Ukraine

Rebuilding Ukraine, with an estimated cost of around $1 trillion, will be an unprecedented undertaking given the massive scale and uncertain environment. Although the reconstruction details are still being determined, the main international donors are likely to be the EU and its Member States, international financial institutions, and the United States. And while large-scale efforts are unlikely to start across all of Ukraine until after a peace agreement is reached, limited recovery projects have already been launched and may be expanded.

Marshall Plan Times Ten

Russia’s war of aggression has generated enormous economic damage in Ukraine, not to mention over 140,000 civilian and military casualties. According to the latest World Bank estimates, the overall damage in Ukraine resulting from the war is already around $425 billion. This consisted of $135 billion in direct damage and $290 billion in disruptions to economic flows and production.

Longer-term, Ukraine foresees around $1 trillion necessary for post-war reconstruction over a ten-year period. Depending on the depth and destruction of the war, however, even this colossal estimate may increase over time. By comparison, the oft-invoked example of the Marshall Plan—America’s historic reconstruction of Western Europe after World War II—was around $100 billion in current dollars spread over four years and across seventeen European countries. Ukraine may require that times ten over ten years and could become the world’s largest reconstruction effort since 1945.

To help meet this need, the international community has begun organizing donors’ conferences of governments and companies interested in supporting and rebuilding Ukraine’s economy. In July 2022, the Ukraine Recovery Conference was held in Lugano, Switzerland, with the participation of five heads of state and government and 58 international delegations (representatives of governments and international organizations). In October 2022, Germany and the European Commission co-hosted in Berlin a conference of experts to develop ideas for Ukraine’s reconstruction.

On June 21-22, 2023, the Ukraine Recovery Conference convened in London with officials from 61 countries, leaders of 33 international organizations, and numerous companies. At the conference, the European Commission unveiled a €50 billion proposal for Ukraine (in grants and loans over three years) as part of its EU budget review, which the Council and Parliament will now need to discuss and decide upon. The EU along with several international financial institutions signed agreements worth over €800 million to mobilize private investment for Ukraine. And over 500 firms signed the Ukraine Business Compact committing to supporting Ukraine’s reconstruction. The next conference will convene again in Berlin in 2024.Continue Reading Ukraine’s Reconstruction

On 28 October 2022, the European Commission (the “Commission”) adopted the  second amendment to its Temporary Crisis Framework for State Aid measures to support the economy following the aggression against Ukraine by Russia (the “Framework”). The second amendment to the Framework extends its duration by one year until 31 December 2023.

The four most important things you need to know about this amendment are:

  • Maximum aid amounts have been increased;
  • Guarantees or subsidised interests can now cover larger amounts of loans when taken by large energy utilities companies that provide financial collateral for trading activities on energy markets. Exceptionally, guarantees can also be provided as unfunded financial collateral directly to central counterparts or clearing members to cover the liquidity needs of energy companies, to clear their trading activities on energy markets;
  • To achieve the EU targets of reducing electricity consumption in response to high energy prices, Member States may provide compensation for genuine reductions in electricity consumption; and
  • State recapitalisations are not subject to detailed rules as under the COVID-19 Temporary Framework, however the Commission highlights the general principles it will use to assess them on a case-by-case basis. 

Continue Reading The Commission prolongs and amends its Temporary Crisis Framework relaxing State aid rules to support the economy following the aggression against Ukraine by Russia

In recent weeks, the U.S. Department of the Treasury has further expanded the scope of sanctions targeting Russia in response to its ongoing invasion of Ukraine and its purported annexation of the Kherson, Zaporizhzhya, Donetsk, and Luhansk regions of Ukraine. The U.S. Department of Commerce also has expanded export controls against Russia and Belarus. These measures are in addition to the new EU and UK sanctions and export controls announced last week and covered in our October 10 client alert.

On September 30, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued guidance that the United States is prepared to more aggressively use its existing authorities to impose sanctions against persons who provide material support to or for sanctioned persons or sanctionable activity, with a particular emphasis on entities and individuals in jurisdictions outside of Russia that provide political or economic support for Russia’s purported annexation of Ukrainian territory. This guidance was accompanied by a series of new designations to OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”), including a Chinese firm and an Armenian firm that were designated for having provided material support to a Russian firm that specializes in procuring foreign items for Russia’s defense industry.

On September 15, OFAC issued two new determinations: a determination pursuant to Executive Order (“E.O.”) 14024 and a determination pursuant to E.O. 14071. The first authorizes the imposition of property-blocking sanctions against persons determined to operate in, or to have operated in, the quantum computing sector of the Russian economy. The second prohibits U.S. persons, with limited exceptions, from providing quantum computing services to any person located in Russia.

On September 9, OFAC issued preliminary guidance concerning a ban on a broad range of services related to the maritime transportation of Russian-origin crude oil and petroleum products (collectively “seaborne Russian oil”). The ban will take effect on December 5, 2022 with respect to maritime transportation of Russian crude oil and on February 5, 2023 with respect to maritime transportation of Russian petroleum products. The ban will include an exception for the receipt of services by jurisdictions or actors that purchase seaborne Russian oil at or below a price cap to be established by a coalition of countries including members of the G7, the EU, and the United States.

Additionally, the Commerce Department’s Bureau of Industry and Security (“BIS”) amended the Export Administration Regulations (“EAR”) on September 15 to (i) expand the scope of the Russian industry sector export restrictions to cover additional items, including quantum computing and advanced manufacturing-related hardware, software, and technology, and to apply the industry sector export restrictions to Belarus; (ii) add dollar value exclusion thresholds to some earlier restrictions on luxury goods exports to Russia; and (iii) expand the scope of the military end-user and military-intelligence end-user rules to reach entities in third countries, with a particular focus on entities that support military or military-intelligence end users or end uses in Russia or Belarus. On September 30, following Russia’s announcement that it would annex the Donetsk, Luhansk, Kherson, and Zaporizhzhya regions of Ukraine, BIS added dozens of entities to its Entity List, which imposes BIS licensing requirements for the export, reexport, or transfer (in-country) to such entities of any goods, technology, and software that are subject to the EAR.Continue Reading The United States Imposes Additional Sanctions and Export Controls Against Russia and Belarus

Russia is no longer a partner of the European Union; Ukraine has been accepted as a candidate member; the United States supply weapons and advanced intelligence to an ex-Soviet Union member; NATO is back on the front stage; the UK and Turkey are part of a new ‘European Political Community’… Nobody, a year ago, could have predicted these dramatic changes on the European chessboard. And Vladimir Putin’s behaviour is making these changes increasingly irreversible.

An assessment follows about the current situation, what it means for the transatlantic relationship, what it changes in the debate on enlargement in the European Union and what might be its implications for the future.

The war in Ukraine

The war in Ukraine did not start in February 2022. It started in 2014, when Russia annexed Crimea and launched military operations in the Eastern Ukrainian oblasts of Donetsk and Luhansk. But the reaction of the world at the time was rather subdued: the Obama administration condemned the annexation of Crimea but let France and Germany alone participate in the ‘Minsk process’ with Russia and Ukraine in the so called ‘Normandy format’. This process quickly entered into a deadlock – with Ukraine’s military  only discreetly supported and supplied by Western countries – and Putin concluding that there was therefore no real obstacle to the restoration of Russia’s lost Empire.

The scenario completely changed on February 24, 2022. What Russia called a ‘special military operation’ was seen by the rest of the world as a massive invasion of an independent country, the first ‘war of aggression’ in Europe since the end of world two and a violation of  the most basic principles of the UN charter and the current world order.Continue Reading Changes on the European chessboard

In late June, the European Council (leaders from the 27 EU Member States) granted Ukraine and Moldova the status of “candidate countries” for EU membership, and promised Georgia the same once it meets certain conditions. What are the practical consequences of this seminal decision?

In short, the process of preparing for membership in the European Union is fundamentally political and tailored to each specific country and historical moment. For instance, no country in the EU’s history had to simultaneously wage war to defend its homeland and independence while on the accession path. Although there are various precedents, accession criteria, pre-existing funding streams, and established processes, the scale, type, and duration of benefits available to Ukraine from the EU accession path will be unique. As important as the psychological boost to Ukraine from the EU’s political signal, the tangible benefits from Ukraine’s candidacy status will be invaluable.

Historical Precedents

Notwithstanding four earlier rounds of enlargement in the 1970s-1990s (Denmark, Ireland, UK, Greece, Portugal, Spain, Austria, Finland, and Sweden), significant EU pre-accession funding started with the enlargement process across Central and Eastern Europe (CEE) after the end of the Cold War. The first major program, PHARE (Poland and Hungary Assistance for Restructuring their Economies), launched in 1989 to cover these two countries and soon expanded to eight other candidate countries to prepare them for EU membership. It distributed about €16 billion between 1990 and 2006.  There were also two targeted funding programs for the environment and transport (ISPA) as well as agriculture (SAPARD), which distributed an additional €5 billion.Continue Reading Ukraine’s EU Accession Process

On June 23, 2022, the UK introduced a series of further trade restrictions in relation to Russia, including in connection with certain security-related goods and technology, iron and steel products, communications interception and monitoring services, jet fuel and fuel additives, UK or EU currency banknotes and a broad category of “revenue generating goods” which includes a range of items used by various industries. The UK supplemented these measures with additional asset-freezing sanctions on June 29.

This alert summarizes these new sanctions measures and touches upon further recent UK sanctions developments, including proposals for further restrictions on the import of gold into the UK and Russian access to UK trusts services.

New Trade Restrictions

The Russia (Sanctions) (EU Exit) (Amendment) (No. 10) Regulations 2022 further amended the UK’s Russia sanctions Regulations (the “UK-Russia Regulations”) to introduce the new trade restrictions outlined, which came into force on June 23, 2022.Continue Reading UK Introduces Further Sanctions Measures Relating to Russia

Technology equity markets took a sharp turn in the last two months of Q1 2022, with S&P Technology Index reaching to over 18% in the red in mid-March, before closing the quarter at 7% off.  In the last month, across all sectors, Russia’s attack on Ukraine has rattled markets and dented investor appetite amid increased volatility and uncertainty.  The decline in valuations is being impacted by the combined headwinds of rising inflation and interest rates, as well as geopolitical uncertainty. 

Russia’s invasion of Ukraine triggered an unprecedented phenomenon: global technology firms responded to the invasion by suspending or terminating business operations, effectively self-sanctioning beyond regulatory requirements, often at great expense to bottom lines.  This trend will likely continue – in 2022 decisions about where to invest and who to accept investment from will be driven by ethical concerns, as well as the shifting geopolitical risks.  However, as we will see in this article, many tech businesses struggle to fully abandon their presence in Russia.

This article highlights some of the ways in which the Ukraine crisis is changing tech M&A.

Expanded scope of Due Diligence

As tech companies embark on M&A deals, proactive and effective risk management will be more essential than ever.  Enhanced focus on these issues is likely to translate to expansion of transaction timelines.Continue Reading Ukraine Crisis:  Changing M&A Transactions for Technology Companies

On April 20, 2022, the cybersecurity authorities of the United States, Australia, Canada, New Zealand, and the United Kingdom—the so-called “Five Eye” governments—announced the publication of Alert AA22-110A, a Joint Cybersecurity Advisory (the “Advisory”) warning critical infrastructure organizations throughout the world that the Russian invasion of Ukraine could expose them “to increased malicious cyber activity from Russian state-sponsored cyber actors or Russian-aligned cybercrime groups.”  The Advisory is intended to update a January 2022 Joint Cybersecurity Advisory, which provided an overview of Russian state-sponsored cyber operations and tactics, techniques, and procedures (“TTPs”).

In its announcement, the authorities urged critical infrastructure network defenders in particular “to prepare for and mitigate potential cyber threats by hardening their cyber defenses” as recommended in the Advisory.

Overview.  The Advisory notes that “evolving intelligence” indicates that the Russian government is exploring options for potential cyber attacks and that some cybercrime groups have recently publicly pledged support for the Russian government and threatened to conduct cyber operations on behalf of the Russian government.  The Advisory summarizes TTPs used by five state-sponsored advanced persistent threat (“APT”) groups, two Russian-aligned cyber threat groups, and eight Russian-aligned cybercrime groups.  Additionally, it provides a list of mitigations and suggests that critical infrastructure organizations should implement certain mitigations “immediately.”

Russian State-Sponsored Cyber Operations.  The Advisory notes that Russian state-sponsored cyber actors have “demonstrated capabilities” to compromise networks; maintain long-term, persistent access to networks; exfiltrate sensitive data from information technology (“IT”) and operational technology (“OT”) networks; and disrupt critical industrial control systems (“ICS”) and OT networks by deploying destructive malware.  The Advisory details five Russian APT groups:
Continue Reading International Cybersecurity Authorities Issue Joint Advisory on Russian Cyber Threats to Critical Infrastructure

Russia’s continued invasion of Ukraine is broadly impacting foreign direct investment (“FDI”) screening. A range of governments have announced they will apply close scrutiny to investments from Russia and its allied countries in general, and not only to investors that are subject to sanctions or other restrictive measures. The European Commission (“Commission”) has published guidance on the screening of investments from Russia and Belarus.

The German government has already intervened, appointing a fiduciary for an operator of critical gas infrastructure. Canada issued a policy statement targeting Russian investors and Italy permanently broadened its FDI regime. Our blog provides a summary of these developments below.

Commission Communication calls for systematic assessment of Russian and Belarusian investments

On 6 April 2022, the Commission published a Communication (“Communication”) with guidance on screening of FDI from Russia and Belarus. The Communication emphasizes greater vigilance towards Russian and Belarusian investments into the EU and stresses that FDI screening goes beyond investments by persons or entities that are subject to sanctions. While the Communication is a direct response to the military aggression of Russia against Ukraine, it also elaborates on more general principles of FDI screening in the EU.

The Commission calls upon Member States to systematically assess and prevent threats related to Russian and Belarusian investments. In particular, the Commission encourages Member States to ensure close cooperation both on the national and EU level in relation to FDI screening activities, as well as in the implementation of EU sanctions. The EU FDI Regulation already provides for such cooperation and facilitates information exchange among Member States and the Commission. In particular, Member States may learn about a transaction through the cooperation mechanism and assess FDI filing requirements within their own jurisdiction. As discussed in our blogpost concerning “One Year of the EU FDI Regulation”, Member States have found the cooperation mechanism to be “a very useful instrument” and to have fostered valuable discussions in relation to transaction screening and critical sectors.

But a number of Member States do not have FDI screening regimes in place, including Belgium, Estonia, Greece, Ireland, Luxemburg, the Netherlands, Portugal and Sweden. Where FDI regimes are not yet in place or do not allow for pre-investment screening, the Commission calls to urgently set up a comprehensive FDI screening mechanism and in the meantime to use other suitable legal instruments to address security or public order risks. For those Member States that are in the process of setting up a screening mechanism, the Commission calls on them to accelerate adoption and prepare implementation, including supporting it with appropriate resources.

The Communication notes the potential screening of FDI after the completion of a transaction. While FDI screening is usually undertaken before closing of a transaction, the EU FDI Screening Regulation also allows for the screening of FDI post-closing. If a Member State launches the formal screening of an FDI, it is subject to EU cooperation mechanism irrespective of its planned or completed status. Furthermore, the cooperation mechanism may be initiated within 15 months after the investment has been completed when an investment is not subject to screening at national level. This may occur when the Member State does not have a screening mechanism or when the Member State maintains a screening mechanism but the specific FDI transaction was not submitted by the parties for ex-ante screening.

The Commission reports that based on 2020 data, Russian individuals or entities control about 17,000 EU companies, and have potentially controlling stakes in another 7,000 companies and minority stakes in a further 4,000 companies. The Commission strongly encourages Member States to apply FDI screening to intra-EU investments that are ultimately controlled by Russian or Belarusian persons or entities. In that context, the Communication describes the conditions under which Member States may be permitted to impose restrictions on the free movement of capital and freedom of establishment.
Continue Reading FDI regulators show their teeth – Close scrutiny and firm intervention in response to Russia’s war against Ukraine

Responding to Covid 19 has left many countries’ foreign exchange reserves dangerously low, with countries whose economies relied on tourism particularly badly affected.  The economic rebound as the Western world’s highly-vaccinated populations emerged from lockdowns and began spending, caused supply chain tightness, sparking the beginnings of an inflationary spike.  The Russia-Ukraine crisis has exacerbates that