In response to Russia’s continued efforts to destabilize Eastern Ukraine, the United States (“US”) and European Union (“EU”) continue to expand their coordinated sanctions regimes against Russia. The latest measures, which took effect on September 12, 2014, are designed to deepen and strengthen existing economic sanctions and target the Russian financial, energy, and defense sectors. Overall, the US and EU sanctions regimes in response to the Ukraine crisis have been characterized by an incremental, step-by-step intensification and increased isolation of key sectors of the Russian economy. Moreover, recent sanctions show a willingness to expand measures into new sectors despite the potential impact on US and EU businesses. This Alert provides a summary of the latest measures and explains key implications for legal and natural persons subject to US and/or EU jurisdiction in respect of their activities with certain Russian and other related entities. While the US and EU sanctions are coordinated and similar in many respects, there are notable differences in substance and with respect to the universe of targeted entities. Therefore, this Alert discusses the US and EU sanctions regimes separately. For your information and future reference, pertinent US and EU official source documents are hyperlinked in the text of this alert. US Sanctions On September 12, 2014, the US Departments of Treasury and Commerce announced additional sanctions and designations. As detailed below, the new US sanctions largely accomplished the following: 1. strengthened sanctions on Russia’s financial sector by further restricting issuance of new debt and designating Russia’s largest bank; 2. broadened sanctions on the Russian energy sector with restrictions on exports of certain goods, services, and technology under new Directive 4; 3. expanded the scope of sanctions on the Russian defense sector with new capital market restrictions under new Directive 3; and 4. named additional entities subject to the Directives on the Office of Foreign Assets Control’s (“OFAC”) Sectoral Sanctions Identifications List (“SSI List”) and Specially Designated Nationals List (“SDN List”) and to the US Department of Commerce’s Entity List. Access to US Capital Markets. As discussed in our previous memo, OFAC had issued Directives 1 and 2 pursuant to Executive Order 13622, which broadly restricted new financing of certain Russian financial institutions and companies in Russia’s energy sector. On September 12, 2014, OFAC revised Directives 1 and 2 and added additional entities to the SSI List under Directives:Fried Frank International Trade and Investment Alert™ 09/15/14 2 Directive 1 previously prohibited US persons from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity by, on behalf of, or for the benefit of certain financial institutions. The amended Directive 1 reduced the debt maturity period to 30 days, rather than 90 days. However, OFAC noted that new debt issued prior to September 12, 2014 with a maturity of 90 days or less will not be covered by the amended Directive. OFAC also explained that Directive 1 does not apply to equity of non-sanctioned entities held by entities on the Sectoral Sanctions Identifications List (“SSI List”), but only to new equity issued, directly or indirectly, by an SSI listed entity. Unlike entities listed on OFAC’s SDN List, US persons are not prohibited in transacting with SSI List entities as counterparties in equity of nonsanctioned entities. OFAC added Sberbank, Russia’s largest bank, to the list of financial institutions restricted under amended Directive 1 on the SSI List. OFAC added energy companies Gazprom Neft and AK Transneft to the SSI List under Directive 2. These measures, including the listing of Russia’s largest bank, will further isolate Russian financial institutions from the U.S. capital markets. They are intended to increase the economic cost to Russia of its actions in eastern Ukraine. New Energy Sector Sanctions. In addition to the capital market restrictions on the Russian energy sector, OFAC issued a new Directive 4 and related General License 2, and designated additional entities on the SSI List under Directives 2 and 4, as follows: Pursuant to E.O. 13622, Directive 4 prohibits US persons from providing, exporting or reexporting, directly or indirectly, to SSI Listed entities, goods, services (excluding financial services), and technology in support of exploration or production for deepwater (more than 500 feet), Arctic offshore, or shale projects that could promote the production of oil in Russia or certain maritime areas claimed by and extending from Russia. The restricted services include “drilling services, geophysical services, geological services, logistical services, management services, modeling capabilities, and mapping technologies.” OFAC also noted that Directive 4 is not limited to projects producing solely oil, but can also apply to projects producing gas along with oil. General License 2 permits – until September 26, 2014 – certain otherwise prohibited activities and services under Directive 4 in connection with their wind down. OFAC included the following energy companies on the SSI List under Directive 4: OAO Gazprom, Gazprom Neft, Lukoil, Surgutneftegas, and Rosneft. In addition, the US Department of Commerce’s Bureau of Industry and Security (“BIS”) added the same five companies to its Entity List, providing a presumption of denial for exports to such entities. The new export restrictions under Directive 4 built upon the sanctions recently issued by BIS targeting the Russian oil and gas sector. While OFAC’s new sanctions are limited to certain Russian entities, they go beyond BIS’s export licensing measures because they: (1) restrict the provision of services, as well as goods and technology; and (2) cover all goods and services in support of the targeted activities, rather than just listed items. The Treasury Department explained that these measures “will impede Russia’s ability to develop so-called frontier or unconventional oil resources, areas in which Russian firms are heavily dependent on U.S. and Fried Frank International Trade and Investment Alert™ 09/15/14 3 western technology. While these sanctions do not target or interfere with the current supply of energy from Russia or prevent Russian companies from selling oil and gas to any country, they make it difficult for Russia to develop long-term, technically challenging future projects.” 1 New Defense Sector Sanctions. OFAC issued a new Directive 3 and related General License 1A, and designated entities on the SSI List under Directive 3, as follows: Pursuant to E.O. 13622, Directive 3 prohibits US persons from transacting in, providing financing for, or otherwise dealing in new debt of longer than 30 days maturity by, on behalf of, or for the benefit of entities on the SSI List under Directive 3. OFAC placed Rostec, a Russia-based, state-owned holding company for the defense industry, on the SSI List under Directive 3. General License 1A, which supersedes and replaces General License 1, authorizes certain transactions involving derivative products notwithstanding Directives 1, 2, and 3. BIS added the following entities in the Russian defense sector to the Entity List: AlmazAntey Air Defense Concern Main System Design Bureau, JSC, Tikhomirov Scientific Research Institute of Instrument Design, Mytishchinski Mashinostroitelny Zavod, OAO, Kalinin Machine Plant, JSC, and Dolgoprudny Research Production Enterprise. Similarly, OFAC added these firms to the SDN List, except for Tikhomirov Scientific Research Institute of Instrument Design, while also designating JSC NIIP. This latest round of sanctions focuses more on the Russian defense sector than previous rounds. It shows the willingness of the United States to expand its sector-wide sanctions to key aspects of the Russian economy. Scope of Directives. Consistent with updated guidance issued by OFAC on August 13, 2014, OFAC has confirmed that prohibitions on entities on the SSI List extend to entities 50 percent or more owned by one or more entities on the SSI List. EU Sanctions On September 8, 2014, the EU Council adopted legislative measures containing the most expansive sector-wide EU restrictions on Russia yet. 2 In particular, Council Regulation (EU) No 960/2014 updates previous EU sanctions designed primarily to restrict access to EU capital markets. The updated measures target Russian majority state-owned (i) financial institutions, (ii) energy providers, and (iii) defense companies. While largely similar to the US developments discussed above, the EU and US sanctions target a number of different entities and differ in their specific terms. In detail: Access to EU Capital Markets. The most stringent measures adopted by the EU Council relate to Russia’s access to Europe’s capital markets. It is now prohibited, from September 12, 2014 onwards, to “purchase, sell, provide investment services for or assistance in the 1 US Department of the Treasury, Announcement of Expanded Treasury Sanctions within the Russian Financial Services, Energy and Defense or Related Materiel Sectors (Sept. 12, 2014), available at http://www.treasury.gov/press-center/press-releases/Pages/jl2629.aspx. 2 Council Regulation (EU) No 959/2014 of 8 September 2014, Council Regulation (EU) No 960/2014 of 8 September 2014, Council Implementing Regulation (EU) No 961/2014 of 8 September 2014, Council Decision 2014/658/CFSP of 8 September 2014, and Council Decision 2014/659/CFSP of 8 September 2014. Fried Frank International Trade and Investment Alert™ 09/15/14 4 issuance of, or otherwise deal with transferable securities and money-market instruments with a maturity exceeding […] 30 days” to Sberbank, Gazprombank, VTB, Russian Agriculture Bank (Rosselkhozbank), and VEB. 3 Under the previous regime, the measures against these five banks had only applied to “bonds, equity or similar financial instruments with a maturity exceeding 90 days, issued after 1 August 2014.” 4 Further, the new measures now also prohibit “to directly or indirectly purchase, sell, provide investment services for or assistance in the issuance of, or otherwise deal with transferable securities and moneymarket instruments with a maturity exceeding 30 days, issued after September 12, 2014 by” (i) three Russian providers of military goods (OPK Oboronprom, United Aircraft Corporation, and Uralvagonzavod), and (ii) three Russian oil majors (Rosneft, Transneft, and Gazprom Neft). 5 Neither of those latter categories of companies had been subject to EU money market restrictions under the previous regime. The EU sanctions also cover any legal person outside the EU that is 50 percent or more owned by any of the above companies, and any legal person “acting on behalf or at the direction of an entity referred to” above. Finally, the new measures make it illegal “to directly or indirectly make or be part of any arrangement to make new loans or credit with a maturity exceeding 30 days to any” of the above. The new measures are thus designed to (i) expand the number of Russian majority state-owned or controlled companies subject to the EU capital market restrictions, and (ii) expand the sectors subject to such restrictions from banks to include energy companies and defense contractors. ‘Dual-Use’ Items. Previously, the EU sanctions regime only prohibited EU exports of products with both civilian and military purposes to Russia, if there was a clear military end user purchasing the goods. The new measures make it illegal “to sell, supply, transfer or export, directly or indirectly, dual-use goods and technology” to nine specific Russian entities listed in Annex IV of Council Regulation (EU) No 960/2014, unless the items are “intended for the aeronautics and space industry” and “for maintenance and safety of existing civil nuclear capabilities within the EU, for non military use and for a non military end user.” The nine entities are (i) JSC Sirius (optoelectronics for civil and military purposes), (ii) OJSC Stankoinstrument (mechanical engineering for civil and military purposes), (iii) OAO JSC Chemcomposite (materials for civil and military purposes), (iv) JSC Kalashnikov (small arms), (v) JSC Tula Arms Plant (weapons systems), (vi) NPK Technologii Maschinostrojenija (ammunition), (vii) OAO Wysokototschnye Kompleksi (anti-aircraft and anti-tank systems), (viii) OAO Almaz Antey (state-owned enterprise; arms, ammunition, research), and (ix) OAO NPO Bazalt (state-owned enterprise; production of machinery for the production of arms and ammunition). In addition, the provision of technical assistance, brokering, and other services, as well as financing and financial assistance, related to dual-use items for these defense contractors is also prohibited. However, the prohibitions are without prejudice to contracts or agreements concluded prior to September 12, 2014. Energy Sector. The new EU sanctions regime will also prevent European energy services companies from providing “directly or indirectly, the following associated services necessary for deep water oil exploration and production, arctic oil exploration and production, or shale oil projects in Russia: (i) drilling, (ii) well testing, (iii) logging and completion services, (iv) 3 Council Regulation (EU) No 960/2014 of 8 September 2014, Article 5(1). 4 Article 5 of Council Regulation (EU) No 833/2014, available at http://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=OJ:JOL_2014_229_R_0001&from=EN. 5 Council Regulation (EU) No 960/2014 of 8 September 2014, Article 5(2) (a) and (b).Fried Frank International Trade and Investment Alert™ 09/15/14 5 supply of specialized floating vessels.” Again, these prohibitions are without prejudice to contracts or framework agreements concluded before September 12, 2014, and an exception is available in an event “likely to have a serious and significant impact on human health and safety or the environment.” Previously, the EU had only made exports of certain energyrelated equipment and technology to Russia subject to prior authorization, which had been intended to be denied where products were destined for deepwater oil exploration, and production, arctic oil exploration or production and shale oil projects in Russia. Additional designations. In addition to the sector-wide measures outlined above, the EU continues to add more designation to its list of persons and entities subject to restrictive measures. Having previously targeted persons and entities for undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, the designations of the latest 24 individuals are based on their “conducting transactions with separatist groups in the Donbass region of Ukraine.” 6 While targeting the Russian oil industry, the latest EU sanctions do not cover the Russian gas production and export industry, which is critical to many European countries’ energy supplies. For example, Finland and the Baltic states are highly dependent on Russian gas supplies. Such commercial realities have meant that the latest round of measures has come into force following a substantial delay (the EU Council adopted the measures on 8 September 2014, but they were only published in the EU’s Official Journal on September 12 2014, on which date they entered into force). It is understood that there has been some resistance to the imposition of fresh sanctions among several EU member states. Austria, the Czech Republic, and Slovakia, in particular, had voiced concerns about new, tougher sanctions. Austrian banks have extensive business deals in Russia, while the Czech Republic’s engineering export industry and Slovakia’s steel tubes exports to Russia have been cited as reasons behind the three countries’ hesitant position on Russia sanctions. Slovakia is also understood to be suffering from Russian retaliatory measures in the form of a Russian fruit import ban. 7 It has also been reported that Russia has reduced the supply of natural gas to Poland in recent days by 45 percent in response to Poland providing gas to Ukraine. Poland is understood to have halted this due to the shortfall from Russia. 8 The EU has so far sought to balance these commercial realities against the broader objective of aligning its restrictive measures more broadly with those taken by the US in response to the Ukraine crisis. Indeed, the consultation document sent out to EU Member States in preparation of the latest round of sanctions stated as one objective of the measures: “It would also increase the alignment of EU measures with those adopted by other G7 partners.” 9 This EU balancing act is also evident in the statement made by EU Council President Herman van Rompuy in relation to the latest intensification of EU restrictive measures: “We have always stressed the reversibility and scalability of our restrictive measures.” 10 6 Council Regulation (EU) No 959/2014 of 8 September 2014, Article 1. 7 Christoph Hasselbach, Resistance grows in EU to new Russia sanctions, Deutsche Welle, Sept. 5, 2014 available at http://www.dw.de/ resistance-grows-in-eu-to-new-russia-sanctions/a-17903208. 8 Russia reduces gas exports to Poland, BBC, Sept. 11, 2014, available at http://www.bbc.co.uk/news/worldeurope-29154335. 9 Council Regulation (EU) No 959/2014 of 8 September 2014, Council Regulation (EU) No 960/2014 of 8 September 2014, Council Implementing Regulation (EU) No 961/2014 of 8 September 2014, Council Decision 2014/658/CFSP 10 Statement by the President of the European Council Herman Van Rompuy on further EU restrictive measures against Russia, 11 September 2014, available at http://www.consilium.europa.eu/uedocs/cms_Data/ docs/pressdata/en/ec/144867.pdf.Fried Frank International Trade and Investment Alert™ 09/15/14 6 Conclusion Russia’s failure to adequately address US and EU demands of working towards a diplomatic solution to the Ukraine crisis has resulted in a continued escalation of sanctions measures. The US and EU have moved beyond targeted sanctions, and have now deepened and broadened the sectoral measures to amplify their impact. As a consequence of this incremental, but steady, intensification of measures, companies and financial institutions dealing with Russian counterparties should review and monitor developments closely to ensure they are acting in accordance with a greatly expanded sanctions regime. In particular, any legal and natural persons subject to US and/or EU jurisdiction should exercise caution and due diligence before entering into any transaction related to the Russian financial, energy, or defense sectors (or with a company owned by an entity in these sectors). These US and EU companies should also update their compliance policies and procedures correspondingly. These actions are all the more pertinent, as the latest ratcheting up of the sanctions regimes may not yet represent the high watermark in US and EU sanctions against Russia. In fact, the US and EU issued the latest round of sanctions after Russia and Ukraine announced a cease fire. Moreover, the US Treasury Department stated that “the United States, in close cooperation with the European Union, will impose ever-increasing sanctions that further Russia’s isolation from the global financial system unless Russia abandons its current path and genuinely works toward a negotiated diplomatic resolution to the crisis.” 11 For its part, the EU Council had, for the first time, suggested considering (i) “the suspension of Russian participation in high-profile international cultural, economic or sports events (Formula 1 races, UEFA football competitions, 2018 World Cup, etc.)” and (ii) expanding the sector-wide measures into “new sectors of the Russian economy.” 12 On the other hand, as noted above, the US and EU have both stressed that their sanctions on Russia are designed to be both reversible and scalable. Either way, we recommend that our clients and friends remain vigilant for further developments. * * * 11 US Department of the Treasury, Announcement of Expanded Treasury Sanctions within the Russian Financial Services, Energy and Defense or Related Materiel Sectors (Sept. 12, 2014), available at http://www.treasury.gov/ press-center/press-releases/Pages/jl2629.aspx. 12 Peter Spiegal, Brussels Blog: Leaked Russia sanctions paper: the excerpts, Financial Times, Sept. 3, 2014, available at http://blogs.ft.com/brusselsblog/2014/09/03/leaked-russia-sanctions-paper-the-excerpts/. Fried Frank International Trade and Investment Alert™ 09/15/14 7 Fried Frank’s International Trade and Investment Group regularly represents clients in international mergers and acquisitions, joint ventures, principal investments, and sensitive corporate investigations, particularly in relation to matters that implicate the US government's regulation of international business activities, such as the Committee on Foreign Investment in the United States (CFIUS), economic sanctions, export controls, and anti-corruption and anti-bribery. For decades, our international trade and investment practitioners have been consistently recognized for their legal and policy-based contributions. Today, our practice is unique among its kind: it draws upon the Firm’s long tradition of senior US government and diplomatic service, combines policy insight with deep technical expertise and business judgment, is fully integrated with Fried Frank’s preeminent Corporate and Litigation Practices, and is international in its outlook, experience, network reach, and reputation. Authors: Hon. Mario Mancuso Dr. Tobias Caspary Michael Gershberg Adam Brenner Till Vere-Hodge This alert is not intended to provide legal advice, and no legal or business decision should be based on its content. If you have any questions about the contents of this alert, please call your regular Fried Frank contact or the attorneys listed below: Contacts: Washington, D.C. Hon. 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