After announcing planned additional sanctions in the energy and military end-use sectors, the European Union and the United States both made good on their promises. The EU published its Council Regulation on July 31, 2014 (Council Regulation (EU) No 833/2014) and the US is scheduled to publish its Bureau of Industry and Security (BIS) regulation on August 6, 2014 (Russian Oil Industry Sanctions and Addition of Person to the Entity List).
The sanctions are aligned in large part, with a focus on restricting exports of items subject to military (and dual/use and national security) controls and exports of certain newly listed items (Newly Sanctioned Items), such line and oil well pipe, tubing, casing, drilling equipment, certain pumps, liquid elevators, offshore oil platforms and many additional items, to projects pertaining to deep water oil exploration and production, Arctic oil exploration and production and shale oil projects in Russia (collectively, Russian Sectoral End-Uses). However, due to differences in the US and EU legal structures, as well as differences in policies, there are some notable differences which may trip up global exporters:
- US: The US sanctions are broader in some areas, notably the scope of the Newly Sanctioned Items includes more products, technology and most important, seismic data, than does the EU list of Newly Sanctioned Items. It includes gas production equipment and covers gas end-uses as well as oil end-uses in its list of restricted end-uses. In addition, the new US sanctions lack grandfathering provisions;
- EU: While somewhat narrower in their scope of products, unlike the US, the EU sanctions contain a licensing requirement for items listed on the Common Military List to Russia and items on the Dual Use List to military end-uses in Russia, a licensing requirement for all of the Newly Sanctioned Items going to Russia (not just those going to Russian Sectoral End-Uses), and greater ancillary restrictions in areas related to the sanctions, such as facilitating, brokering and financing prohibited transactions.
Below we summarize the new sanctions for each jurisdiction, including a comparison to the other regime. We then offer some practice pointers on how to handle compliance with the new sanctions.
EU Sectoral End-Use Sanctions
Effective August 1, 2014, the EU imposed the following:
- EU Common Military List: A prohibition on providing direct or indirect technical assistance, financing or financial assistance related to goods and technology on the EU Common Military List to Russia.
US Comparison: In the US, this area is handled by the Directorate of Defense Trade Controls (DDTC) of the US Department of State under the International Traffic in Arms Regulations (ITAR). Although DDTC placed a hold on all licenses for the export of defense articles and services to Russia on March 27, 2014, it has not yet issued a regulation on Russia. The effect of the hold is effectively to prohibit the export, reexport and brokering of defense articles and services to Russia. However, we anticipate that DDTC will issue a Federal Register notice either officially adding Russia to the list of ITAR 126.1 proscribed countries or, more likely, imposing severe restrictions on the licensing of exports, reexports and transfers of defense articles and services to Russia and the brokering of such items to Russia.1
- Dual Use Goods and Technology (Exports) to Military End Uses/Users: A prohibition on selling, supplying, transferring, directly or indirectly dual use goods and technology to Russia or for use in Russia for military end use or for a military end user. The regulations do permit competent EU authorities to issue a license for execution of obligations prior to August 1, 2014.
US Comparison: The US has not imposed a general military end use export control for all items on the Commerce Control List (CCL) although they certainly are capable of doing so, and have done so for Iraq (all CCL and EAR99 items) and China (certain CCL items). Instead, the US has removed Russia’s favorable licensing status for items subject to national security controls, meaning that BIS will deny license applications for NS controlled goods to Russia. However, the CCL does contain many non-NS controlled items which would also be on the EU Dual Use list, as a result of other multilateral controls such as the Australia Group, Nuclear Suppliers Group and the like. Since most items on the CCL subject to multilateral regimes require a license to Russia, however, the lack of a general military end use control in the US may not make much of a practical difference. BIS and its other reviewing agencies can simply deny licenses to military end uses. Accordingly, US exporters should exercise extreme caution in exporting items on the CCL (and indeed even EAR99 items) to Russia where there is reason to believe that the end user or end use is military.
- Dual Use Goods and Technology (Technical Assistance, Brokering, Financing) to Military End-Users/End-Uses: A prohibition on providing direct or indirect technical assistance, brokering, financing or financial assistance related to dual-use goods and technology (and, for technical assistance and brokering, their production, manufacture, maintenance or use) to Russia for a military end use or end user.
US Comparison: The US sanctions do not contain a similar provision. The EU regulations relating to the export and brokering of dual use goods for military end uses are in general broader than US regulations, which, outside of the weapons of mass destruction (WMD) end use area and other specific end uses, do not prohibit the brokering of dual use items. Instead, other US laws cover such ancillary actions in somewhat different ways:
- US criminal laws prohibit various acts such as aiding and abetting crimes;
- US export regulations prohibit the export of controlled technology where a license is required; and
- Since the brokering and financing activities prohibited by the EU involve military end uses, they might be captured by ITAR brokering regulations.
That said, however, these EU sanctions provisions prohibiting other forms of assistance are broader than the US provisions.
- Authorizations for Newly Sanctioned Items to Russia and Prohibition on the Issuance of Authorizations for Russian Oil End Uses: A requirement for a license or authorization from EU competent authorities for the sale, supply, transfer or export, directly or indirectly, of technologies listed in Annex II to the Official Journal for use in Russia. For the EU Annex II list, click here. There is a prohibition on the EU competent authorities granting an authorization for projects pertaining to deep water oil exploration and production, Arctic oil exploration and production, or shale projects in Russia. The regulations do permit competent EU authorities to issue a license for execution of obligations prior to August 1, 2014.
US Comparison: The US list is substantially longer than the EU list, covering several additional Schedule B numbers plus several ECCNs — including two brand new ones and the first ever export controls on seismic data (see discussion below). The EU list has one CN code (Schedule B) number on its Annex II (7306 21002 ) that is not also on the US Sanctioned List. Since the US captured all the other numbers in the EU list plus more, one wonders if this omission was an oversight.
Although the EU list is shorter, however, the effect may be greater in one respect. The EU requires a license for all exports to Russia, and establishes a policy of denial for the prohibited Russian Oil End Uses. By contrast, the US sanctions only require licenses to the prohibited end uses. Thus, for example, if a US exporter wanted to export line pipe for a sewage treatment project in Moscow, it would not be required to obtain a US export license, while a similarly situated EU exporter would require authorization, although that would presumably be granted. Given the specificity of the items on the relevant annexes, it remains to be seen how significant a difference this will be.
- Newly Sanctioned Items to Russia (Technical Assistance, Brokering, Financing): A requirement for a license or authorization from EU competent authorities on providing direct or indirect technical assistance, brokering, financing or financial assistance related to the technologies listed in Annex II to the Official Journal for use in Russia. For the EU Annex II list, click here. The regulations do permit competent EU authorities to issue a license for execution of obligations prior to August 1, 2014.
US Comparison: The US sanctions do not contain a similar provision requiring a license for ancillary brokering or financial services in relation to the export of Newly Sanction Items to Russia, although technical assistance might well be covered through controls on technology exports. As a practical matter, this EU licensing requirement may well cause all financing for projects using Annex II technologies to grind to a halt. It is noteworthy that Annex II contains some very basic products such as line and drill pipe and other important items for oil exploration and production. By requiring a license for financing of projects using these items, EU regulation may halt more projects than the current US Regulation.
- Transactions in Securities/Money Market Instruments with Listed Parties: A prohibition on purchasing, selling, providing brokering or assistance in the issuance of, or otherwise dealing in transferable securities and money market instruments with a maturity exceeding 90 days, issued after August 1, 2014 by persons entities or bodies listed in Annex III: 1) Sberbank; 2) VTB Bank; 3) Gazprombank; 4) Vnesheconombank (VEB); and 5) Rosselkhozbank.
US Comparison: This is the analogy to the US Sectoral Sanctions issued by the US Department of Treasury Office of Foreign Assets Control (OFAC) on July 16, 2014, and expanded on July 2014. Please see our July 18, 2014 alert summarizing the US Sectoral Sanctions. Of the five entities listed in Annex III, the US Sectoral Sanctions share two of them: Gazprombank and Vnesheconombank (VEB).
However, it is notable that the financial instruments are much more narrowly defined in the EU (transferable securities and money market instruments) than they are in the US (equity and debt with a maturity of greater than 90 days). For example, OFAC has indicated that extensions of credit for more than 90 days, even in trade transactions, would be considered prohibited debt. The same would likely not be covered under the EU sanctions.
US Sectoral End-Use Sanctions
Effective August 6, 2014, the US imposes the following:
- Adds United Shipbuilding Corporation to the Entity List
EU Comparison: The EU has not sanctioned the United Shipbuilding Corporation.
- Removed Russia’s favorable licensing status for items controlled for national security reasons, and also removed the use of any license exceptions for the export of Newly Sanctioned Items to Russian Sectoral End-Uses.
- Added a Licensing Requirement for Newly Sanctioned Items Going to Russian Sectoral End-Uses: In new part 746.5 to the Code of Federal Regulations, BIS imposed what it calls “Russian Industry Sector Sanctions” — that is, a license requirement for the export of any item subject to the Export Administration Regulations (EAR) that is listed in Supplement 2 to Part 746, or in eight enumerated ECCNs (see below) where the party either knows, has reason to know, or is unable to determine whether the items will be used in exploration for, or production of oil or gas in Russian deepwater (greater than 500 feet) or Arctic offshore locations or shale formations in Russia.
As noted above, the US list of Newly Sanctioned Items is longer than the EU’s list:
- It contains five 6 digit Schedule B numbers not contained in the EU list, that is 730424 (oil well casings of stainless steel), 731100 (containers for compressed or liquefied gas of iron or steel), 761300 (aluminum containers for compressed or liquefied gas), 852139 (industrial gas cleaning and gas separation equipment), 847989 (oil and gas field wire line and down hole equipment) and 870899 (parts and accessories for mobile drilling derricks). As can be seen from this additional list, the US list of Newly Sanctioned Equipment includes some gas production equipment.
- It also has added eight ECCNs:
- 0A988, a new ECCN covering oil and gas exploration data, e.g. seismic analysis data, hydraulic fracturing items and high pressure pumps: This is the first ECCN to include data: data does not constitute “technology” under the EAR, as it is not specific information necessary for the operation, installation, maintenance, repair, overhaul, refurbishing or other ECCN terms. This is a major departure from the EAR and it remains to be seen how BIS will address when seismic data is “subject to the EAR” — that is subject to US jurisdiction — and whether it will attempt to apply a 25% de minimis test as it does for technology and software. The inclusion of high pressure pumps, with the phrase “high pressure” undefined, also substantially increases the items subject to the Russian Sectoral End-Use Sanctions”;
- 1C992, Commercial Charges and devices containing energetic materials;
- 3A229, Firing Sets and equivalent high-current pulse generators;
- 3A231, Neutron generator systems, including tubes;
- 3A232, Detonators and multipoint initiation systems;
- 6A991, Marine or terrestrial acoustic equipment;
- 8A992, Vessels, marine systems or equipment not controlled by 8A001 or 8A002;
- 8D992, a new ECCN, covering software specially designed for the operation of unmanned submersible vehicles used in the oil and gas industry.
- The US sanctions differ from the EU sanctions, as noted above, by being wholly end-use based. Thus, unlike the EU, where exporters must obtain authorizations for the export of all Newly Listed Items to Russia, in the US, licenses are only required for exports of Newly Listed Items to the restricted oil and gas end-uses. But if you are unable to determine what the end use is, a license is required. This puts a premium on determining the end-use under the US sanctions.
Practice Pointers: Complying with the US & EU Sectoral End-Use Sanctions
The new sectoral end-use sanctions will require US and EU companies, particularly those servicing the oil and gas sectors, to take certain steps. The following lists some potential check points and guidelines: More will undoubtedly emerge as the US and EU defines key terms, and offer further guidance.
- Do you sell anything directly or indirectly to Russia? If yes, proceed with the checklist.
- Continue to screen all parties to your transactions against the applicable lists — the US, the EU, and others. Be sure to screen any person or entity who owns 50% or more of any parties to the transaction as well. Although these new sanctions are primarily Sectoral End-Use in nature, the prior person/entity based sanctions remain as do additional EU restrictions involving trade with Crimea.
- Determine if you sell anything (hardware, software, technology, data) on either the EU or US lists.
- If you do, determine if you sell it directly or indirectly to Russia, and determine if you have any outstanding contracts or legal obligations.
- Determine and document the end-uses for your exports for both continuing obligations and any future obligations. This means revising your end-use certifications to include the sectoral sanctions questions and obtaining new signed certifications from your distributors and end-users in Russia. It also means conducting additional due diligence on your end-users.
- Apply for licenses to the competent EU authorities for EU exports, regardless of end-use, but noting both end-uses and whether activities, while prohibited, are grandfathered.
- In the US, document reasons why the sectoral end use sanctions do NOT apply before proceeding with any further exports.
- For legal obligations that run afoul of the sectoral end use sanctions, review carefully your legal obligations and determine whether contractual clauses, including but not limited to force majeure clauses, offer a legal excuse for non-performance.
- Educate your sales and business development on the scope of the sanctions.
- Put in place procedural processes to check exports of the critical products to Russia, such as a block on all exports of the CN/Schedule B numbers and — for the US — on the listed ECCNs, where the bill to or pay to party is located in Russia.
- For companies involved in seismic data collection or analysis, analyze all current contracts with Russia and determine whether you can legally perform the contract keeping in mind the extraterritorial reach of US export control laws. If performance is prohibited, determine whether contractual clauses, including but not limited to force majeure clauses, offer a legal excuse for non-performance.
- For all exporters, both US and EU, reexamine your products for items on the ITAR and the EU Common Military List. Future licenses for exports to Russia are unlikely to be forthcoming, and any existing license is likely to be revoked. Prepare for the likely results.
- For EU companies selling dual use items to Russia, put in place end-use controls for military end-uses.
- Likewise, although similar controls do not exist, US companies would be well-advised to obtain information about Russian military end-uses and consult counsel on next steps.
- For EU companies brokering, financing or assisting in sales to Russia, either of the Newly Listed Items, or for military end-uses or end-users, you should examine all existing and future Russian projects for compliance with the EU Sectoral End-Use Sanctions.