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
  • Gazpromneft
  • Lukoil, OAO
  • Rosneft 
  • Surgutneftegas

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
      • Uralvagonzavod
      • Rosneft
      • Transneft
      • Gazprom Neft

4. Definitions

  • 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.