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Impact of EU sanctions for European companies in the Gulf

GCC entities navigate a legal minefield if seen to be assisting EU companies in breaching sanctions against Russia

EU sanctions Reuters
European Commission president Ursula von der Leyen

As the conflict in Ukraine continues, so does the response of the West, one of which is in the form of sanctions against Russia. 

Sanctions from the US, EU and UK continue to expand. In this week alone we are already discussing the implications of the G7 price cap on the purchase of Russian oil and how that will impact the energy market and wider ecosystem.

Where Russia and its economy is so intertwined with the rest of the world, it has not been an easy task for those companies and individuals subject to sanctions to extract themselves from such a dominant and commercial global market.  

But how do EU sanctions impact the Gulf? 

To date, the UAE has not aligned itself with Western sanctions against Russia.

Russia is a major trading partner for the UAE and wider GCC countries, and a prominent member of OPEC+, where it is not unusual for Middle East countries to adopt a neutral stance when it comes to Western politics. 

Strictly speaking the latest EU sanctions do not then legally impact a Dubai-incorporated entity or indeed an entity incorporated in the GCC. 

This is because EU sanctions, in their primary form, only apply to EU individuals, EU entities or entities conducting business in the EU.

But of course lots of GCC and Dubai companies have EU nationals working for them who have to personally comply with EU sanctions. 

The impact of the latest EU sanctions is that it brings into play a version of US type “secondary sanctions” which will apply to non-EU persons.

The EU has effectively brought in legislation which provides a legal basis for the sanctioning of foreign (non-EU) companies in circumstances where they themselves are facilitating EU companies in breaching EU sanctions. 

This is a significant development and a major policy shift since the EU sanctions historically do not have extra-territorial effect – meaning they have only applied to those individuals or entities falling within the scope of EU sanctions, primarily EU nationals and entities.  

In terms of any impact on GCC trade, for legitimate business which does not violate EU sanctions, it should be (and seems to be) business as normal.

Russians have invested heavily in property in Dubai. The trading arm of Russia’s Lukoil, Litasco, has moved part of its operations to Dubai over the last few months. Russian investment into the Middle East is booming. 

The concern is where GCC entities are seen to be assisting EU companies in breaching EU sanctions.

The GCC entity, in this scenario, runs the risk of being listed by the EU themselves as a designated entity, bound by EU authority. This is damaging for a myriad of legal, commercial and financial reasons. 

It is a legal minefield that GCC entities have to navigate. 

James Willn is partner, energy and natural resources at law firm Reed Smith Middle East