On July 16, 2014, the US Treasury Department, Office of Foreign Assets Controls (OFAC) issued the Sectoral Sanctions Identifications List (SSI List), imposing sanctions on several entities in the Russian financial and energy sectors. OFAC also designated as Specially Designated Nationals (SDNs) several other individuals and entities, including Kalashnikov Concern, manufacturer of the AK-47 assault rifle.
The European Union also has been active in imposing Ukraine-related sanctions. First, on July 11, 2014, the EU adopted Council Decision 2014/455/CFSP and Council Implementing Regulation No. 753/2014, imposing sanctions on 11 individuals involved in destabilizing eastern Ukraine. Second, on July 16, 2014, the European Council adopted conclusions (the Communique) expressing willingness to expand targeting of entities contributing to the crisis in Ukraine; block new project funding for Russia from the European Investment Bank, and coordinate Member State positions to similarly block funding from the European Bank of Reconstruction and Development; and restrict investments in Crimea and Sevastopol.
New US Sanctions
Issuance of Sectoral Sanctions Identification List
In naming entities to the SSI List, OFAC has imposed the first “sectoral” sanctions on Russia under Executive Order 13662, targeting certain entities in the Russian financial and energy sectors. OFAC has stopped short of “blocking” the listed entities as Specially Designated Nationals (SDNs). Rather, OFAC has restricted US persons and persons within the United States from transacting in, providing financing for, or otherwise dealing in new “debt” of longer than 90 days’ maturity issued for sanctioned persons, any entity such sanctioned person owns, directly or indirectly, 50 percent or more, their property, or their interests in property. In the case of the sanctioned entities solely in the financial sector, the same restrictions also apply to newly issued “equity.” All other transactions with these persons or involving their property or property interests are permitted, provided that they do not involve blocked property under Ukraine-related Executive Order 13660, 13661, or 13662, or any other sanctions program administered and enforced by OFAC.
The SSI List identifies entities in the Russian financial and energy sectors that OFAC has targeted for the new debt and new equity sanctions. The list includes two directives—Directive 1 pertaining to certain Russian entities the financial sector, and Directive 2 pertaining to specific Russian entities in the energy sector (together, the OFAC Directives).
Several aspects of the OFAC Directives are notable, with specific information provided in Frequently Asked Questions Guidance (FAQ Guidance) published on the OFAC website and summarized as follows:
- Definition of debt. “Debt” includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper.
- Definition of equity. “Equity” includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership.
- Broader restrictions for Russian financial sector. Directive 1 restricts transactions related to new debt and new equity issued by listed entities in the financial sector. Directive 2, which pertains to the energy sector, restricts transactions related only to new debt only.
- Effective dates. The restrictions set forth in Directives 1 and 2 apply to new debt and new equity issued on or after July 16, 2014 and with a maturity of 90 days or longer.
- Restrictions on new debt for the Russian financial and energy sectors. The Directives prohibit transactions involving new debt; financing in support of such debt; and any dealing in such debt, including services in support thereof, for sanctioned persons. [N.B. A prior version of the Directives previously stated that the restrictions applied to new debt or new equity issued “of” these persons, but have been changed to apply to debt for these persons. Additionally, the FAQ guidance of July 16, 2014 appears to overstate the Directives’ restrictions to be applied to new debt issued “by, on behalf of, or for the benefit of” the persons operating in Russia’s financial and energy sectors.] The OFAC Directives also apply to rollover of existing debt where the rollover results in the creation of new debt with a maturity of longer than 90 days.
- Restrictions on new equity for the Russian financial sector. Directive 1 prohibits transactions involving new equity; financing in support of such equity; and any dealing in such equity, including services in support thereof, for sanctioned persons in the financial sector.
- Applicability to subsidiaries, property, and interests in property of sanctioned entities. The Directives apply to new debt and equity issued for persons not only identified on SSI List , but also entities owned 50 percent or more by listed entities, as well as their “property” and “interests in property.” These terms are broadly defined in 31 C.F.R. § 589.308.
- Permissible transactions. The following types of transactions currently are permitted:
- Transacting in, financing, or dealing in debt and equity issued before July 16, 2014
- Transacting in, financing, or dealing in debt with a maturity of 90 days or less, even if issued after July 16, 2014
- Transacting in, financing, or dealing in new equity for entities operating in the Russian energy sector
- For US financial institutions, maintaining correspondent accounts and processing US dollar-clearing transactions for listed entities, provided that such services are not used for transactions prohibited by the Directives
- Derivative products. General License No. 1 authorizes US persons and persons in the United States to engage in transactions involving derivative products whose value is linked to underlying debt or equity that is restricted under the Directives.
- No blocking. Notably, the entities identified on the SSI List are not also designated on OFAC’s SDN List. Therefore, US persons and persons located in the United States are not required to block the property and interests in property of sanctioned persons that come into their possession or control. Rather, US persons should reject restricted transactions, and any “financial institution” must report rejected transactions to OFAC within 10 days in accordance with Section 501.604 of the Reporting, Procedures and Penalties Regulations (31 C.F.R. Part 501). OFAC notes that it is possible SSI List entities may be designated as SDNs under Executive Order 13662 or other authority in the future.
- Licensing. In the introduction to the SSI List, OFAC states that “[e]ntities and individuals on the list are occasionally licensed by OFAC to transact business with US persons in anticipation of removal from the list or because of foreign policy considerations in unique circumstances.”
Sanctioned entities in the Russian financial sector include:
- Bank for Development and Foreign Economic Affairs (Vnesheconombank) State Corporation (a.k.a. Vnesheconombank, a.k.a. VEB)
- Gazprombank OJSC
Sanctioned entities in the Russian energy sector include:
There are multiple entries on the SSI List for each of the entities listed above, reflecting different names under which the entities are doing business.
New SDN Designations
OFAC designated five individuals and eleven entities under Executive Orders 13660 and 13661. These persons are listed as SDNs and are thus “blocked.” This means that the property or property interests of the SDN located in the United States or in the possession or control of a US person, such as a US bank or other financial institution, are frozen. This effectively cuts off the sanctioned persons from the US financial and commercial system, and prohibits US persons from conducting business with the sanctioned persons anywhere in the world.
Sanctioned individuals include:
- Sergey Beseda, a senior officer in the Russian Federal Security Service
- Aleksandr Yurevich Borodai, who has declared himself “Prime Minister of the People’s Republic of Donetsk”
- Sergei Ivanovich Neverov, Deputy Chairman of the Russian State Duma
- Oleg Genrikhovich Savelyev, Minister for Crimean Affairs
- Igor Shchegolev, aide to Russian President Vladimir Putin
Sanctioned entities include:
- Donetsk People’s Republic (a separatist entity that has illegitimately declared independence in eastern Ukraine)
- Federal State Unitary Enterprise State Research and Production Enterprise Bazalt;
- Feodosiya Enterprise
- JSC Concern Radio-Electronic Technologies
- JSC Concern Sozvezdie
- JSC Military-Industrial Corporation NPO Mashinostroyenia
- JSC Concern Almaz-Antey
- Kalashnikov Concern
- Konstruktorskoe Byuro Priborostroeniya Otkrtoe Aktsionernoe Obshchestvo (a.k.a. Instrument Design Bureau)
- Luhansk People’s Republic (a separatist entity that has illegitimately declared independence in eastern Ukraine)
With the exception of the Donetsk People’s Republic and Luhansk People’s Republic, which are separatist entities, the SDN entities listed above operate in the Russian arms and related materiel sectors.
If any of the above entities owns another entity 50 percent or more, the property and property interests of the second, non-designated entity are also deemed blocked under § 589.406, and cannot be dealt in.
The designation of Kalashnikov Concern (Kalashnikov) is particularly notable, as it is likely to impact US firearms dealers and brokers. In the FAQ Guidance, OFAC states that new transactions with Kalashnikov are prohibited. However, Kalashnikov products that were bought and full paid for prior to July 16, 2014 are not blocked, and US persons may keep or resell such items. With respect to Kalashnikov items in the inventory of a US person in which Kalashnikov has an interest, such as products not fully paid for or sold on consignment, OFAC recommends that US persons contact OFAC for further guidance.
New EU Sanctions
The EU sanctioned 11 individuals pursuant to the Council Implementing Regulation No. 753/2014, which implements Council Regulation 269/2014, the measure targeting those involved in threatening the territorial integrity of Ukraine. Specifically, the Regulation targets separatist leaders involved in setting up parallel government structures and commanding forces in Donetsk and Luhansk. The 11 sanctioned persons are:
- Aleksandr Yurevich Borodai, who has declared himself “Prime Minister of the People’s Republic of Donetsk”
- Alexander Khodakovsky, who has declared himself “Minister of Security of the People’s Republic of Donetsk”
- Alexandr Aleksandrovich Kalyussky, who has declared himself “Deputy Prime Minister for Social Affairs of the People’s Republic of Donetsk”
- Alexander Khryakov, who has declared himself “Information and Mass Communications Minister of the People’s Republic of Donetsk”
- Marat Bashirov, who has declared himself “Prime Minister of the Council of Ministers of the People’s Republic of Luhansk”
- Vasyl Nikitin, who has declared himself “Vice Prime Minister of the Council of Ministers of the People’s Republic of Luhansk”
- Aleksey Karyakin, who has declared himself “Supreme Council Chair of the People’s Republic of Luhansk”
- Yurij Ivakin, who has declared himself “Minister of Internal Affairs of the People’s Republic of Luhansk”
- Igor Plotnitsky, who has declared himself “Defence Minister of the People’s Republic of Luhansk”
- Nikolay Kozitsyn, commander of Cossack forces fighting against Ukrainian government forces
- Oleksiy Mozgovy, leader of armed separatist groups
The Regulation imposes a travel ban into the EU, subject to exemptions when travel is justified on the grounds of attending intergovernmental meetings or a UN or an OSCE event. Furthermore, the Regulation freezes all funds and economic resources belonging to, owned, held or controlled by the sanctioned person. The Regulation also prohibits any direct or indirect economic support to or for the benefit of such persons. Finally, any activity that is intended to circumvent these restrictions is prohibited.
To date, the United States has not sanctioned any of the eleven individuals listed above on either the SSI or SDN lists, although authority to do so exists under Executive Order 13660.
Upcoming Additional EU Sanctions
At a meeting on July 16, 2014, the European Council adopted conclusions regretting that Russia had not taken adequate steps since the last European Council meeting on June 27 to de-escalate tensions in eastern Ukraine, and announcing that the EU would expand sanctions accordingly. The Communique expresses willingness on the parts of Heads of State and Government to:
- Instruct Ministers in Council to adopt, by the end of July, a list of Russian entities that are materially or financially supporting actions undermining Ukraine’s sovereignty
- Consider targeting individuals and entities that “actively provide material or financial support to the Russian decision-makers responsible for the annexation of the Crimea or destabilization in eastern Ukraine”
- Block European financing for new Russian projects through the European Investment Bank, and coordinate Member State positions to similarly block funding from the European Bank of Reconstruction and Development and EU-Russian funding programs (cross-border cooperation and civil society programs may continue)
- Restrict investments in Crimea and Sevastopol (proposals for this measure are expected from the Commission and the European External Action Service shortly)
EU measures to target Russian entities would be especially notable, as the EU has only sanctioned two entities (both based in Crimea) to date. Furthermore, targeting of individuals and entities providing support to Russian “decision-makers” would mark a significant expansion of the grounds upon which the EU could impose sanctions.
The United States and the European Union have imposed a range of sanctions in response to Russia’s annexation of Crimea and efforts to destabilize Ukraine.
US sanctions imposed in response to the Ukraine situation have included:
- Executive Order 13660: As we have previously advised, this executive order, issued March 6, 2014, provided for the blocking of persons involved in certain Ukraine-related activity, including threatening the territorial integrity of Ukraine, undermining of democratic processes, and misappropriation of state assets.
- Executive Order 13661: As we have previously advised, this executive order, issued March 17, 2014, targeted Russian government officials and persons involved in the Russian arms sector.
- Executive Order 13622: As we have previously advised, this executive order, issued March 20, 2014, authorized the Treasury Department to impose sanctions against persons in any sector of the Russian economy as it deems appropriate, including the financial services, energy, metals and mining, engineering, and defense sectors.
The EU measures have included:
- Council Regulation 208/2014, implementing Council Decision 2014/119/CFSP: These sanctions, which entered into force on March 6, 2014, target former Ukrainian President Viktor Yanukovych and his close circle of allies identified by the EU as responsible for the misappropriation of Ukrainian state funds and for human rights violations in Ukraine.
- Council Regulation 269/2014, implementing Council Decision 2014/145/CFSP: As we have previously advised, these sanctions, which entered into force on March 18, 2014, target persons identified as involved in threatening the territorial integrity of Ukraine.
- Council Regulation No. 692/2014, implementing Council Decision 2014/386/CFSP: As we have previously advised, these sanctions, which entered into force on June 23, 2014, banned most imports of goods from Crimea and the city of Sevastopol.
OFAC formally has implemented Executive Orders 13660, 13661, and 13662 through promulgation of the Ukraine-Related Sanctions Regulations, 31 C.F.R. Part 589, as we have previously advised. Furthermore, the US Department of Commerce and US Department of State have imposed certain Russia-related export restrictions, on which we have previously advised.
The SSI List sanctions represent a significant expansion of US restrictions on Russia, even though the sanctions only prohibit US persons from engaging in transactions involving "new debt" and/or "new equity" of certain specified entities.
First, the new SSI List is the first implementation of the sectoral sanctions authorized under Executive Order 13662. That EO identified several sectors of the Russian economy; and with these first designations, more can be expected absent a resolution of the situation in Crimea and eastern Ukraine.
Second, the scope of the terms "new debt" and "new equity" is unclear. While OFAC has indicated these terms encompass certain types of debt instruments and equity, and that only those items with a maturity of beyond 90 days and issued on or after July 16, 2014 are covered, there are still questions regarding whether various types of credit may be included.
Third, while four specific entities have been identified, the restrictions appear to apply to entities in which any one of these entities has a 50 percent or more ownership interest, and perhaps other entities or projects where the identified entity has a "property interest." Further clarification is needed from the US Government before the full impact of these new sanctions is understood.
Fourth, it appears that OFAC may be amenable to approving, on a case-by-case basis, license applications for certain types of transactions involving entities on the SSI List, as opposed to dealings with SDNs that typically face a policy of denial. However, it is unclear how license requests may be evaluated and adjudicated in the immediate period ahead as US and EU policies directed at Russia and Ukraine evolve.
Finally, with respect to EU sanctions, it should be noted that while to date the EU sanctions regime generally has focused on targeted sanctions to freeze the economic resources of specifically designated persons and entities, this policy is under review and may change.