The US Department of Treasury’s Office of Foreign Assets Control (OFAC) has issued additional sanctions targeting certain Russian banks, energy and defense companies. The sanctions, issued September 12, 2014, are intended to increase the cost to Russia as it continues to violate Ukraine’s territorial integrity and sovereignty. These and previously issued sanctions can be rolled back only when Russia implements the 12-point Minsk Agreement Peace Plan developed by the US and its European allies.
Under current conditions prevailing in the region, these sanctions could continue well into the future. It is possible that additional sanctions targeting Russian businesses and individuals will be levied in the coming weeks, as the US and its allies continue to isolate Russia, its leadership and the “cronies” of President Putin, from US financial markets and increase cost of borrowing for certain specifically identified companies in key sectors of the Russian economy. In addition to the sanctions implemented by the Executive Branch, members of Congress have introduced several bills to further expand US sanctions on Russia.
As described in our earlier alert, the US Treasury has targeted persons or entities by either placing them on the OFAC List of Specially Designated Nationals (SDN List) or by otherwise targeting them through a new, enhanced set of discretely targeted sanctions, titled Sectoral Sanction Identifications (SSI), under Executive Order 13662. The SSI program is now administered through a set of four directives, replacing and amending previously issued Directives 1 and 2 and adding Directives 3 and 4, as well as OFAC General Licenses No. 1A and No. 2.
US persons are prohibited from conducting transactions with any person or entity identified on the OFAC SDN List. The SSI Directives are designed to prohibit specific types of transactions by US persons with the targeted entities on the SSI List and any entity in which the named company owns a 50 percent or greater ownership interest. The SSI sanctions do not constitute blocking actions nor are the targeted SSI entities added to OFAC’s SDN List.
The current sanctions on Russia’s financial, defense and energy sectors are as follows:
1. Five new Russian defense sector entities placed on the SDN list
Treasury’s Office of Foreign Asset Control (OFAC) has added five Russian defense/materiel sector entities to its SDN List under EO 13661. All transactions by US persons, wherever located, with entities on the SDN List (including any entity in which the named person owns a 50 percent or greater interest) are prohibited and property and property interests of an SDN within the United States or in the possession or control of US persons is blocked.
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This brings the number of Russian defense entities on OFAC’s SDN list to 14.
At the same time in a parallel action, the Commerce Department’s Bureau of Industry and Security (BIS) has expanded its export restrictions aimed at the Russian defense sector. It has added the same five Russian defense companies to the BIS Entity List and additionally imposed a license requirement on US persons for the export, reexport or foreign transfer of items subject to the Export Administration Regulations (EAR) to the designated defense entities, with a presumption of denial.
2. Targeted SSI new debt and equity sanctions aimed at Russia’s financial sector
Treasury has tightened the debt financing restrictions under Amended Directive 1 of the SSI program by reducing from 90 days to 30 days the maturity period for newly issued debt. It also has targeted Russia’s largest bank, Sberbank of Russia. The Amended Directive now prohibits US persons from “all transactions in, provision of financing for, and other dealings in new debt of longer than 30 days maturity or new equity of persons determined to be subject to the Directive, their property or their interest in property.”
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3. Targeted SSI new debt sanctions aimed at Russia’s defense sector
In addition, Treasury has issued a new directive targeting Rostec, a major Russian conglomerate that operates in the defense and related materiel sector. Directive 3 prohibits US persons from “all transactions in, provision of financing for, and other dealings in new debt of longer than 30 days maturity of persons determined to be subject to this Directive, their property or their interest in property.”
4. Targeted SSI goods, services and technology sanctions aimed at Russia’s energy sector
Treasury has also imposed SSI sanctions under new Directive 4 against five energy companies. Directive 4 prohibits “the provision, exportation, or reexportation, directly or indirectly, of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in the maritime area claimed by the Russian Federation and extending from its territory, and that involve any person determined to be subject to this Directive, its property, or its interests in property.” To the extent US persons are involved in existing transactions or arrangements that would violate Directive 4, US persons must wind down operations, contracts or other agreements that were in effect prior to September 12, 2014 with the sanctioned energy companies no later than September 26, 2014. See also OFAC General License No. 2.
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5. Targeted SSI new debt sanctions aimed at Russia’s energy sector
In addition to the goods, services and technology sanctions imposed on the energy companies listed above, Treasury has amended Directive 2 to further target Russia’s energy sector. Amended Directive 2 targets Gazprom Neft and TransNeft and prohibits US persons from "all transactions in, provisions of financing for, and other dealings in new debt of longer than 90 days maturity of persons determined to be subject to this Directive, their property, or their interests in property." Amended Directive 2 continues to apply to Rosneft and Novatek.
In a parallel action, BIS also added the five major Russian energy companies subject to Directive 4 to the BIS Entity list, imposing a license requirement on US persons where the exporter, reexporter or transferor knows those items will be used directly or indirectly in exploration for, or production from, deepwater, Arctic offshore or shale projects that have the potential to produce oil in Russia, with a presumption of license denial.
How can DLA Piper help? Action steps for companies with business relationships related to Russia
This summary encompasses the basic concepts embodied in the Ukraine-related sanctions. Sanctions compliance is a factually intensive exercise and our team of sanctions professionals will be pleased to help you navigate these issues.
In addition, to the extent that your company has business or business relationships in or related to Russia that have not yet been impacted by sanctions, you should:
- Identify and understand fully any and all direct and indirect business ties to Russia.
- Assess the business consequences of potential transactions or business ties with the SDN or SSI named parties.
- Know your customer (or counterparty) — check the names of all potential parties to a transaction against the OFAC SDN and SSI lists and determine whether the parties are owned 50 percent or more by the listed entity.
- Assess the legal consequences of any prohibitions that may impact your business.
- Implement appropriate business strategies and legal measures to protect against and minimize the consequences of future sanctions prohibitions.