On April 6, 2018, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) sanctioned seven Russian oligarchs, 12 companies controlled by those oligarchs, 17 senior Russian government officials, a state-owned Russian weapons trading company, and a Russian bank. These SDN designations were made pursuant to the Countering America's Adversaries Through Sanctions Act (CAATSA) and Executive Orders related to the Ukraine and Syria sanctions programs. U.S. Treasury Secretary Steven Mnuchin stated that these sanctions were in response to the Russian government's activities in Ukraine and Syria as well as other anti-Western actions worldwide. The Russian oligarchs were targeted in particular because “the Russian government operates for the disproportionate benefit of oligarchs and government elites.” OFAC also issued two general licenses to minimize disruption to U.S. persons and businesses from these designations, including authorization for activities to wind-down operations or agreements with newly sanctioned entities. This round of sanctions covers companies heavily involved in global trade, and its impact will be significant in the U.S. and worldwide. U.S. persons who do business with Russia or Russian companies should carefully review these business relationships, ensure they are in compliance with sanctions laws, and prepare for the possibility of additional Russian sanctions in the future.
The Russian entities designated include major businesses that operate worldwide, including in the United States. They include:
- EN+ Group, a major aluminum producer;
- United Company RUSAL PLC, a subsidiary of EN+ Group and one of the world’s largest aluminum producers;
- GAZ Group, Russia’s largest commercial vehicle manufacturer;
- Gazprom Burenie, OOO, the oil and gas exploration wing of Gazprom;
- Renova Group, a major investment and management company; and
- Rosoboroneksport, a Russian weapons trading company.
Additionally, OFAC designated several senior executives of major Russian state-owned enterprises. It is important to review the list of new designations, noting that any entities in which these individuals own a majority interest are also subject to sanctions.
U.S. persons may still conduct business with entities even when their senior executives have been designated by OFAC as SDNs, but must use increased caution. U.S. persons are forbidden from negotiating with or entering into contracts signed by these individuals. Any U.S. entity or person that deals with these companies must also ensure that their goods or services are for the benefit of the company itself, not a blocked individual. U.S. companies who do business in Russia should be vigilant to ensure compliance with OFAC’s 50 percent rule, which states that any entity owned 50% or more, in the aggregate, by one or more SDNs is also considered sanctioned. For example, U.S. persons cannot even deal with a U.S. subsidiary or company owned by a Russian SDN. Any U.S. person that is currently engaged in business with a newly sanctioned person or entity must immediately halt any business activity, including fulfillment of contracts, shipments, or payments. If a U.S. person is in possession of funds or other property in which a newly sanctioned person has an interest, those funds or property must be blocked.
As is usual when OFAC issues sanctions that may negatively affect U.S. persons or their interests, it issued two General Licenses. General License 12 authorizes wind-down related transactions, including the importation of goods or services into the United States, for several of the blocked entities, and General License 13 authorizes transactions to divest debt, equity, or other holdings of three of the blocked entities. It also issued several FAQs relating to these new sanctions and the General Licenses. General License 12 allows for U.S. persons to conduct certain activities to wind down operations or contracts by June 5, 2018, notably including the importation of goods or services into the United States. However, the FAQs make clear that even though a U.S. company may accept goods under a contract pursuant to General License 12, any outstanding payments may not be made, and must instead be deposited in a blocked account at a U.S. financial institution. Additionally, General License 12 does not allow for exportation of goods from the United States. General License 13 allows U.S. persons to engage in certain transactions by May 7, 2018 to divest or transfer debt, equity, or other holdings (including global depositary receipts) in EN+ Group PLC, GAZ Group, or United Company RUSAL PLC to a non-U.S. person that is not a blocked person. Any U.S. person who takes advantage of these General Licenses to wind down their business with newly blocked entities is required to file a report with OFAC within ten business days of the expiration of the relevant General License.
These sanctions are likely to have significant effects throughout the U.S. economy and worldwide. CAATSA contains a mandatory sanctions provision requiring secondary sanctions on any foreign person that OFAC determines has knowingly facilitated significant transactions (including deceptive or structured transactions) for or on behalf of a SDN or SDN’s immediate family member. Additionally, foreign financial institutions may face sanctions relating to their ability to maintain U.S. correspondent accounts or payable through accounts if OFAC determines that they have knowingly facilitated significant financial transactions on behalf of any Russian SDN. On April 8, 2018, Russian Foreign Ministry Spokeswoman Maria Zakharova stated in an interview that a list of measures to respond to these sanctions has already been prepared.
U.S. businesses should remain vigilant about compliance with economic sanctions if they do business with Russia or Russian-owned companies. Businesses should ensure their compliance programs remain up-to-date with the latest sanctions and have contingency plans in the event that a contract with a Russian entity falls under new sanctions. Extra care should be taken to ensure compliance with the myriad of sanctions programs when doing business with the Russian government or its state-owned entities, or the Russian defense, intelligence, energy, or financial sectors. If a U.S. business plans to take advantage of the General Licenses issued by OFAC in connection with these sanctions, it should begin making preparations now and ensure that proper procedures are followed, including the mandatory report to OFAC. U.S. persons that have dealings with these SDNs should act immediately to ensure compliance with OFAC sanctions: immediately cease any business activity and freeze any assets of these SDNs that a U.S. person may be in possession of.