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 of the Heads of state and Government on ukraine of 27 May, the 16 Jury European councir took a serres of steps to reinforce restrictive measures in view of Russia's action destabilising the situation in Ukraine. These include: the expansion of the rist of designations to incrude persons and entities that ardsupporting materially 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 entities who actively provide materiar or financiar support to, or are benefiting from, the Russian decision-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 Russian Federation and the call to EU Member states to coordinate their positions within the EBRD Board 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 a viewto taking a decision, on a case by case basis, qn the suspension ofthe imprementation of EU bilaterar and regionar cooperation programmes. However, projects dearing excrusivery with cross-border cooperation and civil society would be maintained. ' The adoption of additional measures in particular restricting trade with and investments in Crimea 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 EEAS have been undertaking preparatory work on targeted measures, as it requested in March, so that further steps can be taken without delay" At its meeting on 22 JulY 2014, the Foreign Affairs Council also stressed its readiness ,,to introduce without delay a package of further significant restrictive measures,,. To this the end the councir requested "the commission and the EEAS to finarise preparatory work on possible targeted measures and 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 wiil be presented on Thursday 24 July". The Foreign Affairs Council also agreed to expand the restrictive measures with a view to targeting individuals or entities who actively provide material or financial support to or are benefiting from the Russian decision-makers responsible for the annexation of Crimea or the destabilisation of Eastern Ukraine. ln line with this reques! the non-paper outlines a number of measures that could be taken in the areas set out by the Council conclusions and the procedure that should be followed to adopt the relevant legal instruments. The document builds on the preparatory work conducted by the Commission services, in cooperation with the EEAS, in response to the mandate given by the March European Council. Different scenarios were identified and.tested with regard to their impact on the EU economy and on the economies of each Member States. This was the basis for the preparation of country fiches with an economic impact 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 the following 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 othercountries o 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 mearres aimed 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 up or 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 such measures. The Commission is ready to table the necessary legislative proposals in all areas identified, once so requested by the council. Restrictions oa dccess to Eat copitol morkets lor Russion stote-owned finonciol institutions Torgeted medsures in the oreos of access to copitol morkets, defence, dual use goods ond sensitive technologies Russian companies and financial institutions are heavily dependent on EU capital markets: . Between 2004 and 2012 a total of USD 4g.4bn was raised through lPOs in the EU by companies incorporated in Russia. Out of those, USD 15.4bn was issued by state-owned financial institutions. o ln 2013, 47% ol the bonds issued by Russi*n public financial institutions were issued in the EU's financial markets (!7.5bn out of a totat of !15.8bn). Restricting access to capital markets for Russian state-owned financial institutions would increase their cost of raising funds and constrairt.their ability to finance the Russian economy, unless the Russian public authorities provide them with substitute financing. lt would also foster a climate of market uncertainty that is likely to affect the business environment in Russia and accelerate capital outflows. With regard to the scope ofthe restriction, the measure would consist in prohibiting any EU persons from investing in debt, equity and similar financial instruments with a maturity higher than 90 days, issued by state-owned Russian financial institutions after the entry into force of the restrictive measure anywhere in the world. lt would also be prohibited to provide investment services and any service in relation to the admlssion to trading on a regulated market or trading on a multilateral trading facility with regard to the same financial instruments. With regard to the entities targeted, the measure would tar!et Russian state-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) and secondary (subsequent trading) market of the newly issued Russian securities. Existing shares and bonds would not be covered. Transactions other than those mentioned before with the targeted entities would remain possible, u lmpact on Russian investors would consist in sharply increased costs of issuance, even if eventually alternative financing sources in third markets could be found. Substitution would not be easy in the short term. Even if not cautht by EU sanctions, third-country investors will likely be unwilling to participate in new issuances by targeted entities or demand significantly higher yields. This would push companies to seek State financing as a stop-gap, further straining the govemment's budgeL Within the EU, direct negative impac6 would be limited (opportunity cost of new investment and related services) and concentrated in .jurisdictions with high levels of financial intermediation or attractive venues for issuance. The indirect impact wouldle distributed across the EU as potential investors and holders of Russian securities are spread out. Whilst the measure will cover only new issues of (selected) Russian securities, it may affect indirectly the securities previously issued by targeted entities, and already traded and held by EU investors. Adverse effects could materialise in loss of revenue for operators,-Sepressed value of existing securitles, loss of market positions, and as an unlikely worst-case scenario risks of defauh on outstanding obligations from targeted institutions. The Russian authorities, as maiority owners of the targeted institutions, would have litde interest in seeing their finaflcial institutions default on their obligations. At an initial stage restrictions would not extend to sovereign bonds, as Russia is a significant investor in issuance by several EU MS. Equity and debt financing irom private se6or operators yould also not be affected. Syndicated loans would also not be covered in tIrc piohibition, given the posslble adverse effects of possible asymmetsical retaliations on the EU subsidiarles in Russia, but it is technically possible to add them in subsequent rounds. The efficiency of the measure strongly depends on coordinatbn with the US. EU and US investors constitute the major portion of market participants investing or assisting the investment in these financial instruments and their venues are the major hubs for issuance. Other jurisdlctionsluch as Switzerland, Singapore, Hong Kong or Tokyo would only provide significant substitution capacity over time, but they could not fully compensate for the loss of EU and US investors. As a possible next step the restriction could be tied to other sanctions in the package, prohibiting subscription of bonds and equities from companies operating in the sectors subject to sanctions (e.9. defence companies as done by the US on 15 July). ,r- 4 I Emborgo on tode in orms (exports and imports) ln addition, all Russian targeted investors could be prohibited from using EU stock exchanges or any other trading venues to list and quote newly issued securities. Russia is both an exporter and importer of arms to and from EU Member States. Russian exports (excluding dual use technologies) are worth EUR 3.2 biilion whire EU exports to Russia are around EUR 300 miilion. An embargo on trade in arms courd be imposed on the whore defence sector, apprying to alr the products risted in the EU common miritary rist. Export licenses are a competence of Member States, although a Council common position on arms export contrors intrdduced harmonised criteria. Some Member States have already suspended granting licenses to Russia. The restrictions would require a Council decision based on Art. 29, with some provisions also introduced in the Council Regulation, in particular concerning related technical and financial assistance. The question on how to deal with prior contracts, needs to be addressed politicarry by Member states. There are a number of options to dear with the issue, such as a clause of safeguard for the execution of contracts signed before a certain date, which could be equally applied to both exports and imports and to spare parts and servicing for existing equipment. The embargo would be reversible. 5.i t t Restrictions on duol use goods exports oI Restrictions on exports ol sensitive technologies, including in the field ol enetgy Russian companies value access to dual use technologles and goods produced in the EU. EU dual use goods exports to Russia amount to around EUR 20 billion per year (military and civilian end users) Restricting exports of certain categories of dual use goods could be an effective and targeted measure. Such a measure has already been put in place by some Member States on an individual basis. The restriction would consist in an export ban for all dual goods for military use, military end users or mixed end-users (companies active in both the military and civilian sectors). Restrictions could take the form of a prohibition to export to the identified end users. National public authorities should refuse granting the requested license when there are grounds t! believe that it is for military use or the end user is a military or a military/civilian company. To perform the trade exporters should prove that it is not for a prohibited use. The envisaged restriction would be reversible but also sdlable. lf necessary, as an incremental step, it could be considered to restrict export to all end users (including civilian end users) for a narrowly defined 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 to around EUR 4 billion per year (20% of the total dual use exports to RU). Dual use goods/technologies for which backfilling from third countries is possible should not be included in the list. Russia needs EU technologies to develop some of the most competitive and export-oriented sectors of its economy, including energy and steel production. EU exports of energy related technologies for non- conventional oil and gas projects amountto approx. EUR 150 million per year. The restriction to technology transfer in the field of energy would only target long term production, so it should not disrupt current supply and trade in energy products. ,a .6 Restridions on fidde- reloted findncing in the technologies/goods The possibility for Russia to substitute such products and technologies originating from the EU or US is low in view of the likely unavailability of similar products (of similar degree of sophistication and quality) elsewhere. For these key, high tech, high value added technologies, which are not dual use goods, restrictions would take the form of a authorization regime based on a Council decision and implementing Regulation with a prohibition to export the identified items when they are destined to specific projects. There would be a system of prior authorization for the sale, supply, transfer or export, directly or indirectly, of the technologies listed in the Council Regulation, whether or not originating in the-onion, for use in Russia. Public authorities would deny export authorization of pre- identified technologies when there are grounds to determine that the products are destined for proiects in deep sea drilling, arctic exploration and shale oil. Gas related projects would not be affected. An indicative list of possible concerned items is annexed. The licensing system is to ensure that the ban is selecilve, limiting the impact for exporilng companies. Coordination with international partners (US considering same type of restrictions) as well as other non EU countries (Norway) would be required to make the EU measure effective. To note, that US only sanctions would still affect EU producers via the de minimis rule according to which products with at least 25% of US content would fall underthe export prohibition. This restriction would cover the provision of technical and financial assistance like export credi! re-insurance or other financial services associated with trades in commodities which are themselves subject to restrictions. lt is therefore a standard ancillary measure aimed at assisting the enforcement of sanctions. The measure would negatively impact on Russia by increasing the cost of accessing to those services in alternative markets (cost increase estimated to around 1-2%). There could be negative impacts for service providers, although a loss of revenue would occur anyway due to the restriction of the related trades. The US are ready to take a similar measure. lf sanctions only apply to some categories of dual use technologies, it would have a very modest impact. 7 ,, t I L i i I 3 fuoeedumttiixcts Trade and financial seMces measures - including those targetiag dual use goods and sensitive technologies - 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 a EEA5 proposau and th!n a Regulation based on aiticle 215(1) TFEU (by qualified maiority, EP informe4 based on a,oint HR/COM proposal). ,,.8 l l I