On July 29, 2014, President Obama imposed tough new sanctions on Russia due to the situation in Ukraine. These "Level 3" sanctions followed two previous rounds of sanctions that targeted individual persons and companies. Now the United States and the European Union ("EU") have imposed sanctions against key sectors of the Russian economy for the first time. The three sectors targeted are Russia's banking and financial industry, oil and gas industry, and defense industry. The banking sanctions named three state-owned Russian banks; VBT Bank, the Bank of Moscow, and the Russian Agricultural Bank, who are barred from any U.S. transactions or medium or long-term financing. For the defense sector, nine large Russian defense firms, including the United Shipbuilding Corp., are prohibited from using the U.S. financial system or engaging in transactions with U.S. persons. Finally, the United States has banned the export of all items, including software, for use in Russia's deep water, Arctic offshore, and shale oil production capabilities.
Previously, the United States had engaged in two rounds of sanctions ratcheting up pressure on the Russians. The first round, which occurred over March and April of this year, applied sanctions to an ever increasing list of persons and entities, including Chernomorneftegaz, the Crimean gas company, Bank Rossiya, InvestCapitalBank, the SGM Group (gas pipeline construction), and Transoil (oil rail freight operator). In total, over 60 persons and entities were named. The sanctions denied visas to the United States to the individuals named and froze the assets of all the individuals and entities named. They also blocked U.S. persons from being able to do any business whatsoever with the persons and entities named.
Subsequently, on July 16, 2014, Mr. Obama barred the access to U.S. capital markets to Rosneft, the country's largest oil producer and Gazprombank, which is the banking arm of Gazprom, the state-owned natural gas company. They also targeted VEB, the state economic development bank and Novatek, another natural gas producer. The Administration also barred business dealings with eight state-owned defense firms, four high-level Russian government officials, the oil shipping facilities in Crimea, and all rebel organizations in the East Ukraine. The four banks and energy companies named were barred from U.S. capital markets.
The sanctions against the financial sector are particularly harmful to the Russian economy. Russian banks are cut off from U.S. and EU capital markets, and are unable to obtain access to median and long-term debt. Further, their existing debt held with either U.S. or EU financial institutions, or held in U.S. dollars, will be impossible to be financed, cleared or settled. To give an example of the extent of these sanctions, Gazprombank alone has $8.2 billion dollars in U.S. dollar denominated debt.
In addition to the section sanctions, Executive Order 13660, formally titled "Blocking Property of Certain Persons Contributing to the Situation in Ukraine" (‘"Blocking Order’’) defines the terms of the sanctions. Section 2 of the Blocking Order denies entry into the United States of all the individuals named. Section 3 prohibits donations of any type of articles by, to, or for the benefit of any person whose property and interest in property are blocked by the order. Section 4 freezes the assets of all individuals, entities and banks named, and prohibits any contribution or provision of funds, goods or services by, to, or for the benefit of the named individuals or entities. It prohibits the receipt of any contribution or provision of funds, goods, or services from any named individuals or entities. Essentially, the Blocking Order freezes their assets in the United States and prohibits any type of commercial activity with the named individuals and entities.
The Blocking Order applies to “U.S. persons” who are defined as any United States citizen, permanent resident alien, or entity organized under the laws of the United States or any jurisdiction within the United States, including foreign branches, or any person who is present in the United States. Therefore, the Blocking Order applies to U.S. citizens no matter where they are in the world; thus, prohibiting U.S. citizens who may be in England, Germany, and the like, from having any commercial activity with the blocked persons. These sanctions also extend to any individual or entity who is acting for or on the behalf of any blocked person.
The impact of these sanctions on U.S. business and financial institutions is obvious. Any assets that they hold of any of the designated persons are frozen. Further, they are prohibited, along with all their foreign subsidiaries and affiliates, from having any business transactions whatsoever with the named persons or entities. A key challenge for U.S. companies is to make sure that they are not inadvertently dealing with "strawmen" who are actually acting by or on behalf of the named persons. Therefore, it is important to have systems in place to guard against this happening.