The United States has imposed new economic sanctions and export restrictions related to the situation in the Ukraine, and the European Union has announced its intent to implement additional measures. The U.S. measures do not impose territorial sanctions against Russia but continue the approach of targeting designated parties and prohibiting certain activities. In a shift toward the energy and banking sectors, the U.S. has cut off from its financial system certain new debt and equity transactions of major Russian companies. Given this development, U.S. companies should carefully review the scope of these new sanctions.
Pursuant to Executive Order 13662 and 31 C.F.R. Part 589, on 16 July 2014 The Office of Foreign Assets Control (OFAC) published a new “Sectoral Sanctions Identifications List” (SSIL) targeting entities in the Russian financial and energy sectors. This is the first round of sanctions imposed under Executive Order 13662, which allows sanctions on companies operating in specific sectors of the Russian economy (in addition to the financial and energy sectors, the Executive Order mentions metals and mining, engineering, and defense and related materiel). The entities listed on the SSIL have not been added to the List of Specially Designated Nationals (SDNs). However, OFAC has prohibited certain types of transactions with the SSIL-designated parties. Specifically, OFAC issued two “directives” as outlined below.
- Directive 1 targets two companies: Vnesheconombank and Gazprombank (the various aliases of the companies are included in the link to the SSIL below). The following transactions by U.S. persons or within the United States involving these companies are now prohibited: “transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity of these persons…, their property, or their interests in property. All other transactions with these persons or involving any property in which one or more of these persons has an interest are permitted, provided such transactions do not otherwise involve property or interests in property of a person blocked pursuant to Executive Orders 13660, 13661 or 13662, or any other sanctions programs implemented by the Office of Foreign Assets Control.”
- Directive 2 targets another two companies: OAO Novatek and Open Joint-Stock Company Rosneft Oil Company (their various aliases are also included in the link to the SSIL below). With respect to these companies, the following transactions are now prohibited: “transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity of these persons…, their property, or their interests in property. All other transactions with these persons or involving any property in which one or more of these persons has an interest are permitted, provided such transactions do not otherwise involve property or interests in property of a person blocked pursuant to Executive Order 13660, 13661, or 13662, or any other sanctions programs implemented by the Office of Foreign Assets Control.” Unlike Directive 1, Directive 2 does not place restrictions on transacting in, providing financing for, or otherwise dealing in new equity of the entities listed pursuant to Directive 2.
The full text of Directives 1 and 2, and the entries for the parties listed above, is available here.
OFAC has published guidance that specifically states that the new SSIL restrictions apply not only to the four named entities above, but also to entities owned 50 percent or more by these entities, directly or indirectly (see the Sectoral Sanctions FAQs available on OFAC’s website here).
OFAC has further stated that “debt” in the SSIL context includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper. “Equity” includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership. OFAC has advised that these are not exhaustive lists. In addition, the prohibitions in both Directive 1 and 2 extend to rollover of existing debt, if such rollover results in the creation of new debt with a maturity of longer than 90 days.
OFAC has made clear that adding entities to the SSIL list does not make them SDNs subject to blocking (“freezing”) of their assets and property and interests in property. Rather, OFAC has advised that U.S. persons should reject transactions or dealings that are prohibited by the SSIL directives, and report such rejections to OFAC as required under 31 C.F.R. 501.
OFAC also issued a General License No. 1 (see here) which authorizes all transactions by U.S. persons and in the United States involving derivative products whose value is linked to an underlying asset that constitutes either (a) debt with a maturity of longer than 90 days or equity issued on or after 16 July 2014 by a person identified in Directive 1 pursuant to Executive Order 13662, or (b) debt with a maturity of longer than 90 days issued on or after 16 July 2014 by a person identified in Directive 2 to Executive Order 13662. The General License makes clear it does not authorize holding, purchasing, or selling of underlying assets otherwise prohibited by Directive 1 and 2 by U.S. persons, or within the United States.
OFAC has also advised that transacting in, providing financing for, or otherwise dealing in any debt or equity issued prior to the sanctions’ effective date by, on behalf of, or for the benefit of the entities operating in the financial and energy sectors that are identified in the directives is permissible. In addition, transacting in, providing financing for, or otherwise dealing in debt instruments with maturities of 90 days or less issued by or on behalf of the entities identified in the directives, even if they are issued after the sanctions’ effective date, is permissible. OFAC is assessing further the types of activities that would be grandfathered and will provide additional guidance.
Transacting in, providing financing for, or otherwise dealing in new equity instruments for entities operating in the Russian energy sector identified in Directive 2 is permissible (as Directive 2 does not speak to “equity” as Directive 1 does). U.S. financial institutions may continue to maintain correspondent accounts and process U.S. dollar-clearing transactions for the entities identified in the directives, so long as those activities do not involve transacting in, providing financing for, or otherwise dealing in prohibited transaction types identified by the directives. OFAC has also informally advised that the new sanctions are not intended to, for example, prohibit Gazprombank itself from giving a loan to another party who is not itself restricted or designated.
In addition to the SSIL measures, OFAC also yesterday listed several new individual and entity SDNs, including certain separatist groups. The list of names is available on OFAC’s website here.
In conjunction with this OFAC action, the U.S. Commerce Department’s Bureau of Industry and Security (BIS) also announced that it added eleven parties to its Entity List because of concerns regarding Russia’s continued action in Ukraine. The BIS announcement is available here. The Entity List designations result in a licensing requirement for the export, re-export, or in-country transfer of items subject to the Export Administration Regulations (EAR) to these parties, with a presumption of denial of such requests. In particular, we note that because of the Entity List designations, any person or entity (including non-U.S. entities) that is providing goods, software, or technology subject to the EAR to these parties would require licenses to export or re-export such items to them (even when the items subject to the EAR are already located outside the United States). Interactions with any subsidiaries (either joint ventures or direct equity ownership stakes) of these parties would also raise red flags and require further due diligence to confirm that U.S. items are not being diverted to these parties and that the subsidiary is a bona fide legally distinct entity from its parent. If a subsidiary entity is controlled by any of these parties as a result of its level of ownership and/or its involvement in the company’s business activities, the Entity List’s licensing requirements and policies specific to the named parties also apply to the subsidiary company as well (BIS has confirmed this position for Entity List entities on its Entity List FAQ website available here).
On 17 July 2014, the European Council agreed to expand the European Union’s restrictive measures with regard to the situation in Ukraine by the end of July. The new restrictive measures will target entities that are supporting actions undermining Ukraine's sovereignty, territorial integrity, and independence. Specifically the measures could target Russian entities engaged in the above activities, which would broaden the scope of the EU measures currently in place (at present the European Union has only designated entities in Crimea and Sevastopol whose ownership had been transferred contrary to Ukrainian sovereignty). The new measures could also target persons and entities that provide material and/or financial support to Russian decision makers responsible for the Crimean annexation and the destabilization of Eastern Ukraine. The expanded measures will allow for the listing of persons and entities on a wide basis, but will fall short of covering specific sectors of the Russian economy like the U.S. measures outlined above.
In addition, the European Council requested that the European Investment Bank suspend new financing operations in Russia to stop the flow of European public money into Russia. EU member states will coordinate their positions within the European Bank for Reconstruction and Development with a view to also suspending the financing of new operations in Russia.
The European Council also requested the European Commission to: (a) review, on a case-by-case basis, the suspension of EU-Russia and other regional cooperation programs, except for programs that deal exclusively with cross-border cooperation and civil society; and (b) submit proposals for additional measures aimed to restrict investment in Crimea and Sevastopol, and that International Financial Institutions refrain from financing projects that might recognize these regions.
The EU has also called for an immediate end to the conflict in the region, following the tragic plane crash in Ukraine on 17 July 2014.