The US Treasury Department’s Office of Foreign Assets Control ("OFAC") has imposed several new Ukraine-related sanctions as of July 16, 2014. Significantly, the new sanctions impose restrictions on certain types of dealings by US persons with specified Russian energy, defense and financial services entities. The EU has also signaled that it will make a decision on a significant expansion to its list of designated (asset frozen) persons by the end of July. This briefing summarizes the most recent changes.
For our previous Ukraine/Russia updates, please see our blog.
1. New US designations
OFAC has updated its list of Specially Designated Nationals (the "SDN List"), adding several individuals and entities. Five individuals – including Russian government and military officials – were placed on the SDN List. Eleven entities were added, including several Russian companies and the unrecognized Russian separatist states in eastern Ukraine. Assets of these persons and entities are blocked to the extent that such assets are in the United States or under the control of US persons.
2. Sectoral sanctions: restrictions on certain financing activities
Additionally, OFAC has published a "Sectoral Sanctions Identifications List" (the "SSI List"). The SSI List includes persons determined by OFAC to be operating in sectors of the Russian economy identified in Presidential Executive Order 13662 (“E.O. 13662”). One subsection of the SSI List – Directive 1 – prohibits US persons from transacting in, providing financing for, or otherwise dealing in debt with a maturity of longer than 90 days or equity, if that debt or equity is issued on or after July 16, 2014 (the applicable sanctions effective date) by, on behalf of, or for the benefit of specified entities operating in Russia’s financial sector. Another subsection of the SSI List – Directive 2 – prohibits US persons from transacting in, providing financing for, or otherwise dealing in new debt – issued on or after July 16, 2014 – of greater than 90 days' maturity by, on behalf of, or for the benefit of specified entities operating in Russia’s energy sector. Both sets of restrictions apply to majority-owned subsidiaries of the sanctioned entities.
The entities sanctioned under the SSI List include Gazprombank, Vnesheconombank, OAO Novatek and Rosneft Oil Company.
OFAC has published guidance about these new sanctions. The guidance makes clear that short-term financing (having a maturity of 90 days or less) remains permissible, as well as transacting in, providing financing for, or otherwise dealing in new equity instruments for entities operating in the Russian energy sector (Directive 2 of the SSI List). The guidance also makes clear that dealing in debt or equity issued prior to the sanctions' effective date of July 16, 2014 is permissible. US financial institutions remain able to maintain correspondent accounts and process US dollar-clearing transactions for persons on the SSI List, so long as those activities do not involve transacting in, providing financing for, or otherwise dealing in the identified prohibited transaction types.
Simultaneously with the announcement of the new Ukraine-related sanctions, OFAC also issued General License No. 1 in conjunction with those sanctions, authorizing transactions within the US and by US persons involving derivative products whose value is linked to an underlying asset that may otherwise be restricted pursuant to the SSI List. General License No. 1 does not authorize the holding, purchasing, or selling of underlying assets otherwise prohibited by those prohibitions.
3. EU Update
The EU expanded its sanctions on July 11 with the publication of EU Regulation 753/2014. This extended the existing asset freeze to 11 additional individuals said to be responsible for and to support actions in Eastern Ukraine undermining Ukraine's sovereignty, territorial integrity and independence.
The Conclusions note that the de-escalation steps the EU requested in June have not been adequately taken and that, as a result, the EU has agreed to expand its sanctions relating to Ukraine. The Council has therefore been tasked with adopting the necessary legal instruments and deciding by the end of July on a first list of entities and persons to be targeted as materially or financially supporting actions undermining or threatening Ukraine's sovereignty, territorial integrity and independence. The EU specifically notes that the measures are intended to target entities and not just individuals and will include entities from the Russian Federation. The Council has also been asked to consider the possibility of targeting individuals or entities who actively provide material or financial support to the Russian decision-makers responsible for the annexation of Crimea or the destabilisation of Eastern Ukraine.
The EU Conclusions also announce a number of other measures:
- The Council has requested the European Investment Bank to suspend the signature of new financing operations in the Russian Federation.
- European Union member states will coordinate their positions within the European Bank for Reconstruction and Development's Board of Directors with a view to also suspending financing of new operations.
- The European Commission has been invited to re-assess EU-Russia cooperation programmes with a view to taking a decision (on a case by case basis) on the suspension of the implementation of EU bilateral and regional cooperation programmes.
- The Council has requested proposals for additional measures on restricting investments in Crimea and Sevastopol and has stated that it expects international financial institutions to refrain from financing any projects that explicitly or implicitly recognise the illegal annexation of Crimea and Sevastopol.
Based on the most recent announcements, companies should expect to see additional EU sanctions imposed in the coming weeks, in particular in the form of the expansion of the existing asset freeze to cover additional entities.
These sanctions represent the toughest US economic sanctions against Russia to date. Whilst the sanctions are targeted at specific activity only, they are significant in that they will impact Russia's main oil producer, as well as important financial institutions. Notably, the sanctions did not target Gazprom, the large Russian natural gas company.