The United States and European Union implemented new sanctions against Russia on 12 September 2014 as a result of the ongoing crisis in Ukraine. While the new US and EU measures share many similarities, companies subject to both US and EU law should carefully review each set of sanctions to ensure that activities involving Russia are not affected by the new measures.
EU officials have stated that depending on the results of a comprehensive review to be conducted at the end of September regarding the implementation of the Ukrainian peace plan, some or all of the EU measures against Russia could be amended, suspended or repealed in their entirety. US officials have not made any similar statements, but likely would act in coordination with the EU to loosen or remove sanctions against Russia if there is significant positive progress in Ukraine.
Summary of New US Measures
The new US measures largely tighten restrictions imposed against Russian financial and energy companies identified on the Sectoral Sanctions Identification List (“SSI List”) and/or increase the number of entities subject to such measures. Notably, the US Government has imposed new restrictions prohibiting US persons from providing goods, services or technology related to deepwater, Arctic offshore or shale oil exploration and production activities to certain specified Russian energy companies. In addition, one Russian defense conglomerate was added to the SSI List and is now subject to certain financing restrictions, while several Russian defense companies were added to the List of Specially Designated Nationals (“SDN List”). Other than the Russian defense companies, no new entities or individuals were added to the SDN List under these recent actions.
Similar to previous actions, these sanctions apply not only to the companies identified on the SSI List or SDN List, but also to any entities that are owned 50 percent or more (in the aggregate) by one or more of the listed entities. The new US measures, and the Russian entities targeted under these measures, are:
Increased Debt Restrictions on SSI-Listed Russian Financial Institutions
- Targeted Russian entities: Bank of Moscow, Gazprombank, Sberbank (new), Russian Agricultural Bank, Vnesheconombank (VEB), and VTB Bank.
- Previously, US persons were restricted from dealing in any new debt with a maturity period of 90 days or more, or new equity, of five previously-identified Russian financial institutions. The new measures tighten these restrictions by reducing the maturity period for affected new debt from 90 to 30 days, in addition to continuing the prohibition on dealings in any new equity of such companies.
- Sberbank also was added to the list of Russian financial institutions subject to these restrictions.
New Debt Restrictions on SSI-Listed Russian Defense Conglomerate
- Targeted Russian Entity: Rostec (new).
- SSI restrictions previously applied only to certain Russian financial and energy companies. The new measures expand SSI restrictions to Russia’s defense sector by adding a Russian defense conglomerate, Rostec, to the SSI List. Similar to sanctions against SSI-listed Russian financial institutions, US persons are prohibited from dealing in any new debt with greater than 30 days maturity issued by Rostec or its majority-owned subsidiaries.
New Russian Energy Companies Subject to SSI List Debt Restrictions, But No Change in Scope of Affected Debt
- Targeted Russian Entities: Gazprom Neft (new), Novatek, Rosneft, Transneft (new).
- US persons already were prohibited from dealing in any new debt with greater than 90 days maturity of Novatek and Rosneft. The new measures add Gazprom Neft and Transneft to the SSI List and impose the same scope of restrictions regarding new debt with a maturity of more than 90 days.
- Notably, the new measures do not impose any restrictions at this time on any new debt of such listed energy companies with a maturity period of more than 30 days, but less than 90 days (unlike the measures imposed on Russian defense and financial companies).
New Restrictions on Exports of Goods, Services and Technology for Certain Oil Exploration/Production Operations to SSI-Listed Russian Energy Companies
- Targeted Russian entities: Gazprom, Gazprom Neft, Lukoil, Surgutneftegas, and Rosneft(all new).
- The new measures restrict US persons from exporting any goods, services (other than financial services, as discussed below), or technology in support of exploration or production for Russian deepwater, Arctic offshore, or shale projects that have the potential to produce oil to five Russian energy companies identified in a new category on the SSI List.
The US Commerce Department previously had imposed export licensing requirements on transfers of similar goods, software and technology to Russia. The new measures complement these prior restrictions and further prohibit the provision of services (other than financial services) related to deepwater, offshore or shale oil production/exploration activities to the five named entities.
- In conjunction with the new measures, the US Treasury Department issued a General License permitting US persons affected by this new prohibition to engage in all necessary activities connected to winding down any operations, contracts or other agreements affected by this measure until September 26, 2014. The General License does not authorize the provision of any new goods, services or technology to the listed energy companies, except to the extent necessary to wind down operations.
Companies taking advantage of this General License must submit a report to the Treasury Department regarding the activities at issue within 10 days after the wind down has concluded.
- Notably, these measures do not prohibit the provision of financial services (e.g., clearing financial transactions or providing insurance relating to restricted activities of the targeted Russian entities).
One of the targeted Russian entities, Gazprom Neft, is subject to separate SSI List debt restrictions discussed below.
New Russian Defense Companies Added to SDN List
- Newly-added Russian entities: Dolgoprudny Research Production Enterprise,MytishchinskiMashinostroitelnyZavod, KalininMachinePlantJSC, Almaz-Antey GSKB, and JSC NIIP.
- Certain Russian defense companies, including Kalashnikov Concern, already had been added to the SDN List through previous actions. The new measures add five more Russian defense companies to the SDN List.
- US persons generally are prohibited from engaging in any transactions involving these companies and their wholly-owned subsidiaries.
The US Treasury Department also re-issued a General License permitting US persons to engage in transactions involving derivative instruments whose value is linked to an underlying asset that would be considered to be prohibited new debt or new equity of SSI-listed Russian financial, energy and defense companies.
Summary of New EU Measures
Council Regulation (EU) No 960/2014 (the “Amending Regulation”) was published in the Official Journal of the European Union (EU) and entered into force on 12 September 2014. The Amending Regulation builds on and extends existing restrictive measures adopted by the EU in view of the situation in Ukraine implemented pursuant to Regulation (EU) No 833/2014.
The restrictions implemented under the Amending Regulation include:
New Prohibition on Dual Use Goods and Technology
- Article 2 (a) of the Amending Regulation prohibits the transfer of all Dual Use Goods and Technology to those Russian entities listed in Annex IV. The entities listed in Annex IV are predominantly Russian companies engaged in the military sector. The prohibition carves out contracts concluded before 12 September 2014 and goods intended for the aeronautics and space industry.
- The prohibition on the transfer of Dual Use goods and technology builds on the existing EU arms embargo which already prohibits the transfer of dual use items to Russia for military use or to a military end user. Those companies who have existing contracts with the Annex IV entities should be able to rely on extant export authorizations to continue to supply dual use items (for non-military use) for pre-existing contracts.
New Prohibition on Services Necessary for Certain Sectors of the Russian Oil Industry
- Article 3 (a) of the Amending Regulation prohibits the provision of (i) drilling, (ii) well testing, (iii) logging and completion services, and (iv) supply of specialized floating vessels, for deep water oil exploration and production, arctic oil exploration and production, or shale oil projects in Russia. The prohibition carves out contracts concluded prior to 12 September 2014 and associated ancillary contracts.
- The prohibition on services for deep water oil exploration and production, arctic oil exploration and production, or shale oil projects in Russia builds on existing prohibitions for the supply of goods, technical assistance and financing for such projects. The prohibition does not provide for a licensing derogation. However, pre-existing contracts are excluded from the prohibition.
Expansion of EU Capital Market Restrictions
- Article 5 of Regulation (EU) No 833/2014, which imposed certain EU capital market restrictions on specified Russian companies, has been replaced. The headline implications of the amended Article 5 are:
The 90 day maturity threshold for transferable securities and money market instruments has been reduced to 30 days for new issue after 12 September 2014; and
The prohibition on dealing with transferable securities and money market instruments with a maturity exceeding 30 days, issued after 12 September 2014, is extended to those entities listed in Annex V (i.e. OPK Oboronprom, United Aircraft Corporation, and UralVagonZavod) and Annex VI (i.e., Rosneft, Transneft and Gazprom Neft) – and entities outside of the EU owned 50% or more by the Annex V and Annex VI entities.
- These additional restrictions on access to EU capital markets will continue to squeeze the ability of certain Russian entities to raise new capital on EU financial markets. The additional measures do not affect existing holdings of the Annex III, Annex V or Annex VI entities. Nor, do the new measures affect trading of existing instruments (i.e. pre-12 September 2014 issue) on secondary markets.
Initial Russian Reaction
Russian Federation President Putin has stated that Russia will impose asymmetrical measures in response to the latest sanctions. A Russian presidential aide mentioned that this may affect the import of automobiles, clothing and other consumer goods. Earlier this week, in an interview with a major Russian newspaper Prime Minister Medvedev said that Russia was considering imposing restrictions on western airlines flying over Russia in route to Asia. Last month, Russia imposed import bans on agricultural and food products. The ban is in place for one year.