Écrit par Jessica Horwitz, George Reid, Sabrina Bandali, Mitchell Dorbyk and Serge Dupont
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 a wide-ranging expansion of its 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. Since February 24, 2022, Canada has 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:
- Well over two thousand individuals and entities have been added to Schedule 1 of Canada's Special Economic Measures (Russia) Regulations, the Schedule of the Special Economic Measures (Ukraine) Regulations and Schedule 1 of 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 freezes assets and prohibits all property dealings, financial transactions and trade in goods and technology. Entities now on Schedule 1 include, among others, 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 (former 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 under Canada's Criminal Code or asset freeze listings under Canada's Freezing of Assets of Corrupt Foreign Officials Act (under the latter of which there are no regulations affecting Russia or Belarus at present, but there are regulations related to Ukraine).
- Effective on February 24, 2022, Canada 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, the docking of cruise ships licensed or registered in Canada (except in emergency situations), services related to maritime transport of crude oil, 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, and since September 29, 2022, the Russian-occupied areas of the Kherson oblast and Zaporizhzhia oblast. The sanctions on the Kherson and Zaporizhzhia regions were subject to a 30-day wind down period for contracts entered into before September 29, 2022. 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." These restrictions are in addition to the restrictions that apply to the Crimea region of Ukraine, which have been in place since 2015. 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. Investments involving direct or indirect ties to Russian investors and/or entities will now 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.
- Effective March 24, 2022, Canada amended the Special Economic Measures (Russia) Regulations to implement a Restricted Goods and Technologies List. The amendments prohibit individuals and businesses in Canada, and Canadian citizens and corporations outside of Canada, from exporting, selling, supplying or shipping any of the goods or technologies on the Restricted Goods and Technologies List to Russia, with some exceptions. The list is extensive and expands on the scope of items in categories similar to those contained in Canada's Export Control List, such as electronic devices including computers, coding software, and telecommunications equipment, sensors and lasers, navigation and avionics, marine, aerospace and transportation equipment and technology. The addition of this list brings Canada's export and supply controls for Russia closer in line with the scope of controls imposed by the United States. As the list is incorporated by reference into the regulations, Canada can add to the list without the need for a regulatory amendment to the regulations. On April 5, 2022, Canada amended the Special Economic Measures (Belarus) Regulations to apply the same restrictions to Belarus.
- Effective April 5, 2022, Canada amended the Special Economic Measures (Russia) Regulations and Special Economic Measures (Belarus) Regulations to add restrictions on insurance in the aviation and aerospace sectors. It is now prohibited to insure or reinsure any good, or technology in relation to a good, listed in Chapter 88 of the Harmonized Commodity Description and Coding System – which is the chapter that covers aircraft, spacecraft, and parts thereof – for the benefit of Russia or any person in Russia and Belarus or any person in Belarus.
- On May 18, 2022, Canada amended the Special Economic Measures (Russia) Regulations to create three additional lists of goods that are either prohibited from being exported, sold, supplied or shipped to, or from being imported, purchased or acquired from, Russia.
- Schedule 6 Part 1 lists luxury goods that Canadians are prohibited from supplying to Russia. This list includes a wide range of products such as cosmetics, gold and silver, various clothing and accessories, alcohol and many more consumer discretionary products.
- Schedule 6 Part 2 lists Russian luxury goods that Canadians are banned from purchasing or acquiring, including goods such as fish, caviar, alcohol or diamonds used in jewelry.
- Schedule 7 lists goods prohibited for supply to Russia that have potential applications in manufacturing of weapons, but which also have many other commercial, industrial, medical or laboratory end uses. Schedule 7 cover a wide array of products including, for example, aluminum and aluminum products, certain raw materials like tungsten, motor vehicle parts, various heavy-duty machinery such as forklifts or pile drivers, boats, pumps, camera equipment and many more goods. Note that despite the manner in which the contents of the list is described in the government's media releases, the export ban on Schedule 7 goods is not specific to end use of the goods.
- Effective June 7, 2022 Canada amended the Special Economic Measures (Russia) Regulations to ban the supply of key services to certain Russian industries. Canadians and persons in Canada are prohibited from providing a wide range of services, such as mining and oil & gas extraction support services, energy distribution, repairs and research & development, to Russia or to any person in Russia in specified industries. The prohibition is in effect immediately without any wind-down or grandfathering allowances. The scope of services covered by the prohibition is broad and includes management services, construction work; computer and related services; transportation of petroleum, natural gas and crude oil; accounting, auditing and bookkeeping services; architectural services, engineering services, advertising, and others. The Russian industries subject to the original prohibition were mining of coal and lignite, extraction of crude petroleum and natural gas, mining of metal ores, other mining and quarrying, mining support service activities, manufacturing of coke and refined petroleum products, and manufacturing of chemicals and chemical products. On July 14, 2022, Canada further expanded its services ban to Russian operators of oil and gas pipelines and the Russian manufacturing sector, including businesses that manufacture metal products, computers, electronics and optical devices, electrical equipment, machinery, motor vehicles, trailers and semi-trailers, transport equipment. Two additional categories of support services for manufacturing were added to the schedule. The July 14 amendments were subject to a 60-day wind down period for contracts entered into before July 14, 2022. Due to the broad nature of these sanctions, we strongly advise that any person or entity doing business in Russia review whether their activities are in violation of these amendments. This includes multinational corporations providing services to Russian affiliates on an intercompany basis
- Effective June 27, 2022, Canada amended the Special Economic Measures (Russia) Regulations and the Special Economic Measures (Belarus) Regulations to create schedules listing additional categories of advanced technology that are now subject to a supply prohibition. The same prohibitions apply to items on Russia regulations Schedule 5.1 and Belarus regulations Schedule 3 as to items on the Restricted Goods and Technologies List: Canadians and persons in Canada cannot export, supply, sell, or ship any goods or technology (including intangibles such as technical data, software or technical assistance, training or consulting) listed on those schedules, regardless of where the goods or technology are situated, to Russia or Belarus or any person in Russia or Belarus. These schedules include items such as quantum computing equipment and technology, cryogenic freezers, certain manufacturing equipment and technology including apparatus for ultrasonic extrusion or certain laser cladding, certain software, and microscopes and related equipment. These prohibitions came into effect immediately.
- Effective August 6, 2022 (30 days after the amendment date of July 7, 2022), it is prohibited for persons in Canada, or Canadian citizens or entities operating outside Canada, to import, purchase or acquire any gold products listed in Schedule 9 of the Russia regulations from Russia or any person in Russia. The schedule includes unwrought gold, semi-manufactured gold, gold powder, monetary gold, and articles of jewelry, goldsmiths' or silversmiths' wares and parts thereof of precious metal other than silver, whether or not plated or clad with precious metal. The prohibition does not apply to travellers' personal effects or to goods in transit through Russia from a third country.
- On December 7, 2022, Canada amended the Special Economic Measures (Russia) Regulations to prohibit the provision of eight specific categories of services set out in Schedule 10 of the Regulations to or for the benefit of Russia or persons in Russia if those services are related to maritime transportation of Russian crude oil, unless that oil was purchased at or below the price set out in the G7+ Coalition Oil Price Cap List.
- On February 14, 2023, Canada added both Russia and Belarus to to the list of countries that Canada considers "non-market economies" for purposes of trade remedy investigations due to significant state intervention in domestic markets and export trade. This makes it easier for Canadian authorities to use third country surrogate price data when calculating dumping margins in investigations involving exports from Russia and Belarus.
- On March 10, 2023, Canada amended the Special Economic Measures (Russia) Regulations to prohibit the import of a wide range of aluminum and steel products originating from Russia, as listed in Schedule 11 of the regulations.
- On July 19, 2023, Canada expanded its trade restrictions to prohibit the export, sale, supply or shipment by any Canadian or person in Canada of any "arms and related material" to Russia or any person in Russia, as well as on any financial, technical or other services related to the sale, supply, transfer, manufacture, maintenance or use of arms and related material. Exports of arms and military equipment covered by Canada's Export Control List were already effectively prohibited because of the export permit presumption of denial that has been in place since February, 2022. However, this amendment expands the supply ban to more broadly cover "any type of weapon, ammunition, military equipment—including military vehicles—or paramilitary equipment, and their spare parts". This supply ban is further to the ban on import, purchase or acquisition of arms and related material introduced in February, 2023, and the supply bans for materials listed on the Restricted Goods and Technologies List and on Schedule 7 of the Russia regulations introduced in 2022, which also list various materials with military applications that may overlap. There are exemptions for equipment for humanitarian use or use by the Canadian Armed Forces.
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), the performance of contracts entered into before the sanctions came into force (in the case of the the Crimea region geographic sanctions) or for 30 days after entry into force (for the Donetsk, Luhansk, Kherson and Zaporizhzhia geographic sanctions). However, no new transactions or business is permitted with these individuals, entities or regions.
In the June 2022, the Government of Canada amended the Special Economic Measures Act to add the world's first known forfeiture mechanism. The mechanism creates the potential for property owned or controlled by persons subject to a sanctions asset freezing order to be seized through a court-supervised process and forfeited to the Canadian government for use in: (a) the reconstruction of a foreign state adversely affected by a grave breach of international peace and security; (b) the restoration of international peace and security; and (c) the compensation of victims of a grave breach of international peace and security, gross and systematic human rights violations or acts of significant corruption. We described these amendments in another blog post, Canada's Federal Budget 2022 and Canadian Sanctions Implications. In December 2022, Canada announced its intention to pursue, as a test case, forfeiture of certain assets held in Canada by an entity allegedly controlled sanctioned Russian billionaire Roman Abramovich. The case remains in development.
On June 22, 2023, Canada passed legislative amendments as part of the 2023 Federal Budget omnibus bill, Bill C-47, to introduce a definition of "deemed ownership" to the Special Economic Measures Act. The definition expands application of dealings bans to property held by entities in which a sanctioned person either legally holds, or otherwise exercises in practice, a controlling interest. Canada's definition is currently broader than the approach taken by other countries, which, in the absence of interpretive guidance to clarify the scope of the rule, has created confusion and interpretive ambiguity particularly for companies navigating compliance with multiple sanctions regimes. The amendments also enabled Canada to list individuals and entities located in third countries on a particular sanctions list under the Special Economic Measures Act where the third country actor has helped other listed persons to evade sanctions—introducing the possibility of Canadian 'secondary sanctions'. We discuss these amendments in other blogs posts, Canadian Government Introduces Legislation to Add Sanctions 50% Rule and Update Rules on Ownership and Control and New Canadian Economic Sanctions "Deemed Ownership" Rule Now in Force.
FINTRAC released a Special Bulletin (which is updated from time to time) highlighting the risk that Russia-linked money laundering may be connected to the evasion of sanctions. The Bulletin notifies reporting entities under Canada's anti-money laundering laws of characteristics associated with Russia-linked money laundering, including the involvement of firms in offshore jurisdictions that have "historically specialized in Russian clientele or in transactions associated with Russian elites and their associates", a sudden rise in transactions to offshore jurisdictions associated with Russian financial flows, and certain cryptocurrency transactions, such as transactions emanating from IP addresses in Russia, or "chain hopping", involving transfers from one virtual currency to another.
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 have also implemented broad and steadily expanding sanctions over the past year, although it is important to note that despite similarities in breadth, the sanctions of these other jurisdictions are not precisely aligned with Canada's. Some of Canada's sanctions are broader than equivalent ones in those other countries, and there are also examples of instances in which Canada's sanctions are narrower. It is important not to assume that Canada's sanctions are the same as those of other jurisdictions (for example the United States); separate sanctions analysis and due diligence should be conducted for each jurisdiction of relevance to your business or transaction.
On June 7, 2022 the Canada border Services Agency and the United States Bureau of Industry and Security announced new cooperative measures in the area of Russia sanctions and export control enforcement. The two agencies began sharing more information, conducting pre and post verification audits of goods, detaining and seizing shipments and coordinating on investigation or enforcement actions. By cooperating, the departments hope to "stop critical goods and technologies from falling into Russian hands."
One non-Canadian measure that has implications for Canadian businesses is the United States' imposition of "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 severely constrained the capacity of Russian financial institutions to conduct foreign exchange transactions globally, 80 percent of which are in U.S. dollars.
While the SWIFT-related measures affect mostly financial institutions, not specifically Canadian businesses engaged in trade and investment with Russian entities or subsidiaries of Russian entities, the measures have worked their way through many channels to all parts of the Russian financial system, its economy and beyond. For example, the measures against the Russian central bank have impeded 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 were a freefall of the ruble and a spike in domestic interest rates. Sanctions also forced restrictions on the transfer of foreign currency abroad (capital controls) by Russia on February 28, 2022. Meanwhile, the Russian banks targeted by the sanctions incurred liquidity shortages of hard currencies and are unable to process international transactions for their clients. The Russian government has implemented a number of restrictive measures in response, including, among others, an "exit tax" payment required in transactions in which foreign investors are seeking to divest Russian assets. Issues concerning such payments should be evaluated carefully with the advice of Russian legal counsel as well as sanctions counsel of applicable local jurisdictions.
The bottom line is that the sanctions have been felt by virtually all Russian entities and their subsidiaries funded by, or exposed, to the Russian financial system, and by commercial actors dealing with these Russian entities. Canadian businesses are advised to assess their direct and indirect exposure to this risk in their commercial dealings.
These sanctions imposed by Canada and other countries have had a profound and wide-ranging effect on the operations of many 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.
These are complex and rapidly evolving matters, with significant exposure risks. The Bennett Jones International Trade group is available to assist companies to evaluate risk exposure, develop response plans, and advise on the impact of Canadian sanctions on Canadian and foreign businesses.