1. Introduction

Activity levels involving Russia and Ukraine continue at a torrid pace, with daily developments. In the past few days, there have been diplomatic overtures, a suspension of export licenses to Russia, legislative action, and further sanction releases. In an effort to keep you informed, we have aggregated the various developments in this alert, including some previously reported sanction announcements from our prior alerts (to read these alerts, here and here). We are continuing to monitor all sanctions related activity as it happens.

  1. Putin-Obama Call May Lead to a Diplomatic Solution?

Russian President Vladimir Putin called President Barack Obama on March 28, 2014 to discuss the US proposal for a diplomatic resolution to the crisis in Ukraine, that was presented at an earlier meeting at the Hague. President Obama suggested that Russia “put a concrete response in writing,” and agreed that Secretary of State John Kerry would meet with his Russian counterpart, Foreign Minister Sergey Lavrov, to discuss this matter. According to the White House, President Obama noted that the Ukrainian government continues to “take a restrained and de-escalatory approach to the crisis and is moving ahead with constitutional reform and democratic elections.”

Not surprisingly, the Kremlin had a different interpretation of the conversation. According to reports, President Putin “drew Barack Obama’s attention to continued rampage of extremists who are committing acts of intimidation towards peaceful residents, government authorities and law enforcement agencies in various regions and in Kiev with impunity.” President Putin did, however, suggest “examining possible steps the global community can take to help stabilise the situation,” and the two presidents agreed that “specific parameters for this joint work will be discussed by the Russian and US foreign ministers in the near future.”

Notwithstanding the differing interpretations of the discussion, the phone call between the two leaders appears to be a first positive step towards a diplomatic solution to the Ukraine crisis. Although Secretary of State Kerry and Foreign Minster Lavrov were unable to reach an agreement during discussions on March 30, 2014, both sides have agreed to keep talking.

  1. US and UK Suspend Issuance of Export Licenses for Exports to Russia

On March 25, 2014, the US Department of Commerce’s Bureau of Industry and Security (BIS), which oversees items on the Export Administration Regulations’ Commerce Control List, announced that since March 1, 2014, it has placed a hold on the issuance of licenses that authorize exports or reexports of items to Russia. BIS said they will continue this practice until further notice.

Two days later, on March 27, 2014, the US Department of State’s Directorate of Defense Trade Controls (DDTC), which oversees the International Traffic in Arms Regulations’ US Munitions List, announced they were halting the issuance of licenses that would authorize the export of defense articles and defense services to Russia. The DDTC also stated they would continue this practice until further notice.

These decisions apply only to new license applications and will not affect existing BIS issued licenses. Regardless, these temporary decisions have the potential to significantly disrupt trade between the US and Russia — possibly more broadly than the designation of Russian “cronies” as Specially Designated Nationals (SDNs).

While most commercial products exported to Russia do not require an export license, according to BIS’s annual report, in 2013, BIS approved 1,832 licenses for the export of BIS-controlled items to Russia. The licenses were for $1.5 billion, $800 million of which were for devices described as “designed to initiate an energetic charge,” classified under ECCN 1A007.

The US has not acted alone. On March 18, 2014, the UK announced that it has suspended all “extant licences and application processing for licences for direct export to Russia for military and dual use items destined for units of the Russian armed forces or other state agencies which could be or are being deployed against Ukraine.”

  1. Bills to Aid Ukraine and Sanction Russia Poised to be Sent to White House

On April 1, 2014, the US House of Representatives passed HR 4152, the bi-partisan bill that provides financial aid to Ukraine while imposing sanctions on Russia for Vladimir Putin’s annexation of Crimea. The Senate passed the bill on March 27, 2014, leaving only the President’s signature for its official passage into law.

HR 4152 provides $1 billion in loan guarantees to Ukraine and imposes penalties on Russia. The bill generally authorizes the imposition of blocking and visa sanctions on:

  • Any person, including a current or former official of the government of Ukraine or a person acting on behalf of that government, who has perpetrated or is responsible for directing significant acts of violence or gross human rights abuses against persons associated with the anti-government protests in Ukraine that began on November 21, 2013;
  • Any person who has perpetrated or is responsible for directing significant acts intended to undermine Ukraine’s peace, sovereignty, or territorial integrity, including acts of economic extortion;
  • Any official of the government of the Russian Federation, or a close associate or family member of such an official, who is responsible for or complicit in directing acts of significant corruption in Ukraine; and
  • Any individual who has materially assisted, sponsored, or provided financial, material, or technological support for such acts.

These sanctions break no new ground. Instead, they largely track sanction authority established by President Obama in the first two Executive Orders, promulgated under the International Emergency Economic Powers Act (IEEPA). The bill also imposes IEEPA sanctions on any person violating, attempting to violate, or conspiring to violate any regulation, license, or order issued to carry out the sanctions. Again, since the existing Executive Orders are promulgated under IEEPA, this sanctions provision also simply reinforces existing administrative law.

The bill also authorizes the Executive Branch to impose blocking and visa sanctions on “any government official of the Russian Federation, or a close associate or family member of such an official, who is responsible for or complicit in directing acts of significant corruption in the Russian Federation, including the expropriation of private or public assets for personal gain, corruption related to government contracts or the extraction of natural resources, bribery, or the facilitation or transfer of the proceeds of corruption to foreign jurisdictions.” This sanctions power for corruption and expropriation of property within Russia is a significant expansion from that exercised by the President in the Ukraine Executive Orders.

Natural Gas Exports

As an export control side-note, Congressman Ed Royce, who co-sponsored the House bill, continued to push to remove restrictions on the export of US crude oil and natural gas into Eastern Europe. On the House floor, he stated that lifting “these self-imposed sanctions on ourselves, in terms of not exporting our excess gas, would not only boost the US economy and create American jobs, but would reduce the energy revenues that comprise 52% of the budget for the military and the government in Russia.” While it has been argued that expediting the export of natural gas and liquefied natural gas would weaken Russia’s leverage over Ukraine, it is unclear yet whether the US has the appetite for such a measure.

  1. Screening

Executive Orders

As previously reported, on March 20, 2014, President Obama signed his third executive order (13662) that provides for further sanctions against Russia. Specifically, the new executive order authorized designating persons as specially designated individuals (SDN) for persons who:

  • Operate in such sectors of the Russian Federation economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, such as financial services, energy, metals and mining, engineering, and defense and related materiel;
  • Have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to, or in support of, any person whose property and interests in property are blocked pursuant to this order; or
  • Have been owned or controlled by, or have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to this order.

This last Executive Order provides the US Government further flexibility to sanction Russia if Russia further escalates the Ukrainian crisis. The President voiced concern that Russian military positioning could point to “further incursions” into southern and eastern Ukraine, so upcoming events on the ground will likely indicate whether the US will impose sanctions measures pursuant to this new Executive Order.

This Executive Order followed President Obama’s March 6 and March 17 Executive Orders (13660 and 13661, respectively, also as previously reported) that initiated the imposition of Russian sanctions and authorized blocking, visa and donation sanctions.

OFAC Released SDNs

Also on March 20, 2014, the US Treasury Department’s Office of Foreign Assets Control (OFAC) designated 19 additional Russian individuals and a bank, Bank Rossiya, adding them to the Treasury Department’s Specially Designated Nationals (SDN) list pursuant to Executive Order 13661 (President Obama’s second executive order on the Ukraine crisis). The March 20 SDN designations freeze the assets of 19 additional Russian individuals, including both senior Russian officials and President Putin’s inner circle, a/k/a “cronies,” whom the White House describes as having “substantial resources and influence who provide material support to the Russian leadership.” Their names appear with the designator, “[UKRAINE2].” OFAC also added Bank Rossiya, the personal bank of many Russian officials and President Putin’s inner circle, to the SDN list on the grounds that it “provides material support to these individuals.”

SDN Screening

Screening for SDNs is one of the most difficult areas of US sanctions compliance — and the Russian sanctions are no different.

Under OFAC’s policy, a person or company on the SDN List is considered to have an interest in all property and interests in property of an entity in which it owns, directly or indirectly, a 50% or greater interest. This is the case even when that entity is not specifically listed on the SDN List.

A company will generally not be considered to be a SDN solely because a party on the SDN is a director or officer of a company. However, OFAC has stated that persons should act with “caution” when considering a transaction with a non-blocked entity in which a blocked person has a significant ownership interest that is less than 50% or which a blocked person may control by means other than a majority ownership interest. Thus, a company in which the President or Managing Director is on the SDN List may be blocked by OFAC in the future even if the President owns less than 50% of the company.

The problem is that OFAC usually will not provide guidance on which companies are owned or controlled by SDNs — leaving it to companies to figure it out for themselves. Restricted party screening providers are also not in position to provide further information on whether a company may be owned by a SDN since they rely on the government issued lists. Thus, companies have to rely on public sources, private investigators, or other resources in the target country to determine if a potential customer is a SDN or not.

Another common way to handle this is to request the current or potential business partners to certify in writing that they are not owned by a blocked person. Many contracts now contain representations and warranty language that the parties are not on, or owned, or controlled by parties on the SDN List or other restricted party lists.

In the case of the Russian sanctions, many of the 33 persons named on OFAC’s SDN List are government personnel and do not appear to have any ownership interests in companies. However, the majority of the March 20 designations include individuals with significant business interests.