Proposed sanctions

5/21/2018 Proposed sanctions

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Non poperoutline of on initior package ol torgeted meosures in the oreas of access to

copitol morkets, defence, duor use goods and sensitive technorogies

ln line with the European council conclusions of 21 March and 21 June as well as of the statement ofthe Heads of state and Government on ukraine of 27 May, the 16 Jury European councir took a serresof steps to reinforce restrictive measures in view of Russia's action destabilising the situation inUkraine. These include:the expansion of the rist of designations to incrude persons and entities that ardsupportingmaterially or financiaily actions undermrning or threatening Ukraine,s territoriar integrity,sovereignty and independence.A further modification to the criteria with a view to ailow targeting individuars or entitieswho actively provide materiar or financiar support to, or are benefiting from, the Russiandecision-makers responsibre for the annexation of crimea or the destabilisation of Eastern-Ukraine.

o The request to the ErB to suspend the signature of new financing operations in the RussianFederation and the call to EU Member states to coordinate their positions within the EBRDBoard of Directors with a view to also suspending financing of new operations.' The invitation to the commission to re-assess Eu-Russia cooperation programmes with aviewto taking a decision, on a case by case basis, qn the suspension ofthe imprementationof EU bilaterar and regionar cooperation programmes. However, projects dearing excrusiverywith cross-border cooperation and civil society would be maintained.' The adoption of additional measures in particular restricting trade with and investments inCrimea and Sevastopol.

lmplementation of these measures is underway with a view to finarising them by the end of Jury.Further to taking these measures, the Jury European councir recafled that,,the commission and EEAShave been undertaking preparatory work on targeted measures, as it requested in March, so thatfurther steps can be taken without delayAt its meeting on 22 JulY 2014, the Foreign Affairs Council also stressed its readiness ,,to introducewithout delay a package of further significant restrictive measures,,. To this the end the councirrequested the commission and the EEAS to finarise preparatory work on possible targeted measuresand present proposars for taking action, incruding in the areas of access to capitar markets, defence,dual use goods, and sensitive technorogies, incrudrng in the energy sector. The resurt ofthis work wiilbe presented on Thursday 24 July .


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The Foreign Affairs Council also agreed to expand the restrictive measures with a view to targetingindividuals or entities who actively provide material or financial support to or are benefiting from theRussian decision-makers responsible for the annexation of Crimea or the destabilisation of EasternUkraine.ln line with this reques the non-paper outlines a number of measures that could be taken in theareas set out by the Council conclusions and the procedure that should be followed to adopt therelevant legal instruments.

The document builds on the preparatory work conducted by the Commission services, in cooperationwith the EEAS, in response to the mandate given by the March European Council. Different scenarioswere identified and.tested with regard to their impact on the EU economy and on the economies ofeach Member States. This was the basis for the preparation of country fiches with an economicimpact assessment, which were shared with the Member States. ln light of the feedback received,the analysis was further refined.The work on the possible form of an initial set of EU sectoral sanctions has been guided by thefollowing principles: 4i

. Effectiveness lintensity of impact on the Russian economy)o Cost/benefit rotio (taking into account adverse impacts on the EU ecotpmy, indudingfrom

possible symmetric or asymmetric Russian retaliations)o Bolonce across sectors and across Member States. Coordinotion with sanctions adopted by the US, G7 partners and othercountrieso Scolobitity / reversibility over time;. Legol defensibility of the measures/eose ol implementotion by economic operotoB.

Reflecting this preparatory work, the package of measures presented in this paper contains mearresaimed at affecting Russian calculatlons of costs and benefits in the management of the sbb,minimising adverse impact on the EU and maintaining space for diplomatic action and for scali.E upor reversing the restrictions in light of developments on the ground.It is for Member States to decide on the timing and the modulation they want to have for suchmeasures. The Commission is ready to table the necessary legislative proposals in all areas identified,once so requested by the council.


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Restrictions oa dccess to Eatcopitol morkets lor Russionstote-owned finonciolinstitutions

Torgeted medsures in the oreos of access to copitolmorkets, defence, dual use goods ond sensitivetechnologiesRussian companies and financial institutions are heavily dependent on EUcapital markets:

. Between 2004 and 2012 a total of USD 4g.4bn was raisedthrough lPOs in the EU by companies incorporated in Russia. Outof those, USD 15.4bn was issued by state-owned financialinstitutions.

o ln 2013, 47 ol the bonds issued by Russi*n public financialinstitutions were issued in the EU's financial markets (7.5bn outof a totat of 15.8bn).

Restricting access to capital markets for Russian state-owned financialinstitutions would increase their cost of raising funds and constrairt.theirability to finance the Russian economy, unless the Russian publicauthorities provide them with substitute financing. lt would also foster aclimate of market uncertainty that is likely to affect the businessenvironment in Russia and accelerate capital outflows.With regard to the scope ofthe restriction, the measure would consist inprohibiting any EU persons from investing in debt, equity and similarfinancial instruments with a maturity higher than 90 days, issued bystate-owned Russian financial institutions after the entry into force of therestrictive measure anywhere in the world. lt would also be prohibited toprovide investment services and any service in relation to the admlssionto trading on a regulated market or trading on a multilateral tradingfacility with regard to the same financial instruments.With regard to the entities targeted, the measure would taret Russianstate-owned credit institutions (banks with over 50 public ownership),as well as development finance institutions.The prohibition would extend both to primary markets (flrst issue) andsecondary (subsequent trading) market of the newly issued Russiansecurities. Existing shares and bonds would not be covered. Transactionsother than those mentioned before with the targeted entities wouldremain possible,

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lmpact on Russian investors would consist in sharply increased costs ofissuance, even if eventually alternative financing sources in third marketscould be found.Substitution would not be easy in the short term. Even if not cautht byEU sanctions, third-country investors will likely be unwilling to participatein new issuances by targeted entities or demand significantly higheryields. This would push companies to seek State financing as a stop-gap,further straining the govemment s budgeLWithin the EU, direct negative impac6 would be limited (opportunitycost of new investment and related services) and concentrated in.jurisdictions with high levels of financial intermediation or attractivevenues for issuance. The indirect impact wouldle distributed across theEU as potential investors and holders of Russian securities are spreadout. Whilst the measure will cover only new issues of (selected) Russiansecurities, it may affect indirectly the securities previously issued bytargeted entities, and already traded and held by EU investors. Adverseeffects could materialise in loss of revenue for operators,-Sepressedvalue of existing securitles, loss of market positions, and as an unlikelyworst-case scenario risks of defauh on outstanding obligations fromtargeted institutions. The Russian authorities, as maiority owners of thetargeted institutions, would have litde interest in seeing their finaflcialinstitutions default on their obligations.At an initial stage restrictions would not extend to sovereign bonds, asRussia is a significant investor in issuance by several EU MS. Equity anddebt financing irom private se6or operators yould also not be affected.Syndicated loans would also not be covered in tIrc piohibition, given theposslble adverse effects of possible asymmetsical retaliations on the EUsubsidiarles in Russia, but it is technically possible to add them insubsequent rounds.The efficiency of the measure strongly depends on coordinatbn with theUS. EU and US investors constitute the major portion of marketparticipants investing or assisting the investment in these financialinstruments and their venues are the major hubs for issuance.Other jurisdlctionsluch as Switzerland, Singapore, Hong Kong or Tokyowould only provide significant substitution capacity over time, but theycould not fully compensate for the loss of EU and US investors.As a possible next step the restriction could be tied to other sanctions inthe package, prohibiting subscription of bonds and equities fromcompanies operating in the sectors subject to sanctions (e.9. defencecompanies as done by the US on 15 July).

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Emborgo on tode in ormsexports and imports)

ln addition, all Russian targeted investors could be prohibited from usingEU stock exchanges or any other trading venues to list and quote newlyissued securities.

Russia is both an exporter and importer of arms to and from EU MemberStates. Russian exports excluding dual use technologies) are worth EUR3.2 biilion whire EU exports to Russia are around EUR 300 miilion. Anembargo on trade in arms courd be imposed on the whore defencesector, apprying to alr the products risted in the EU common miritary rist.Export licenses are a competence of Member States, although a Councilcommon position on arms export contrors intrdduced harmonisedcriteria. Some Member States have already suspended granting licensesto Russia. The restrictions would require a Council decision based on Art.29, with some provisions also introduced in the Council Regulation, inparticular concerning related technical and financial assistance.The question on how to deal with prior contracts, needs to be addressedpoliticarry by Member states. There are a number of options to dear withthe issue, such as a clause of safeguard for the execution of contractssigned before a certain date, which could be equally applied to bothexports and imports and to spare parts and servicing for existingequipment. The embargo would be reversible.

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Restrictions onduol use goods

exports oI

Restrictions on exports olsensitive technologies,including in the field olenetgy

Russian companies value access to dual use technologles and goodsproduced in the EU. EU dual use goods exports to Russia amount toaround EUR 20 billion per year (military and civilian end users) Restrictingexports of certain categories of dual use goods could be an effective andtargeted measure. Such a measure has already been put in place bysome Member States on an individual basis.The restriction would consist in an export ban for all dual goods formilitary use, military end users or mixed end-users (companies active inboth the military and civilian sectors).Restrictions could take the form of a prohibition to export to theidentified end users. National public authorities should refuse grantingthe requested license when there are grounds t believe that it is formilitary use or the end user is a military or a military/civilian company. Toperform the trade exporters should prove that it is not for a prohibiteduse.The envisaged restriction would be reversible but also sdlable. lfnecessary, as an incremental step, it could be considered to restrictexport to all end users (including civilian end users) for a narrowlydefined set of highly sensitive dual use goods.As an example this could concern:

. special materials

. quantum key distribution systems,

. some machine tools,

. high performance computers and electronics.Total EU exports ofthe dual use technologies identified above amount toaround EUR 4 billion per year (20% of the total dual use exports to RU).Dual use goods/technologies for which backfilling from third countries ispossible should not be included in the list.

Russia needs EU technologies to develop some of the most competitiveand export-oriented sectors of its economy, including energy and steelproduction. EU exports of energy related technologies for non-conventional oil and gas projects amountto approx. EUR 150 million peryear. The restriction to technology transfer in the field of energy wouldonly target long term production, so it should not disrupt current supplyand trade in energy products.

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Restridions on fidde-reloted findncing in thetechnologies/goods

The possibility for Russia to substitute such products and technologiesoriginating from the EU or US is low in view of the likely unavailability ofsimilar products (of similar degree of sophistication and quality)elsewhere.For these key, high tech, high value added technologies, which are notdual use goods, restrictions would take the form of a authorizationregime based on a Council decision and implementing Regulation with aprohibition to export the identified items when they are destined tospecific projects.There would be a system of prior authorization for the sale, supply,transfer or export, directly or indirectly, of the technologies listed in theCouncil Regulation, whether or not originating in the-onion, for use inRussia. Public authorities would deny export authorization of pre-identified technologies when there are grounds to determine that theproducts are destined for proiects in deep sea drilling, arctic explorationand shale oil. Gas related projects would not be affected. An indicativelist of possible concerned items is annexed. The licensing system is toensure that the ban is selecilve, limiting the impact for exporilngcompanies.Coordination with international partners (US considering same type ofrestrictions) as well as other non EU countries (Norway) would berequired to make the EU measure effective.To note, that US only sanctions would still affect EU producers via the deminimis rule according to which products with at least 25% of US contentwould fall underthe export prohibition.

This restriction would cover the provision of technical and financialassistance like export credi re-insurance or other financial servicesassociated with trades in commodities which are themselves subject torestrictions. lt is therefore a standard ancillary measure aimed atassisting the enforcement of sanctions.The measure would negatively impact on Russia by increasing the cost ofaccessing to those services in alternative markets (cost increaseestimated to around 1-2%). There could be negative impacts for serviceproviders, although a loss of revenue would occur anyway due to therestriction of the related trades. The US are ready to take a similarmeasure. lf sanctions only apply to some categories of dual usetechnologies, it would have a very modest impact.

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fuoeedumttiixctsTrade and financial seMces measures - including those targetiag dual use goods and sensitivetechnologies - may be adopted through a CFSP council Decision based on a,t. 29 TEU (unanimity,based on a EEAS proposal) and then a Regulat ron based on artkle 215(1) TFEU (by qualified majority,EP informed, based on a joint HR/COM proposal).An:arms embargo iivould require a CFSP CqrrncilBecision basedonart.29 TEU (unanimity, baed on aEEA5 proposau and thn a Regulation based on aiticle 215(1) TFEU (by qualified maiority, EPinforme4 based on a,oint HR/COM proposal).

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Documents

Proposed sanctions