New Designations

The US Office of Foreign Assets Control ("OFAC") has issued several new sanctions designations in response to the developing situation in relation to Ukraine, and has also issued several significant clarifications regarding the scope of US Ukraine-related sanctions.  OFAC has designated United Shipbuilding Corporation, a Russian state-owned enterprise, as a Specially Designated National. Additionally, Bank of Moscow, Russian Agricultural Bank, and VTB Bank OAO have been added to the Sectoral Sanctions Identification List ("SSI List") under Directive 1, which prohibits US persons or persons geographically located in the US from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity for these persons, their property, or their interests in property.

Additional Guidance

OFAC has also updated its FAQ related to the SSI List where the prohibitions may have been ambiguous or unclear.

Significantly, it has clarified the meaning of "new debt." If a US person has entered into a long-term credit facility or loan agreement prior to the effective date of the sanctions, drawdowns and disbursements with repayment terms of 90 days or less are permitted. Additionally, drawdowns and disbursements whose repayment terms exceed 90 days are not prohibited if the terms of such drawdowns and disbursements were contractually agreed to prior to the effective date of the sanctions and are not modified on or after the effective date. This guidance on the meaning of "new debt" gives additional comfort to parties who have entered into loan agreements with entities on the SSI List (before such entities were added to the SSI List) that contemplate further draws by the borrower in accordance with the agreement's terms. However, caution is warranted, as US persons may not deal in a drawdown or disbursement initiated after the effective date of the sanctions with a repayment term of longer than 90 days, if the terms of the drawdown or disbursement were negotiated or modified on or after the effective date.

OFAC has also provided guidance as to the issue of trading in the equity of an entity added to the SSI List under Directive 1. OFAC stated that if a US person decides to transact or deal in equity issued by an SSI entity prior to the effective date of the sanctions, the US person "should ensure" that it is not dealing in the newly issued equity. Where a company's "new" equity is clearly identified (such as by International Securities Identification Number) and trades separately from "old" equity, it will be readily possible to determine whether the equity shares in question were issued after the effective date of the sanctions. However, OFAC's updated guidance cautions that the burden will fall on the US person to determine whether or not equity issued by an SSI entity was issued before the effective date of the sanctions or not.

Finally, OFAC has clarified the SSI List's impact on advising or confirming a letter of credit that involves an entity on the SSI List. US persons may advise or confirm a letter of credit issued on or after the effective date of the sanctions on behalf of a non-sanctioned entity in which an SSI entity is the beneficiary (i.e., the exporter or seller of the underlying goods) because the subject letter of credit does not represent an extension of credit to the SSI entity. OFAC has set forth a three-factor test to determine whether a letter of credit transaction is allowed. US persons may not advise or confirm a letter of credit if all of the following three conditions are met: (1) the letter of credit was issued on or after the effective date of the sanctions, (2) the letter of credit carries a term of longer than 90 days maturity, and (3) an SSI entity is the applicant of the letter of credit (i.e., the importer or buyer of the underlying goods or services). This would constitute prohibited activity because the subject letter of credit would represent an extension of credit to the SSI entity.