On 5 December, the EU published Regulation 1290/2014 updating Regulation 833/2014, which had already been amended by Regulation 960/2014 in September.
The amendment process was begun by the European Commission asking stakeholders for their comments on and issues with the earlier Regulations. A number of industries, including the oil and gas, and financial services submitted detailed comments. This lead to a number of proposed revisions being made by both the European Commission and the European Council, some of which were contradictory.
Finally, a text was agreed in late November, and this was put into force by Regulation 1290/2014.
“Ancillary contracts”
The words “or ancillary contracts necessary for the execution of such a contract.” have been added to the grandfathering provisions in Article 2(2) and into 2a(3) but we do not have any further definition of what is an “ancillary contract”.
Further, the “ancillary contract” wording added to Article 2 and 2a has been added to Article 3(5), second paragraph.
The way in which the relevant Member State authorities interpret this provision will have an important bearing on how the sanctions operate moving forward.
Article 3
The confusion over whether Annex II contains goods and/or technologies has now been dealt with by referring at Article 3 to the goods and technologies in Annex II as “items”, as per the use in the “Dual-Use” Regulation 428/2009 (as amended). Annex II itself has been amended to reflect this.
“Territorial scope”
In addition, the territorial scope of “Russia” in Article 3 has been extended to include “its Exclusive Economic Zone and Continental Shelf”, and the use of the phrase “any other country” has been changed to “any other State”. The reason for the latter change is not immediately self-evident.
Definition of “targeted segments”
Articles 2, 2a, 3, 3a, 4 and 5 have all been revised, as has Annex II.
A key change in Article 3 is the expansion of Article 3(3) which now gives the following three definitions of “deepwater”, “Arctic” and “shale”:
(a) oil exploration and production in waters deeper than 150 metres;
(b) oil exploration and production in the offshore area north of the Arctic Circle; or
(c) projects that have the potential to produce oil from resources located in shale formations by way of hydraulic fracturing; it does not apply to exploration and production through shale formations to locate or extract oil from non-shale reservoirs.
There was some concern that the EU was going to be using a definition of “shale” that, in effect, would also place restrictions on conventional projects. Fortunately, this concern appears to have been misplaced.
Safety and environment exception
A new paragraph has been added to Article 3(5) (and similar wording added to Articles 3a and 4) which reads:
The competent authorities may also grant an authorisation where the sale, supply, transfer or export of the items is necessary for the urgent prevention or mitigation of an event likely to have a serious and significant impact on human health and safety or the environment. In duly justified cases of emergency, the sale, supply, transfer or export may proceed without prior authorisation, provided that the exporter notifies the competent authority within five working days after the sale, supply, transfer or export has taken place, providing detail about the relevant justification for the sale, supply, transfer or export without prior authorisation.
At the moment, we have no further detail as to how the phrase “necessary for the urgent prevention or mitigation of an event likely to have a serious and significant impact on human health and safety or the environment” will be interpreted, but we assume it will generally be given a narrow interpretation. The updated UK BIS FAQs do contain a new procedure for invoking this emergency exemption.
As to Annex II, we also have described a major issue with Annex II, in that it had been interpreted as requiring all goods within the CN codes shown as being controlled. This meant that the description in the second column was, in effect, redundant. The interpretation of Annex II had been a matter of debate inside the relevant national agencies, with officials knowledgeable in customs law explaining, often to no avail, that a CN code preceded by ex is then limited to the goods in the following description and not all goods within that CN code.
Further, five headings, relating to pumps have been amended to make it clear that the controlled pumps are “specially designed” to pump muds or cements into oil wells, or “solely or principally” for use with oil field machinery of certain headings. Each of these five CN headings in the first column is preceded by ex. Therefore, we will have to see if national administrations adhere to this notation. Obviously if they do not, the change in the description is irrelevant. The signs are not initially encouraging with UK BIS stating in its FAQs released after the amendment that “A licence is required for export to Russia of goods and technologies listed in Annex II regardless of intended or actual end-use.”
Article 5
This has been amended extensively, with Article 5(3) being heavily amended and a new Article 5(4) added.
The current wording of Article 5(3) has been extended to include two redefined exemptions from Article 5(3), these being:
“(a) loans or credit that have a specific and documented objective to provide financing for non-prohibited imports or exports of goods and non-financial services between the Union and any third State, including the expenditure for goods and services from another third State that is necessary for executing the export or import contracts; or
(b) loans that have a specific and documented objective to provide emergency funding to meet solvency and liquidity criteria for legal persons established in the Union, whose proprietary rights are owned for more than 50 % by any entity referred to in Annex III.”
Under (a), the most important changes relate:
(i) to the use of the phrase “between the Union and any third State” instead of “between the Union and Russia“. This now makes it clear that the exception extends to activities involving third countries as well as directly between the EU and Russia. The narrow scope of the earlier exception had caused a lot of confusion;
(ii) the addition of the words “including the expenditure for goods and services from another third State that is necessary for executing the export or import contracts“. At the moment, the scope of these words is unclear, but it seems likely that the Member State authorities will be looking closely at what expenditure is “necessary” for executing import or export contracts. It is possible that the “execution” may have to be interpreted to include “performance”, “discharge” etc.
A new Article 5(4) has been added which reads:
The prohibition in paragraph 3 shall not apply to drawdown or disbursements made under a contract concluded before 12 September 2014 provided that the following conditions are met:
(a) all the terms and conditions of such drawdown or disbursements:
(i) were agreed before 12 September 2014; and
(ii) have not been modified on or after that date; and
(b) before 12 September 2014 a contractual maturity date has been fixed for the repayment in full of all funds made available and for the cancellation of all the commitments, rights and obligations under the contract.
The terms and conditions of drawdowns and disbursements referred to in point (a) include provisions concerning the length of the repayment period for each drawdown or disbursement, the interest rate applied or the interest rate calculation method, and the maximum amount.
The language here is a helpful clarification applicable to inter alia revolving credit facilities, where under the old Regulation there was debate as to whether the revolving credit facilities were or were not “new loans or credit”.
