On July 29, 2014, the U.S. Treasury Department, acting under the authority granted by President Obama's Executive Order 13662, materially escalated sanctions against Russia, imposing a broad-based package of restrictions on Russian entities in the financial services sector. Additionally, the President authorized the blockage of exports of specific goods and technologies that would benefit Russia's energy sector, and increased sanctions on Russian defense companies. The U.S. also suspended the use of credit that encourages exports to Russia, as well as financing for development projects in the country. These new penalties against Russia follow tougher sanctions agreed to by European Union leaders earlier on Tuesday, July 29, 2014.
RUSSIAN FINANCIAL INSTITUTION AND DEFENSE CONTRACTOR SANCTIONS
The new U.S. sanctions build upon those previously issued July 16, 2014. They prohibit U.S. persons from providing new financing to three new major Russian financial institutions: Bank of Moscow, VTB Bank, and the Russian Agricultural Bank. These sanctions limit access to U.S. capital markets by imposing measures prohibiting U.S. 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 or new equity for Bank of Moscow, VTB Bank, and the Russian Agricultural Bank, their property, or their interests in property.
As a practical matter, this step restricts the medium- and long-term U.S. dollar lending window to these banks. Critically, the U.S. has not yet blocked the property or interests in property of these banks, nor has Treasury prohibited transactions with these entities beyond the specific restrictions. However, the U.S. government may expand the scope of the prohibited transaction types and the number of financial institutions under the authority of E.O. 13662.
Also listed on the Treasury designation is the United Shipbuilding Corporation, a defense technologies firm based in St. Petersburg, Russia. The sanctions freeze any assets it may hold in the United States . In addition, transactions by U.S. persons or within the United States involving United Shipping are generally prohibited.
EUROPEAN UNION SANCTIONS
On Tuesday, July 29, 2014, the European Union issued stringent new economic sanctions against Russia that mirror those implemented by the U.S. on July 16. The EU sanctions are expected to be published Thursday and it is not yet clear whether they will take effect immediately. While previous EU sanctions have focused on specific businesses and individuals, the new set is designed to impact foundational sectors of the Russian economy. The measures, which were prepared in coordination with the United States , target four Russian economic sectors: finance, dual-use equipment that could have military applications, arms, and oil-production equipment.
Under the financial sanctions, Russian state-owned banks will be banned from selling bonds or equities with a maturity of over 90 days in European capital markets. They would sharply restrict the ability of Russia's state-owned banks, including Sberbank and VTB Bank, from raising financing on European markets. The measures also place an embargo on future sales of arms and set restrictions on exports of militarily sensitive goods and technology used in unconventional oil drilling and exploration.
According to officials, the EU will also add eight names to the list of people subject to EU-wide asset freezes and travel ban, including four people close to Russian President Vladimir Putin. Three more entities will also be placed on the list of companies and organizations subject to EU sanctions due to their alleged actions against Ukraine's sovereignty or territorial integrity. The identity of these individuals and entities should be published Thursday, July 31, 2014.
While the latest moves do not cut off entire sectors of the Russian economy, as threatened in the past, the new measures materially restrict access to American and European debt markets for the targeted financial institutions and defense firms. The new American actions will bar affected Russian institutions from the American debt markets for loans over 90 days, meaning that they will still be able to conduct day-in, day-out business with overnight loans but will find it harder to finance medium- and long-term activity. By designating firms in the arms or related materiel sector, Treasury has cut these firms off from the U.S. financial system and the U.S. economy. Similarly, to restrict Russia's access to Europe's money markets, EU citizens and banks will be barred from purchasing certain bonds or stocks issued by state-owned Russian banks.
Given the general importance of a compliance system that enables confirmation of any newly listed sanctioned entities, it is important to again review business relationships, contracts, purchase orders, and upcoming business travel to ensure that a company does not inadvertently violate the March 6, March 17, or March 20 Executive Orders as well as existing U.S. and EU sanctions. A review should be conducted of projects that might be implicated by these sanctions. U.S. companies need to determine how these sanctions might impact on-going and prospective projects. Non-U.S. companies need to do the same, with attention to U.S. and EU inputs that might now be controlled to the point that a project destined for Russia will have to be materially altered.