In response to the continuing crisis in Ukraine, the U.S. government imposed new sanctions on July 16, 2014 against Russian firms in the energy, financial and defense sectors. These sanctions include two new directives barring transactions or dealings in new debt or equity of companies identified on a new Office of Foreign Assets Control (“OFAC”) list known as the Sectoral Sanctions Identifications List (“SSI List”). OFAC also added to its Specially Designated Nationals List (“SDN List”) individuals and entities that it deemed to be involved in the conflict in Ukraine, targeting in particular companies in Russia’s defense sector.
OFAC’s SSI List Targeting Russian Financial and Energy Firms
Directive 1 of the SSI List targets two Russian banks: Gazprombank (GPB) and Vnesheconombank (VEB). It prohibits U.S. persons from dealing in new debt (with a maturity of more than 90 days) or new equity of these banks, or such new debt or equity of companies in which they hold a 50 percent or greater interest. Directive 2 targets two Russian energy companies: Novatek and Rosneft. It contains the same prohibition against U.S. persons dealing in new debt issued by these companies, but does not extend to equity. “New” is defined as debt or equity issued or rolled over on or after July 16, 2014. For both directives, the prohibition applies not only to U.S. persons, but also to transactions occurring within the United States. Entities identified on the SSI List are not SDNs and their property is not blocked. U.S. persons are required to reject any transactions that would violate the two directives, and are barred from providing any services in support of such new debt or equity.
The new “debt” targeted by these sanctions includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, banker’s acceptances, discount notes or bills, or commercial paper, if they have a maturity date of over 90 days. Letters of credit with a maturity of 90 days or less are not affected, which should limit the impact on trade transactions. The prohibition also applies to the rollover of existing debt, for example, through refinancing. “Equity” includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership.
In tandem with these sanctions, OFAC issued General License 1, which permits transactions by U.S. persons and transactions within the United States involving derivative contracts. That is, even where a derivative’s underlying debt is covered under OFAC’s directives, transactions regarding that derivative are allowed.
These sanctions limit the identified companies’ access to U.S. capital markets. Specifically, the entities identified on the SSI List will be unable to raise capital, either through issuing new debt or -- in the case of the listed banks -- equity in the U.S. market. The inability to raise capital may, in turn, affect the identified entities’ credit ratings. The new prohibitions also may potentially affect existing projects to the extent that funding is not already in place and involves credit facilities funded by U.S. persons. Nonetheless, Russia’s SSI-listed companies will still be able to conduct day-to-day business with overnight and short-term loans, as these sanctions target loans with a maturity of over 90 days.
Additions to OFAC’s SDN List and BIS’s Entity List
In addition to the new sanctions levied through the SSI List, OFAC also added Russian and Ukrainian individuals and entities to its SDN List. The Commerce Department’s Bureau of Industry and Security also added the entities to its Entity List, thereby restricting their access to commodities, software and technology that is subject to U.S. jurisdiction. Notable designations include two self-proclaimed states in Ukraine, four Russian government officials, a shipping company in Crimea that is reportedly complicit in the misappropriation of Ukraine’s state assets, and eight Russian arms firms, including Kalashnikov Concern, maker of the AK-47. OFAC published guidance making clear that any persons who purchased their Kalashnikov products before the date of the new sanctions are allowed to keep or re-sell these products.
OFAC listed the following parties:
- Sergey Beseda, an official with Russia’s Federal Security Service
- Aleksandr Borodai, leader of the Donetsk People’s Republic
- Sergei Neverov, Russian State Duma Deputy Speaker
- Oleg Savelyev, Russia’s Minister for Crimean Affairs
- Igor Shchegolev, an aide to Russian President Vladimir Putin
Entities (these entities were also added to BIS’s Entity List)
- Donetsk People’s Republic, a self-proclaimed state in Ukraine bordering Russia
- Bazalt, a Russian arms company
- Feodosiya Enterprise, a shipping facility in the Crimean peninsula
- Concern Radio-Electronic Technologies, a Russian technology company often involved in the production of military technology
- JSC Concern Sozvezdie, a Russian developer and manufacturer of military technology
- JSC Military-Industrial Corporation NPO Mashinostroyenia, a Russian weapons producer
- JSC Concern Almaz-Antey, a Russian weapons producer
- Kalashnikov Concern, a Russian weapons producer
- KBP Instrument Design Bureau, a Russian weapons producer
- Luhansk People’s Republic, a self-proclaimed state in Ukraine bordering Russia
- Uralvagonzavod, a Russian weapons producer