Ukraine introduces a new type of sanction – Export controls and trade and investment sanctions

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Background

Since the outbreak of war in Ukraine, there has been a plethora of new laws establishing mechanisms for an adequate political and legal response to Russian aggression against Ukraine. Among the most important is considered the procedure for the nationalization of property related to Russia established by Ukrainian law “On the basic principles of forcible seizure of objects of property rights of the Russian Federation and its residents in Ukraine” (“Nationalization law“).

Another similar mechanism was introduced on May 13, 2022, when the Ukrainian Parliament adopted a new law amending the existing legislation on sanctions (“Amendments“). The amendments enact a new type of sanction equivalent to the seizure of assets in favor of the state. This new sanction is now applicable to both companies and individuals who cause significant damage to the national security of the state. ‘Ukraine.

The purpose of the amendments is to provide a legislative tool to prevent the Russian Federation from further aggressive actions and further use of seized assets to strengthen Ukraine’s defense capability, as well as to fund post-war reconstruction. Ukraine war and to compensate for the losses. We understand that the amendments also make it possible to hold accountable a wider circle of people helping (directly or indirectly) the Russian Federation in its armed aggression against Ukraine.

The law was signed by the President on May 21, 2022 and entered into force on May 24, 2022.


  1. Conditions precedent to the imposition of the new sanction

    The new sanction can only be applied if two preconditions are met:

    • a legal regime of martial law is active; and

    • the person or legal entity in question has already been sanctioned in the form of an asset freeze (which, according to the amendments, now means the deprivation of the right to use and dispose of the assets, including indirectly (by through other natural and/or legal persons) provision or equivalent rights.



  2. Who is affected?

    The amendments apply to natural and legal persons (including residents1 within the meaning of the nationalization law) that:

    • by their actions have caused significant damage to the national security, sovereignty or territorial integrity of Ukraine (including through armed aggression or terrorist activity); and or

    • contributed significantly (including through funding) to the commission of such acts by others.



  3. What is worth considering?

    According to the amendments, the above harmful actions provide for active participation in the aggression against Ukraine. The non-exhaustive list of such actions includes the direct financing of armed aggression against Ukraine; personal participation in the organization of illegal elections and/or referendums in the temporarily occupied Ukrainian territory; and provide informational support for the above actions or illegal decisions, etc. However, certain actions which, on the face of it, may not be perceived as contributing significantly to the national security, sovereignty or territorial integrity of Ukraine, are still considered as such, for example:

    • payment of taxes to the aggressor state budget exceeding the equivalent of UAH 40 million for legal entities and UAH 3 million for individuals in the last four consecutive fiscal (reporting) quarters;

    • payment of taxes to the aggressor state budget exceeding the equivalent of UAH 40 million for legal entities and UAH 3 million for individuals in the last four consecutive fiscal (reporting) quarters;

    • invest in government bonds of the aggressor state in an amount equal to or greater than 3 million UAH over a period of one year.



  4. Procedure applied

    Based on the preconditions and grounds provided by the amendments, a central government body (which has not yet been defined by the Cabinet of Ministers of Ukraine (“CMU”)) initiates legal action before the High Anti-Corruption Court of Ukraine demanding the foreclosure of the persons concerned. ‘ assets in favor of the State. After the delivery of the court decision, the CMU adopts a case-by-case procedure for its execution and designates the bodies authorized to manage the seized assets.



  5. Recommendations to consider

    To avoid any implicit risk that may impact your business when working with persons or entities that may be affected by the sanctions discussed, please ensure that you:

    • check with existing and potential counterparties whether their activity meets any of the criteria for sanctions to be imposed;

    • examine the strategies available to mitigate future risks;

    • examine the documents concluded with the natural or legal persons potentially concerned with regard to the provisions relating to force majeure, the termination clauses and the termination options available;

    • perform due diligence on assets currently or expected to be used by your business (if any) that may be affected by the penalties discussed; and

    • take into account risks other than those arising directly from the sanctions adopted (i.e. reputational, financial) linked to other business activities with the natural or legal persons concerned.


    We would be happy to be of any help on this path.

Footnote

1 Legal entities, including their branches and subsidiaries, operating in Ukraine in accordance with Ukrainian law, which are owned or controlled directly or indirectly by the Russian Federation as a state.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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