Kartik Mittal and Daria Sakhno examine how EU sanctions on Belarus affect the broader economy in Law360

This article was originally published in Law360 and can be accessed here. 

Latest updates: The European restrictive measures against Belarus

Kartik Mittal (Partner) and Daria Sakhno (Foreign Lawyer)

The European sanctions regime against Belarus dates back to 2006 and is said to have been in response to Belarus’s lack of respect for human rights, democracy and rule of law. The measures introduced during May-June 2021 are said to have been prompted by an incident which occurred in May 2021 whereby it is alleged that Belarussian warplane(s) had forced a Ryanair flight carrying a journalist, opposed to the ruling Lukashenko regime, to land so that the Belarussian authorities could arrest him. During May & June 2021 the Council of the European Union (“EU”) has introduced a series of restrictive measures against Belarus:

• On 4 June 2021, the EU Council prohibited any aircraft operated by Belarusian air carriers from landing in, taking off from or overfly the territory of the EU;
• On 21 June 2021, the EU Council expanded its list of sanctioned individuals and companies that are subject to a travel ban and assets freeze;
• On 24 June 2021, the EU Council introduced new sanctions aimed at targeting main export sectors of Belarussian economy: including oil, tobacco and potash.

Air Carriers Restrictions

The first set of sanctions against Belarus in 2021 were introduced on 4 June and resulted in prohibiting Belarussian air carriers to:

• continue operating flights to and from European destinations, and
• overfly the EU to reach their non-European destinations.

The EU Regulation giving effect to this latest measure defines Belarusian air carrier as “an air transport undertaking holding a valid operating licence or equivalent issued by the competent authorities of Belarus”^[i]. It, therefore, not only targets Belarus’s state-owned national airline, namely Belavia Belarusian Airlines, but any aircraft carrier operating under a license issued by the competent authorities of Belarus including any private aircraft carrier.

Whilst the competent authorities of the EU Member States have the right to authorize an aircraft to land in, take off from or overfly the territory of the EU in case it is required for humanitarian purposes or any other purpose consistent with the objective of the sanctions regime against Belarus, it does beg the question whether it is proportionate, and consistent with the object of the sanctions regime against Belarus, for the EU to have targeted private aircraft carriers which may be operating under a license issued by the competent authorities of Belarus as opposed to only state-owned air carriers.

List of ‘sanctioned’ persons

On 21 June 2021, the Council Regulation 2021/997 added 78 individuals and seven entities to the list of sanctioned persons named in the Annex I to Regulation (EC) 765/2006. Therefore, as of 21 June, the EU applies restrictions on a total of 166 persons and 15 entities. The targeted persons have been identified as “responsible for repression and intimidation against peaceful demonstrators, opposition members and journalists”^[ii] in the wake of the 2020 presidential election in Belarus, as well as for misconduct of the electoral process.

The restrictions in place against those individuals include travel ban and asset freezing - those on the list are forbidden from entering or transiting through EU territories and their assets in the EU are frozen. In addition, EU citizens and companies are forbidden from making funds available to any individual and company on the list.

Economy sectors restrictions

Finally, on 24 June 2021, the EU officials released a new package of sanctions targeting main export sectors of Belarussian economy: including oil, tobacco and potash (particular salt used in fertilizers). Under the latest sanctions, European companies are also prohibited to "sell, supply, transfer or export, directly or indirectly” ^[iii]communication equipment, technology or software that could be used for monitoring or repression to anyone in Belarus.

EU banks are also banned from offering loans or investment services – they are not allowed to provide insurance or re-insurance, or new loans or credit to the Belarusian government or public bodies and agencies^[iv]. The introduced sanctions prohibit EU entities after 29 June 2021 to issue new bonds and loans to Belarus, with a maturity of more than 90 days. The European Investment Bank will also seize lending to Belarus^[v].

Conclusion

It is said that the goal of these sanctions, as presented by the European Council, is to put pressure on the Belarusian political leaders in order to avoid further political repressions in the country. The new measures, while aiming to put pressure on President Lukashenko, may affect the local economy and, thus, make Belarus more dependent on Russia as the restrictions could bankrupt the country's state airline, potash producers, oil companies and other major state companies on the list. This could, in turn, result, in those companies being bought out by the Russian Federation, which has a Union State Agreement in place with Belarus.

The flying restrictions are likely to result in an increased operating cost for Belarusian air carriers as they may have to take longer routes to reach their destination and/or to stop flight operations to and from a particular destination altogether. This is likely to have a devastating impact on the financial operations of these Belarusian air carriers in the circumstances that the airlines industry is in any event facing enormous difficulties due to the ongoing pandemic. As for non-Belarusian/EU air carriers, such as Ryanair, this is likely to be good news as it is likely that they would be able to attract the customers of the Belarusian air carriers.

The measures could potentially affect banking, oil and agricultural sectors of EU economy. It is understood that the EU imported 1.2 billion euros' ($1.5 billion) worth of chemicals including potash from Belarus last year, as well as more than 1 billion euros' worth of crude oil and related products such as fuel and lubricants. Belarus is considered to be the second world exporter of potash after Canada and logically it creates a big source of foreign currency for Belarus and which is believed to constitute 20% of world’s reserves of potash.

We can expect the restrictions imposed to create shortages of the named assets in the markets and will divert the European purchaser to other markets and sellers. The prices of the fertilizer will thus raise, which, in turn, could cause the increase in price of most agricultural goods. For example, the potash export is currently being diverted from Belarussian ports through Lithuania to Russian ports in order to be shipped from there. Belarus sovereign dollar bonds have already plummeted in response to the announcements.

In relation to the Banking sector, the EU has delegated to the Governments of Member states to draft and come up with penalties for breaching the set restrictions[vi]. In general, EU sanctions regulations provide that EU Member States shall lay down rules for effective, proportionate and dissuasive penalties and shall take all measures necessary to ensure that they are implemented. Banks would need to ensure that they do make funds available to the 166 persons and 15 entities listed as part of the sanctions regime against Belarus and have adequate measure in place to comply with this new sanction’s regime. In the event they hold funds on behalf of listed individuals/entities they must freeze those funds and report it to the appropriate authority.  A serious breach of sanctions is a criminal offence, which could result in large fines and possibly prison sentences for individual involved in breaching sanctions.

As a result of the imposed sanctions, Belarus has already recalled its permanent representative in the EU from Brussels. And has suspended its participation in the EU Eastern Partnership initiative. At the same time, it has been noted that the sanctions do not apply to the Development Bank of Belarus owned by the state, the only bank with outstanding Eurobonds. Therefore, it seems that EU investors can continue to purchase its Eurobonds and the EU banks can continue to provide loans to it.