, cut-backs and other bituminous mixtures based on natural asphalt, on natural bitumen, on petroleum bitumen, on mineral tar or on mineral tar pitch.

The descriptions used above are not an exhaustive list of petroleum products that are impacted. Instead, these are the heading descriptions for the relevant commodity code. Accordingly, any commodity with a tariff heading beginning with one of the listed commodity codes would be restricted.

Interestingly, the EU has not included crude oil in the list of affected petroleum products, and it is not immediately clear at this time why this is the case. Horizon scanning in order to determine whether, if a future wave of targeted measures were to be imposed, crude oil would be included in the scope, is therefore made rather difficult.

However, the restrictive measures are significantly wide-ranging as they appear to include natural gas, something that is of concern considering that the Yamal-Europe natural gas pipeline, which delivers natural gas from Siberia to the EU, transits Belarus. While the restrictive measures do not expressly prohibit ‘transit’, as they do with potash, some consideration will need to be given to any transactions on this pipeline to ensure that there is no ‘export’ of the gas from Belarus. This is an interesting development given the recent discussions between US and EU politicians in respect of the energy security of the EU, following the US’s opposition of Nord Stream II.

Moreover, the prohibition on the transport of petroleum products if they originate in Belarus or are being exported from Belarus to any other country is likely to have wide-ranging implications for the shipping and maritime sector, as the restrictions would apply to any transport of Belarusian-origin petroleum products that are being onward supplied (i.e. from one third party to another). This may have significant implications on supply chains or chain transactions.

Again, the restrictions in respect of petroleum products are subject to a grandfathering provision under which contracts executed before 25 June 2021 and ancillary contracts necessary for the execution of such contracts are excluded.

• Prohibitions relating to the import, purchase, or transfer of potassium chloride ("potash") products.

It is prohibited to import, purchase or transfer, directly or indirectly, potash products as listed in Annex VIII from Belarus, whether or not originating in Belarus.

Potash is the largest export of Belarus and Belarus’ state owned potash producer is one of the world’s largest suppliers. According to national statistics, EU imports only made up approximately 8% of Belarus’ potash sales in 2020. However, the EU prohibition will have a significant impact on the Belarusian potash economy as the restrictions also include a prohibition on the transfer of any potash products (as listed in Annex VIII) from Belarus (irrespective of whether they are of Belarusian-origin) through the EU.

While Belarus commands a strategic location in the energy sector due to the Russian-origin oil and gas pipelines that connect through Belarus to the EU, it is significantly more exposed in respect of physical exports. As a landlocked country, Belarus’ closest port access is via Lithuania, an EU Member State that is now prohibited from transiting potash products (as listed in Annex VIII) from Belarus. Accordingly, Belarusian supply chains are going to feel the ‘pinch’.

Similarly to the other export-related restrictions, contracts executed prior to 25 June 2021 or ancillary contracts necessary for the execution of such contracts are excluded.

• Prohibitions on dealing in transferable securities and money market instruments with a maturity of more than 90 days issued after 29 June 2021 by the Republic of Belarus and certain financial institutions.

It is prohibited to directly or indirectly purchase, sell, provide investment services for or assistance in the issuance of, or otherwise deal in transferable securities and money-market instruments of certain Belarus entities.

This prohibition affects those securities and instruments issued by:

- the Republic of Belarus, its Government, its public bodies, corporations or agencies; or

- a major credit or other institution established in Belarus with over 50% public ownership or control as of 1 June 2021, which includes Belarusbank, Belinvestbank and Belagroprombank;

- non-EU subsidiaries which are directly or indirectly owned more than 50% by Belarusbank, Belinvestbank and Belagroprombank; and

- any legal person, entity or body acting on behalf of or at the direction of Belarusbank, Belinvestbank and Belagroprombank or any non-EU subsidiaries, as identified above.

• Prohibitions in respect of new loans or credit with a maturity of more than 90 days, made after 29 June 2021 to the Republic of Belarus and certain financial institutions.

It is prohibited to directly or indirectly make or be part of any arrangement to make new loans or credit of the applicable tenor to the following entities:

- the Republic of Belarus, its Government, its public bodies, corporations or agencies; or

- a major credit or other institution established in Belarus with over 50 % public ownership or control as of 1 June 2021, which includes Belarusbank, Belinvestbank and Belagroprombank;

- non-EU subsidiaries which are directly or indirectly owner for more than 50% by Belarusbank, Belinvestbank and Belagroprombank; and

- any legal person, entity or body acting on behalf of or at the direction of such non-EU subsidiaries.

We note there are carve outs for: 

- loans or credit in respect of financing for non-prohibited imports or exports of goods and non-financial services between the EU and any third state;

- authorisations in respect of humanitarian assistance, environmental projects and nuclear safety or where necessary to comply with prudential requirements, where such activity would not result in funds or economic resources being made available (directly or indirectly) to designated persons; and

- drawdowns or disbursements under contracts concluded prior to 25 June 2021 where certain conditions are met.

• Prohibitions on the provision of insurance or reinsurance to the Belarusian Government, public bodies , corporations or agencies, including those acting on their behalf or at their direction
  
  
• Specific restrictions in respect of the European Investment Bank regarding disbursements or payments under any existing agreements in relation to projects in the public sector and any Technical Assistance Service Contracts

In addition, Council Decision 2012/642/CSFP concerning restrictive measures in view of the situation in Belarus has been similarly updated by Council Decision (CFSP) 2021/1031 but also includes a requirement for Member States to take action to limit the involvement of multilateral development banks in Belarus. This specifically includes the International Bank for Reconstruction and Development and the European Bank for Reconstruction and Development.

UK Sanctions and Trade Restrictions

The financial sanctions regime imposed against Belarus by the UK is governed by the Republic of Belarus (Sanctions) (EU Exit) Regulations 2019. At the time of publication, the UK has imposed asset freezes and travel bans against Belarusian individuals and entities in connection with the Ryanair incident, as well as the continued suppression of democracy and human rights in Belarus. This includes restrictive measures against senior-ranking officials in the Lukashenko regime and BNK (UK) Ltd.

Notably, to date, the UK is the only authority to impose sanctions on BNK (UK) Ltd, an integral actor in the Belarusian energy-sector. Given that the UK has already taken this step to target an area of the Belarusian economy, it remains to be seen whether it will go further to implement sectoral sanctions similar to those imposed by the EU.

Impact and Next Steps

These EU sectoral sanctions represent a significant departure from the limited sanctions which have previously been in place in respect of Belarus. Those sectors which are particularly impacted by these restrictions and which have direct exposure to Belarus or designated parties will need to take swift action in order to ensure compliance with these measures. We set out below a sector-specific impact analysis and recommendations.

As a more general comment, the latest action taken by the EU marks a further move away from the EU’s traditional approach of targeting specified individuals, entities and items of strategic importance, including military and dual-use equipment, technology and software, towards the use of “smart sanctions” targeting key sectors of the economy of the relevant jurisdiction which have strategic importance, such as those that generate the most revenue for the target regime. Global businesses will need to ensure that their sanctions compliance programmes are also smart enough to absorb the impact of ever increasingly complex and fast-moving international sanctions.

Oil and Gas Sector

The UK has imposed sanctions against BNK (UK) Ltd, a provider of petroleum product services to Belarusian oil refineries. This entity negotiates contracts for fuel supplies to North West Europe and oil terminal companies. This could significantly impact many EU companies.

Notably, prior to imposing sectoral sanctions, the EU designated Mikhail Gutseriev, the founder of SAFMAR Group – a Russian multisector conglomerate – which has significant assets, group companies and other activities in the oil and energy (including refineries, oilfields and coal mining), construction, media and hospitality sectors. Accordingly, it is critical that businesses which are required to comply with EU sanctions assess their exposure to the SAFMAR Group, in light of the fact that EU sanctions restrictions apply to those entities that are owned or controlled by a designated person.

Moreover, businesses will need to be mindful of the origin and location of petroleum products, a feat which is notoriously difficult in this sector. In light of this fact, businesses should consider whether there is an alternative way to mitigate any sanctions risks, such as by way of warranties in respect of the origin or location of affected petroleum products.

The oil and gas sector will also be impacted by the need to terminate any disbursements or payments under any existing agreements in relation to projects in the public sector and any Technical Assistance Service Contracts by the European Investment Bank. Companies need to review their contracts and ensure that none relate to projects in the public sector or any Technical Assistance Service Contracts. Moreover, given the complex nature of commodity transactions (including the ancillary service contracts associated with the same e.g. transport and service fees), enhanced screening measures should be utilised in order to confirm that there is no sanctions-‘nexus’ to the transaction.

Telecoms Sector

The telecoms sector will need to assess any transactions associated with Belarus in order to ensure compliance with the export-related restrictions. Moreover, businesses operating in this sector may consider whether it would be appropriate to scan transaction chains in order to ensure that they are not indirectly providing prohibited services, as this often presents a significant area of exposure for actors in this industry.

Companies in the telecoms sector also need to review their current contracts to determine whether any of them relate to projects in the public sector or Technical Assistance Service Contracts. There should be no payments or disbursements made under those contracts. Additionally, payments should not be made to any designated individuals or entities, and screening should be enhanced to ensure those individuals and entities are correctly identified.

Financial Services Sector

The capital markets restrictions imposed in respect of Belarus closely mirror those imposed in respect of the Russia/Ukraine sanctions programme. Financial institution clients will likely already have internal controls in place, including policies, procedures and screening technology, which are calibrated for sectoral sanctions. These will need to be updated to reflect the additional economic restrictions in respect of Belarus. Of particular importance will be customer-, counterparty- and instrument-level screening. Organisations should check whether any accounts are maintained and/or whether any funds or economic resources are held on behalf of any of the designated individuals or entities. Any such accounts, funds or economic resources should be frozen immediately.

Insurance and Reinsurance

Based on the wording of the regulation there is a risk that the restrictions imposed in respect of insurance and reinsurance apply to both contracts concluded before 25 June 2021 and those entered into after the regulation took effect. Therefore, insurance and reinsurance companies will need to review their existing policies to check whether any cover is provided in relation to the Belarusian Government or its related entities. In addition, insurance and reinsurance companies should check if they are providing any insurance or reinsurance policies in relation to the importation, purchase or transport of petroleum products that originate, are located in or are being exported from Belarus.

In the event that an insurance or reinsurance company has underwritten policies that are now affected by the restrictions, the insurer/reinsurer will need to review those policies to confirm whether they contain appropriate sanctions clauses which would release them from any payment obligation in the event of a loss. If the policies do not contain appropriate sanctions clauses, the insurer/reinsurer will need to check if either, the policies entitle the insurer/reinsurer to terminate or there are local law provisions which would permit them to do so. Insurance and reinsurance companies need to work closely with brokers to ensure no polices are entered into which include these sanctioned risks.

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