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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:
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. 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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