This is a rapid response paper which outlines the major legal risks that businesses operating in the Autonomous Republic of Crimea and the city of Sevastopol (“Crimea”) may face as a result of the contested annexation of Crimea by the Russian Federation in March 2014.

1. The Legal Vacuum

The Russian Federation is set to introduce Russian law and

Russian law-enforcement structures in Crimea. Allegedly,

Ukrainian courts in Crimea have been suspended, as it is

not clear whether they are in a position to deliver justice,

given that judges in the region were appointed and sworn

in by Ukraine. Furthermore, according to some news

reports, nineteen Ukrainian judges have requested to be

transferred to other regions of Ukraine. However, news

agencies are also reporting that courts in Crimea, along

with prosecutors, police and bailiffs, are already using

Russian law. The practical effect of this is that even if,

theoretically, Russian law is applicable in Crimea, there

are not enough Russian qualified law-enforcement staff in

the region. Moreover, court rulings and other acts of

Crimean authorities made under Russian law will be void

under Ukrainian law. These and other legal problems

render the whole legal environment completely inoperable.

Moreover, the Ukrainian parliament is considering a bill

concerning the legal status of Crimea under Russian

occupation. That bill envisages a comprehensive ban on

economic activities in Crimea where such activities,

including the development of natural resources, require

some regulatory action by state bodies. Should it

materialise, we shall produce analysis of this bill.

2. Business Registration and Regulation

In terms of registration of business entities and private

entrepreneurs, as well as other ancillary registrations, the

situation remains extremely uncertain.

Currently, no corporate information regarding companies

registered in Crimea may be supplemented or amended.

According to officials of the Registration Service at the

Head Department of the Ministry of Justice in Crimea (click

here for the official web-page), access to the electronic

Unified State Registry of Legal Entities and Private

Entrepreneurs of Ukraine from Crimea is blocked.

Simultaneously, the software required to ensure access to

the analogous registries maintained in the Russian

Federation has not yet been installed.

As a result, registering a business in any form with all

relevant authorities (e.g. the State Registration Service,

Departments of Ministry of Statistics of Ukraine, the tax

authorities and the Pension Fund Department) is

temporarily suspended. From a practical perspective, the

effect of such suspension extends to both new investors

planning to set up businesses in Crimea and, as it is also

not possible to register any amendments to the

constituent documents of existing legal entities, current

businesses. Therefore, business entities’ routine corporate

actions, including an increase or decrease of charter

capital, changing the composition of management and

officers with signature rights, as well as amending

business entities’ addresses and contact information,

cannot be procured at the moment. The same applies to

transactions for the sale and purchase of corporate rights

and shares in business entities, where such transactions

require registration of changes in the composition of

shareholders in target companies’ constituent documents.

Furthermore, this applies to registration of title to land and

notarised contracts and deeds. In particular, Crimean

notaries currently have no access to Ukrainian registries of

powers-of-attorney and cannot certify powers-of-attorney,

which are a fundamental instrument under Ukrainian law.

3. Banking Industry

On 21 March 2014, the Head of the National Bank

published a press-release stating that assets of Ukrainian

banks operating in Crimea amounted to approximately

22bln UAH. In addition, there is a large amount of

collateral located in Crimea, securing obligations owed to

banks (including their branches) operating in both Crimea

and mainland Ukraine. Currently, there are no specific

legal restrictions on Ukrainian banks operating in Crimea,

other than those generally imposed on Ukrainian banks by

the National Bank of Ukraine. Although it may appear that

the Crimean banking system is operating as before (taking

into consideration the stress in the market), all Ukrainian

banks present in [Crimea] have already restricted their

operations in the region, such restrictions varying from

complete closure of all offices located in Crimea

(PrivatBank Ukraine), to suspension of cash operations, to

limiting money withdrawals, to early termination of

deposits.

Long-term, if Russian occupation persists, all Ukrainian

banks registered with the National Bank of Ukraine and

operating in accordance with Ukrainian law may, in order

to continue to conduct their businesses in Crimea, be

required to register with the Central Bank of Russia .

According to information that is available from public

sources, Ukrainian banks may be granted a nine month

grace period (until 31 December 2014) to decide whether

to apply for a banking licence from the Central Bank of

Russia.

Although Ukrainian authorities, in particular, the National

Bank of Ukraine, according to its press release on 21

March 2014, de facto acknowledged the possible

nationalisation of Ukrainian banks by [Russia], or their

transfer to Russian jurisdiction, it is still unclear what the

consequences of failing to obtain a Russian licence will be

for Ukrainian banks.

Given the above, and that there are more questions than

answers relating to the functioning of the “Crimean

Ukrainian” banking system in the near future, the general

credibility of the Crimean banking system has been

significantly affected. Therefore, caution is recommended

when considering activities involving banks in Crimea

(including making payments through Crimean branches of

Ukrainian banks).

4. Currency Control Restrictions

The National Bank of Ukraine started imposing restrictions

and limitations on Ukrainian banks and their clients prior

to the Crimean crisis. These restrictions and limitations are

aimed at protecting the Ukrainian banking system and, in

particular, preventing complete capital outflow. Please

click here to view our previous publication on such

restrictions and limitations. No additional or specific rules

have been imposed as a result of the Crimean crisis.

5. Cross-Border Loans

Recent events in Ukraine have resulted in a great number

of questions raised by lenders of cross-border loans into

Ukraine. The possible implications of the Crimean crisis on

English law loans are discussed here click here.

6. Mineral Resources and Energy Sector

Crimea mainly produces limestone and iron ore on-shore,

yet the main focus has always been on fossil fuels, such as

oil and gas, within the continental shelf and Ukrainian

territorial waters in the Black Sea. Over the last few years,

the interest in hydrocarbon resources has increased, as

the Ukrainian Government has opened a number of

investment opportunities in this area and even instigated a

couple of ambitious projects.

Shortly after the Crimean referendum the unrecognised

“Chairman” of the Crimean Parliament announced that key

strategic state enterprises of the oil and gas industry, such

as National JSC “Chornomornaftohaz” and Crimean-based

assets of Ukrtranshaz (a subsidiary company of the stateowned

JSC “NAK Naftohaz”, which manages the Ukrainian

gas pipeline system) will be nationalised by the newly selfproclaimed

independent Republic of Crimea.

Although nothing was said in respect of private oil and gas

investments in Crimea, it is evident that all existing

arrangements, such as production sharing agreements,

with Ukrainian State and state-owned companies will be

postponed for an indefinite period. At the same time, the

Ukrainian Government has never shown any intention of

withdrawing from its oil and gas projects with private

investors in Crimea and one would expect the [Ukrainian]

Government to renew all subsoil licences [once/if] it

regains control of Crimea.

On the other hand, Russia may declare that the sea-bed is

under its jurisdiction and refuse to recognize off-shore

licences issued by the Ukrainian Government. Russian

companies will not be able to develop new oil and gas

fields in the Black Sea until Russia achieves an acceptable

level of stability in the Crimean peninsula. Even then,

there is significant doubt that Russian companies alone

will be able to manage deep-sea oil and gas projects in the

region, as Crimea’s uncertain legal status represents very

high investment and reputational risks for any foreign oil

and gas contractors.

The destiny of Crimean hydrocarbons is not the only open

question. Since Crimea is mainly powered from the

mainland, over the last couple of years the Government

has supported development of the renewable energy

sector on the peninsula, which is now home to many solar

power plants. These could now be subject to

nationalisation by the Russian Government, in which case

investors may challenge the nationalisations in Russian or

international courts (such as the investment arbitration

tribunals under the Energy Charter Treaty).

7. Real Estate

The real estate market in Crimea is currently on hold. The

reason for this is that access to state / local municipal

authorities and notaries’ access to the Ukrainian electronic

real estate registries is blocked.

Therefore, it is currently impossible to:

(i) perform any basic real estate

transactions, such as sell and purchase, or

lease;

(ii) register any encumbrances or

limitations (such as mortgages, bans on

alienation, servitude, etc.) over buildings,

structures or land plots;

(iii) receive any information (including in

the form of extracts from the State Register

of Proprietary Rights to Immovable Property

and State Land Cadastre) regarding any

title, encumbrances or limitations over the

property in Crimea; and

(iv) allocate into lease or ownership any

land plot on the territory of Crimea.

A draft bill passed by the Ukrainian parliament in first

reading last week concerning Crimea, which is defined in

the bill as a “temporarily occupied territory”, declares:

“Any legal transaction regarding real estate that is made

in violation of the requirements of Ukrainian legislation is

considered invalid from the moment of its signing.” This

bill, once passed in full and enacted into law, may shed

light onto further regulation and development of the real

estate market in Crimea.

We shall continue to monitor the situation in Crimea and

report any significant developments.

For further information, please contact:

Olexander Martinenko

Ukraine

+380 44 391 33 77

View my CV

Victoria Kaplan

Ukraine

+380 44 391 33 77

Volodymyr Kolvakh

Ukraine

+38 044 391 33 77

Natalia Kushniruk

Ukraine

+380 44 391 33 77

Sergiy Gryshko

Ukraine

+38 044 391 33 77

Ruslan Ostapenko

Ukraine

+380 44 391 33 77

If you would like specific advice, please call your usual contact or the named contact responsible for the issue addressed in

this email (see above).

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