This blog was originally published on February 25, 2022 and has been updated to reflect further developments.
On February 21, 2022, Russia formally recognized the purported independence of two regions in Eastern Ukraine, Donetsk and Luhansk. The next day it ordered Russian troops into the separatist-occupied territories, and the incursion escalated into a multi-pronged invasion of Ukraine on February 24, 2022. Canada swiftly announced new sanctions that target Russia and the occupied Ukrainian regions, as it warned it would do if Russia were to continue its aggressive policies against Ukraine.
Prime Minister Trudeau announced on February 22, 2022, that Canada would, in coordination with like-minded NATO partner states, issue additional sanctions targeting Russia, Belarus and the separatist-controlled territories of Ukraine. Between February 24 and March 14, 2022, Canada implemented a series of escalating restrictions on trade and financial transactions with these regions, including some that leverage seldom used legal mechanisms beyond economic sanctions legislation. Canada's new sanctions include the following measures:
- Over 500 individuals and entities have been added to Schedule 1 of Canada's Special Economic Measures (Russia) Regulations, four individuals have been added to the Schedule of the Special Economic Measures (Ukraine) Regulations and 19 new individuals and 25 entities have been added to the Special Economic Measures (Belarus) Regulations. Some of these listings are new, while other entities that were previously on Schedules 2 and 3 of the Russia regulations, which impose targeted sectorial sanctions limited to debt and/or equity financing constraints, were shifted to Schedule 1, which prohibits all financial transactions and trade in goods and technology. Entities now on Schedule 1 include the Central Bank of Russia, the Russian National Wealth Fund and the Russian Ministry of Finance, VTB Bank, Sberbank, Bank Otkritie, Novikombank, Sovcombank, Promsvyazbank PJSC, VEB Bank, the Russian Direct Investment Fund, Gazprom, Gazprombank and Gazpromneft, Rostelecom, Rostec, Wagner paramilitary group, Transneft, and United Aircraft Corporation among others, as well as on President Vladimir Putin, Foreign Minister Sergei Lavrov, individual members of the Russian Federal Assembly, Russian Security Council, and other Russian oligarchs and businesspeople such as Roman Abramovich (Owner of Chelsea FC). A consolidated reference list of currently sanctioned persons is available on the Global Affairs Canada website. Note that this consolidated list sometimes has an approximately 24 hour delay between the entry into force of new sanctions listings and the list being updated. The consolidated list also does not include anti-terrorism listings or asset freeze listings under Canada's Freezing of Assets of Corrupt Foreign Officials Act (under which there are no regulations affecting Russia or Belarus at present, but there are regulations related to Ukraine).
- Effective on February 24, 2022, Canada has cancelled all Canadian export permits for goods listed on Canada's Export Control List to Russia, effectively banning the export of all controlled goods and technology including dual-use (civilian) items. Canada also announced that no further permits will be issued barring exceptional circumstances involving medical/ humanitarian need. See Notice to Exporters No. 1071.
- Effective March 3, 2022, Canada issued Tariff Withdrawal Order 2022-1 that removes the entitlement of Russia and Belarus to Canada's Most-Favoured-Nation ("MFN") tariff status under the Customs Tariff. This means that virtually all goods originating from Russia or Belarus will now face a 35 percent Canadian import tariff. The only other country currently excluded from Canada's MFN rates is North Korea. Order 2022-1 does not apply to goods that were already in transit to Canada on or before March 3, 2022. Russian and Belarussian goods are excluded from Canada's MFN rates for 180 days following March 3, 2022, unless both Canada's Parliament and Senate vote to extend the exclusion.
- Canada has banned all investments and related financial transactions, trade in goods, tourism and related financial transactions, and the provision of technical assistance to the regions of Ukraine controlled by the self-declared Donetsk People's Republic and Luhansk People's Republic. Technical assistance is defined as "any form of assistance, such as providing instruction, training, consulting services or technical advice or transferring know-how or technical data." See Regulations Amending the Special Economic Measures (Ukraine) Regulations and Customs Notice 22-01.
- Transport Canada implemented a no-fly zone for Russian aircraft in Canadian airspace, effective February 27, 2022, and Canada closed its territorial waters and ports to Russian-owned or flagged vessels effective March 6, 2022.
- Effective March 10, 2022, it is prohibited for persons in Canada, or Canadian citizens or entities operating outside Canada, to import, purchase or acquire petroleum oil, petroleum gas, or other gaseous hydrocarbons from Russia or any person in Russia.
- On March 8, 2022, the Honourable François-Philippe Champagne, Minister of Innovation, Science and Industry issued a policy statement advising non-Canadian investors and Canadian businesses to review their investment plans involving potential connections to Russian investors and entities, including controlling and minority interests. Minister Champagne stated that Russia's invasion of Ukraine has created an "environment of elevated national security and economic risk to Canada", and that both net benefit reviews and national security reviews under the Investment Canada Act will be impacted. Effective immediately, investments involving direct or indirect ties to Russian investors and/or entities will face increased scrutiny under both review mechanisms: acquisitions of control of a Canadian business involving Russian investors will be found to be of "net benefit" to Canada on an exceptional basis only, and the fact that an investment has ties to or is subject to influence by the Russian state will support a finding that there are reasonable grounds to believe the investment could be injurious to Canada's national security. For more detail regarding Minister Champagne's statement, please see our additional insight, Government of Canada Issues Policy Statement Impacting Russian Foreign Investment in Canada.
The listed person restrictions are subject to grandfathering clauses, which authorize payments by a listed person to a non-listed person owed under a contract that was entered into before the person was listed (in the case of Russian Schedule 1, Belarus Schedule 1 and Ukraine Schedule sanctions), or the performance of contracts entered into before the sanctions came into force (in the case of the Donetsk and Luhansk geographic sanctions). However, no new transactions or business is permitted with these individuals, entities or regions.
Canada acted in coordination with like-minded security partners to develop these sanctions. The European Union, United Kingdom, United States, Japan, South Korea, Switzerland, Australia and other countries also announced sanctions over recent weeks that are largely aligned with Canada's, although there are notable differences. For example, Germany halted certification of the Nord Stream 2 pipeline project.
One non-Canadian measure that has implications for Canadian businesses is the United States' imposition of two new "foreign direct product rules" to supplies or transfers of goods and technology to Russia and to Russian military end users or end uses. This prohibits, under U.S. law, the supply of goods or technology made outside of the United States that were produced using specified categories of U.S. origin software or technology, such as testing or production equipment, or in a plant or "major component" of a plant located outside the United States that is itself a direct product of specified categories of U.S. origin software or technology. In certain circumstances and depending on available license exemptions, U.S. foreign direct product rules can have the effect of making a broader range of items manufactured wholly outside the United States subject to U.S. export control laws when being exported to Russia and imposing significant U.S. export license requirements when these items are exported from third countries (such as Canada) to Russia. The U.S. Department of Commerce has granted Canada a license exemption in connection with the Russia-related foreign direct product rules because Canada has committed to implementing substantially similar export controls in connection with supplies of export controlled goods and technology to Russia. Exporters should confirm their eligibility for this license exemption with U.S. trade counsel to ensure that it applies in their particular circumstances.
Russian Central Bank and SWIFT Sanctions
Sanctions on Russia were toughened significantly further to a February 26, 2022 joint statement by authorities from the European Commission, France, Germany, Italy, the United Kingdom, Canada, and the United States. Specifically, Canada and its partners together committed to sanction the Russian central bank, preventing it from deploying its international reserves to contain the effects of sanctions on its economy and financial system. They also agreed to block selected Russian banks from accessing the global inter-bank messaging system SWIFT, disconnecting the targeted institutions from the global financial system. The EU later extended the SWIFT ban to certain Belarussian banks. Earlier U.S. actions, among other effects, had cut off Russia’s two largest banks Sberbank and VTB—with a combined value of assets representing more than half of the total banking system in Russia—from processing payments through the U.S. financial system. The U.S. steps have already severely constrained the capacity of Russian financial institutions to conduct foreign exchange transactions globally, 80 percent of which are in U.S. dollars.
These added measures affect mostly financial institutions, not specifically Canadian businesses engaged in trade and investment with Russian entities or subsidiaries of Russian entities. However, the measures will work their way through many channels to all parts of the Russian financial system, its economy and even beyond. For example, the measures against the Russian central bank will impede its ability to protect the value of the ruble, to sustain a flow of imports into the economy, and to control domestic interest rates. Early consequences have been a freefall of the ruble and a spike in domestic interest rates. Sanctions have also forced the reported imposition a ban on the transfer of foreign currency abroad (capital controls) by Russia on February 28, 2022. Meanwhile, the Russian banks targeted by the sanctions will rapidly incur liquidity shortages of hard currencies and will be unable to process international transactions for their clients.
The bottom line is that the sanctions will be felt—perhaps not immediately but soon—by virtually all Russian entities and their subsidiaries funded by, or exposed, to the Russian financial system, and hence to any commercial entity dealing with these Russian entities. Canadian businesses will be well advised to assess their direct and indirect exposure to this risk in their commercial dealings.
As these sanctions imposed by Canada and other countries have the potential to affect the operations of Canadian businesses that trade with, provide services to or engage in financial transactions with Russia or Ukraine, businesses should evaluate their current exposure in these regions and monitor developments closely. Canada and its allies have indicated that they could further expand the sanctions if the crisis escalates.