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Commodities trade in Ukraine goes on

London, 8 March 2014

Steel, grain and other commodity export deals are yet to be significantly affected by the growing crises in Ukraine which escalated on 6 March with a US restriction on visas for Russians and Ukrainians threatening Ukrainian sovereignty and the imposition of sanctions by the EU on 18 Ukrainians including ousted president Viktor Yanukovich, the former Prosecutor General, the Head of Security Service, Minister of Justice and some of their relatives or associates.

The presence of Russian troops in Crimea and in particular of Russian ships in the port of Sevastopol are a concern, particularly as Russia is now claiming sovereignty over Crimea and by extension, of all its ports. Closure of Sevastopol and other Ukrainian ports could trigger defaults on contracts and although in individual cases there may be arguments about whether these events constitute force majeure or fall within a prohibition clause, a series of defaults could drive up risk premiums on prices for future shipments. However, as long as the problems are contained primarily to Crimea, we understand that goods will continue to move through the Ukrainian road and rail networks and through the silos and ports as usual.

According to the many Ukraine-based commodity traders and producers with whom we work, goods are continuing to leave the country and State custom and export regimes are working normally. Bank transfers are also being made on time.

Ukrainian traders are of course aware that it is not only in their interests, but also in the interests of producers, to keep trade moving. Producers in particular need to maintain trade in order to finance spring field works and Ukrainian banks are particularly keen to support short term cash flows. The weakening currency will inevitably create volatility which always introduces an element of uncertainty, but at this point we see no significant evidence of market disruption. Indeed some Ukrainian traders advise that a weakening of the Hryvna may in fact be a driver for Ukrainian exports.

Buyers are of course nervous as the situation escalates and some have been trying to talk down the market - exploiting the situation as an excuse to escape from contracts with below market prices, citing force majeure.

It remains to be seen whether US and EU diplomacy will prevail or whether sanctions will be applied to Russian individuals and businesses.

The European Union last week published Council Regulation (EU) No 208/2014, concerning restrictive measures directed against certain persons, entities and bodies in view of the situation in Ukraine

Regulation 208/2014 imposes an asset freeze on all funds and economic resources belonging to, owned, held or controlled by designated persons/entities/or bodies. Consequently, all funds and economic resources belonging to, owned, held or controlled by any designated persons/entities or bodies shall be frozen and it is prohibited for any funds or economic resources to be made available, directly or indirectly to or for the benefit of those designated individuals/entities or bodies. The latter prohibition is subject to a limited exception that permits the crediting of frozen accounts by financial or credit institutions that receive funds transferred by third parties onto the account of a designated person/entity or body provided that any additions to those accounts will also be frozen and that the financial or credit institution informs the relevant competent authority about any such transaction without delay. Further exceptions apply in respect of payments into the frozen accounts of designated individuals/entities or bodies where those payments relate to (a) interest or other earnings on those accounts; (b) payments due under contracts/agreements/obligations that were concluded or arose before the date on which the designated occurred; or (c) payments due under legal decisions in a Member State or enforceable in the Member State. However, any and all such funds must also be frozen.

It is also expressly prohibited to participate knowingly and intentionally in activities whose object or effect is to circumvent the prohibitions outlined above.

As with previous asset freezes imposed by the European Union it is possible to derogate from the prohibitions in certain, specified circumstances, subject to authorisation from the competent authorities of Member States. The specified circumstances are where those funds are necessary to satisfy the basic needs of a designated person (to include payments for food, housing, medical needs), where the funds are used exclusively for the payment of reasonable professional fees/legal expenses, where the funds are used exclusively for the payment of fees or service charges for the routine holding or maintenance of the frozen funds/economic resources or where the funds are necessary for extraordinary expenses. This latter ground requires additional notification by the relevant competent authority to the competent authorities of the other Member States and the Commission.

Further derogations apply with respect to funds necessary to satisfy certain legal claims against a designated person/entity/body and in respect of payments due by designated persons/entities/bodies under contracts/agreements which were concluded by, or under an obligation that arose, prior to the date on which the designation occurred.

The designated persons/entities/or bodies are set out in Annex I and include Viktor Yanukovych together with other leading members of the former Ukrainian government including the former Prosecutor General, Head of Security Service, Minister of Justice and certain of their associates/relatives. While the recitals to the Regulation state that the designated persons/entities or bodies are those who have been identified by the Council as being responsible for the misappropriation of Ukrainian State funds and persons responsible for human rights violations in Ukraine and those individuals/entities or bodies associated with them, the statement of reasons provided in respect of all 18 designated individuals makes reference to the misappropriation of funds only.

The Regulation entered into force on 6 March 2014.

Source,  Clyde & Co