On September 12, 2014, the U.S. Government announced additional Ukraine-related sanctions against Russian interests, with new sectoral sanctions, export restrictions, and transaction-blocking actions. These new sanctions prohibit U.S. persons and companies from providing goods, services, or equipment to certain named Russian energy companies for the purpose of engaging in sophisticated oil and gas exploration, including deepwater, Arctic offshore, and shale gas. They also prohibit U.S. persons and companies from engaging in transactions with certain named Russian defense companies.
The Treasury Department's Office of Foreign Assets Control ("OFAC") also added Russia's largest bank, Sberbank, to the Sectoral Sanctions Identification ("SSI") List and has expanded the sectoral sanctions against Russian financial institutions to prohibit persons subject to U.S. jurisdiction from providing equity or new debt financing with a maturity of only 30 days or more to these institutions. Previously, new debt or equity with a maturity of less than 90 days was not restricted.
Together, these expanded restrictions -- included in four new or amended OFAC Directives -- will require U.S. persons and companies and foreign companies that are subject to U.S. jurisdiction (or that choose to comply with U.S. sanctions) to cease a wide variety of transactions with Russian financial institutions and energy and defense companies.
Expansion of Sectoral Sanctions
OFAC continues to use its existing authority under Executive Order 13662 to target the ability of entities in Russia's defense, energy, and financial sectors to access capital. First, OFAC revised Directive 1, which targets the Russian financial services sector, by prohibiting U.S. persons from extending debt and equity with a maturity of 30 days (as opposed to 90 days) issued afterSeptember 12, 2014, by, on behalf of, or for the benefit of persons on the SSI List. Debt or equity issued after July 16, 2014, but before the September 12 amendment, remains restricted only if it has a maturity of 90 days or longer.
Second, OFAC has placed two additional entities in the Russian energy sector -- Transneft and Gazpromneft -- on the SSI List under Directive 2. U.S. persons may not transact or deal in new debt issued by, on behalf of, or for the benefit of Russian energy sector entities identified on the SSI List under Directive 2. There are now four Russian energy companies subject to Directive 2.
Third, OFAC has issued a new Directive, Directive 3, which targets certain entities in the Russian defense sector. Currently, only the Russian state-owned defense firm Rostec has been identified on the SSI List under Directive 3, and U.S. persons may not transact in debt with a maturity of 30 days or longer issued after September 12, 2014, by, on behalf of, or for the benefit of the company or its interests. Rostec is a large conglomerate that includes a subsidiary with plans to construct new energy plants in Crimea.
Finally, OFAC has replaced General License 1 with General License 1a, which permits U.S. persons to deal in derivative products where the underlying asset would otherwise be restricted under Directives 1 through 3.
New Energy Exploration Restrictions
OFAC also issued a new Directive, Directive 4, which prohibits "the provision, exportation, or reexportation, directly or indirectly, of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory" for persons identified on the SSI List under this Directive. OFAC identified five energy firms -- Gazprom, Gazpromneft, Lukoil, Surgutneftegas, and Rosneft -- on the SSI List under Directive 4. These restrictions complement the Department of Commerce's Bureau of Industry and Security's ("BIS") existing export restrictions on certain items related to energy exploration for persons identified on BIS's Entity List, which now includes all of the entities OFAC listed under Directive 4. Press reports cite U.S. officials as saying that the sanctions were designed to "effectively shut down" Russia's offshore, Arctic, and shale oil exploration.1
OFAC also immediately issued General License 2, which permits U.S. persons currently engaged in exploration activities with the listed persons to conduct wind down activities, which would otherwise have been immediately restricted. Such operations must be completed by September 26, 2014, and persons must report such wind down activities to OFAC within 10 days of their completion.2
Blocking of Additional Entities in the Russian Defense Industry
Finally, OFAC added five Russian defense firms -- OAO Dolgoprudny Research Production Enterprise, Mytishchinski Mashinostroitelny Zavod OAO, Kalinin Machine Plant JSC, Almaz-Antey GSKB, and JSC NIIP -- to its Specially Designated Nationals ("SDN") List. The assets of these entities are blocked, and U.S. persons are prohibited from engaging in transactions with any persons on the SDN List. These sanctions are more restrictive than the sanctions on Rostec, which -- because it is listed on the SSI list rather than the SDN list -- is subject only to restrictions on provision of equity or debt financing.
The addition of the two new Directives, in addition to the new blocking actions and export restrictions, adds complexity to the Ukraine-related sanctions regime. Where an entity on the SSI List is involved, directly or indirectly, with a given transaction, compliance with the regime requires not only an examination of the parties involved but also the specific structure and timing of the transaction. U.S. persons and persons subject to U.S. jurisdiction must update their compliance procedures to account for the additional layer analysis required.