Today, the United States and European Union expanded their sanctions measures in response to the situation in Ukraine. The coordinated measures continue to target the Russian financial and energy sectors, and new restrictions were introduced that affect the Russian defense sector.
The measures include: (1) expanded sectoral sanctions focused on entities in the financial sector and energy sector, (2) new designations of individuals and entities under sanctions laws, and (3) additional parties and activities subject to restrictions under export control laws.
I. U.S. Ukraine-related sanctions – 12 September 2014
1. Sanctions measures imposed by the Department of Treasury
Today, the U.S. Department of Treasury’s Office of Foreign Assets (OFAC) Control imposed further sanctions against Russia for its actions in and relating to Ukraine. Secretary Jacob Lew stated that these measures were necessary given Russia’s “direct military intervention and blatant efforts to destabilize Ukraine,” and that “these steps underscore the continued resolve of the international community against Russia’s aggression.”
OFAC named new Specially Designated Nationals (SDNs) in Russia’s defense sector. OFAC placed additional entities on the Sectoral Sanctions Identifications List (SSIL), and issued two new directives and expanded the scope of one of the directives. (For background information on SSIL, please see our previous sanctions alert here.)
- Directive 1 continues to focus on the Russian financial sector and imposes both new equity and new debt restrictions. However, the maturity of “debt” has been shortened so the restrictions now apply to “debt” longer than 30 days in maturity, including extension of credit such as payment terms beyond 30 days. Sberbank was added to the SSIL under this Directive.
- Directive 2 remains focused on the Russian energy sector and continues to restrict activities involving new debt with maturity of longer than 90 days (the length of maturity was not shortened for these entities). OFAC added to the SSIL entities in Russia’s oil/gas sector such as Gazprom Neft and Transneft.
- A new Directive 3 focuses on the Russian defense and related materiel sector, restricting transactions involving new debt with maturity of longer than 30 days. Rostec was added to the SSIL under this Directive.
- A new Directive 4 further targets the Russian energy sector but is not limited to financial transactions in debt/equity. Instead, U.S. persons are prohibited from providing, directly or indirectly, any goods, services (except for financial services), or technology in support of the exploration or production of deepwater, Arctic offshore, or shale projects that have the potential to produce oil and that involve any person/entity designated under new Directive 4. The following Russian companies are targeted by this broad ban: Gazprom, Gazprom Neft, Lukoil, Rosneft, and Surgutneftegas.
- OFAC FAQ 412 makes clear that the prohibition on the exportation of services includes, for example, drilling services, geophysical services, geological services, logistical services, management services, modeling capabilities, and mapping technologies. The prohibition does not apply to the provision of financial services, e.g., clearing transactions or providing insurance related to such activities.
- This measure complements restrictions administered by the U.S. Commerce Department and is similar to new EU measures published today.
Copies of the Directives are available here. The Directives apply to U.S. persons and activities in the United States. As with the prior Directives, the announcements include reference to various “AKAs” and spelling iterations for the named entities. Also consistent with the prior SSIL measures, entities owned 50% or more by SSIL designees are also targeted.
The General License issued today by OFAC to authorize the “wind down” of operations or contracts involving entities targeted by Directive 4 is very limited, authorizing activities only for two weeks, through 26 September. The General License, available here, makes clear that the provision of new goods/services is not authorized except to cease operations involving projects covered by Directive 4.
Certain entities are subject to more than one Directive. OFAC has clarified in FAQ 415 that each Directive operates independently of the others. If a transaction involves a person subject to two Directives, for example, a U.S. person engaging in that transaction must comply with the requirements of both Directives. Exemptions in one Directive apply only to the prohibitions contained in that Directive and do not carry over to another Directive. For example, if a person is subject to both Directive 2 and Directive 4, the exemption for the provision of financial services by U.S. persons or in the United States under Directive 4 does not supersede the prohibition in Directive 2 on dealing in debt of longer than 90 days maturity of such a person.
The new OFAC SDN designations are available here.
OFAC’s FAQs related to Ukraine are available here.
2. Export restrictions imposed by the Department of Commerce
The Commerce Department’s Bureau of Industry and Security (BIS) continues to expand the use of the Entity List and other export measures. (Please see our previous sanctions alert here.) BIS has added 10 entities to the Entity List, which can impact their ability to receive items subject to U.S. law. These companies operate in Russia’s energy and defense sectors.
The five entities added to the BIS Entity List from the Russian defense sector will be subject to a license requirement for the export, reexport, or foreign transfer of items subject to the Export Administration Regulations (EAR) to the designated entities, with a presumption of denial. These entities are:
- Almaz-Antey Air Defense Concern Main System Design Bureau, JSC
- Tikhomirov Scientific Research Institute of Instrument Design
- Mytishchinski Mashinostroitelny Zavod, OAO
- Kalinin Machine Plant, JSC
- Dolgoprudny Research Production Enterprise
The five energy companies added to the BIS Entity List will now be subject to a license requirement for the export, reexport, or foreign transfer of items subject to the EAR to those companies when 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 in Russia. These entities are:
- Gazprom, OAO
- Lukoil, OAO
License applications for such projects will be reviewed with a presumption of denial when for use directly or indirectly for exploration or production from deepwater, Arctic offshore, or shale projects in Russia that have the potential to produce oil.
BIS also announced it would require licenses for an additional group of items destined to military end uses or end users in Russia. These restrictions will be described in more detail in the Federal Register Notice.
For BIS’ press release, please see here.
II. EU Ukraine-related sanctions 12 September 2014: Regulation 960/2014 and Regulation 961/20142.
Today, a new package of EU Ukraine-related sanctions has come into force through Council Regulation (EU) No 960/2014 and Council Regulation (EU) No 961/2014. These new sanctions amount to a deepening of current restrictions, with the main developments being:
1. Energy sector
- The prohibitions relating to deep water oil exploration and production, arctic oil exploration and production, and shale oil projects in Russia have now been extended to the provision of certain services: drilling, well testing, logging and completion services, and the supply of specialized floating vessels. There is an exception to enable contracts entered into before 12 September 2014 to be performed.
- The prohibition does not apply if the provision of such services is urgent and necessary to prevent or mitigate an event that is likely to have a serious and significant impact on human health and safety or the environment.
2. Dual use/military sector
- In addition to the general prohibition on supply of dual-use goods and technology intended for military use or for a military end-user, there is a new prohibition on the supply or export of dual-use goods and technology, to the following companies:
- JSC Sirius (optoelectronics for civil and military purposes)
- OJSC Stankoinstrument (mechanical engineering for civil and military purposes)
- OAO JSC Chemcomposite (materials for civil and military purposes)
- JSC Kalashnikov (small arms)
- JSC Tula Arms Plant (weapons systems)
- NPK Technologii Maschinostrojenija (ammunition)
- OAO Wysokototschnye Kompleksi (anti-aircraft and anti-tank systems)
- OAO Almaz Antey (state-owned enterprise; arms, ammunition, research
- OAO NPO Bazalt (state-owned enterprise; production of machinery for the production of arms and ammunition
- The prohibition also covers the supply of related technical assistance, brokering services, and financing and financial assistance.
- The supply or export of dual-use goods and technology (and the provision of related technical and financial assistance) intended for non-military use in the aeronautics and space industry or for the maintenance and safety of existing nuclear capabilities within the European Union is exempted from the prohibition.
- The prohibition in relation to financing or financial assistance related to goods in the Common Military List has been expanded to include insurance and reinsurance.
3. Debt and equity restrictions relevant to the financial sector
- The financial restrictions relating to five Russian state-owned banks (Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB), and Rosselkhozbank) have been expanded. In summary, the previous restrictions prohibited the sale or purchase of transferable securities and money-market instruments with a maturity of over 90 days that have been issued after 1 August 2014 by these banks, their majority-owned non-EU subsidiaries and any entity acting on behalf of them or at their direction.
- The restrictions have been expanded to cover:
- transferable securities and money-market instruments with a maturity of over 30 days that have been issued after 12 September 2014; and
- making or being part of an arrangement to make new loans or credit with a maturity exceeding 30 days after 12 September 2014, except for:
- financing related to exports or imports in relation to non-restricted trade between the EU and Russia; and
- emergency funding to enable majority-owned EU-based subsidiaries of the above banks to meet solvency and liquidity requirements.
- However, the exceptions must not be used to circumvent the restrictions.
- The restrictions have also been expanded to cover three major Russian defense companies and three major energy companies. The restrictions only apply to transferable securities, money-market instruments, and loans to these six companies (and their majority-owned non-EU subsidiaries and any entity acting on behalf of them or at their direction) issued or made after 12 September 2014. The six companies are:
- OPK Oboronprom
- United Aircraft Corporation
- Gazprom Neft
- Regulation 833/2014 contained a definition of "brokering" that was relevant to the debt/equity restrictions. The defined term "brokering" has been replaced by the term "investment services," but the definition is otherwise unchanged.
- The definition of "transferable securities" has been made more specific.
5. Designated persons
Twenty-four individuals have been added to the list of designated persons subject to a travel ban and asset freeze. The new designations target persons and entities conducting transactions with separatist groups in the Donbass region in Ukraine, members of the government of the so-called "Donetsk People's Republic," and members of the Russian Duma. A close ally of President Putin, Sergei Chemezov, who chairs the Rostec conglomerate, the leading Russian state-controlled defense and industrial manufacturing corporation, has also been included in the list of designated persons.