The United States and the European Union recently have significantly expanded sanctions against Russia relating to activities involving Ukraine. The new sanctions include export restrictions and designations of individuals and entities. While the EU and US have adopted very similar sanctions (and we anticipate that a coordinated approach will continue), there are, nonetheless, certain distinctions that multinational companies subject to both sets of sanctions will need to understand and accommodate in their compliance programs.
On August 1, 2014, the US Department of Commerce, Bureau of Industry and Security (BIS) issued a final rule (BIS Rule), effective on August 6, 2014, amending the US Export Administration Regulations (EAR), 15 C.F.R. Parts 730-774, to list Russia as an embargoed country and introduce certain strict licensing requirements for exports to Russia.
The BIS Rule adds new § 746.5 to the EAR, titled “Russian Industry Sector Sanctions.” Under new § 746.5, a license is required to export, reexport, or transfer (in-country) to Russia items subject to the EAR that are listed in new Supplement No. 2 to Part 746, or are classified under Export Control Classification Numbers (ECCNs) 0A998, 1C992, 3A229, 3A231, 3A232, 6A991, 8A992, and 8D999, where the exporter, reeexporter, or transferor:
- Knows that the item will be used in Russia’s energy sector for exploration or production of oil or gas from the following types of projects in Russia:
- deepwater (greater than 500 feet)
- Arctic offshore
- shale, or
- Is unable to determine whether the item will be used in such projects in Russia. Thus, there arguably is an obligation on exporters and reexporters to know the end-user and end-use of the products subject to these restrictions; otherwise, there appears to be a presumption of control if destined for Russia.
The BIS Rule states that covered items include, but are not limited to:
"drilling rigs, parts for horizontal drilling, drilling and completion equipment, subsea processing equipment, Arctic-capable marine equipment, wireline and down hole motors and equipment, drill pipe and casing, software for hydraulic fracturing, high pressure pumps, seismic acquisition equipment, remotely operated vehicles, compressors, expanders, valves, and risers."
Of significance, it appears that items falling within these categories that are EAR 99 or otherwise did not require a license for Russia in the past will now be covered and restricted for export and reexport.
Of the specific ECCNs identified in the new rule, two are new to the Commerce Control List at Supplement No. 1 to Part 774 of the EAR: 0A998 and 8D999. ECCN 0A998 includes specific oil and gas exploration items, including software and data that previously would not have been controlled, such as analyses of seismic data. Note that the scope of the data subject to restriction could be quite broad, and clarifications from BIS would be welcome (e.g., does the ECCN only cover processed or analyzed data as opposed to raw data; are the data limited to only exploration activity as opposed to development and production activity).
ECCN 8D999 controls software “specially designed” for the operation of unmanned vessels used in the Russian oil and gas industry. Software that is used in the operation of such unmanned vessels is deemed to be “specially designed” under a “catch and release” framework that BIS has adopted, as we have previously advised.
Exports of covered items for the end uses described above are subject to a licensing policy of denial. Furthermore, such exports are ineligible for any license exception except “GOV” under § 740.11(b), which authorizes export to agencies of the US Government and cooperating governments. The BIS Rule does not exclude from restriction shipments made under contracts or orders that were effective prior to the date of the regulatory notice.
Furthermore, the BIS Rule amends § 742.4 of the EAR to eliminate favorable licensing treatment accorded to Russia for the export or reexport of all items subject to “National Security” controls. Russia previously had been on a list of countries entitled to such treatment. Kazakhstan and Mongolia will continue to receive enhanced favorable licensing treatment under § 742.5
Finally, the BIS Rule provides no "grandfathering" protection for shipments that are on their way to a port for export or reexport. The language of the regulatory notice suggests that items already on board a vessel and enroute to Russia are not restricted, whereas any shipment that has not yet left its country of disembarkation cannot proceed.
On July 29, 2014, the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury added the following four banks to the Sectoral Sanctions Identifications (SSI) List: Bank of Moscow; Russian Agricultural Bank; VTB Bank OAO; and Bank Vneshney Torgovli JSC. As we have previously advised, US persons are now restricted from transacting or dealing in new debt (with a maturity of longer than 90 days) or new equity that are issued by, on behalf of, or for the benefit of these entities, or entities in which any of these banks hold a greater than 50 percent interest.
On both July 29 and July 31, 2014, OFAC added an entity and three individuals to its list of Specially Designated Nationals (SDNs). The new SDNs include officials of the United Shipbuilding Corporation; Vladimir Andreyevich Konstantinov; Vladimir Igorevich Kozhin; and Vladimir Yakunin. As SDNs, their property and interests in property in the United States or within the possession or control of US persons are blocked, and may not be dealt in by US persons anywhere in the world. United Shipbuilding Corporation, based in Russia, was also added to the Entity List maintained by BIS in Supplement No. 4 to Part 744. As a result, exports, reexports or in-country transfers of all items subject to the EAR to United Shipbuilding Corporation are now subject to a licensing policy of denial.
On July 28, 2014, OFAC issued new FAQ guidance on sectoral sanctions against Russia. The Guidance addresses a number of issues as set forth below:
- Depository Receipts Based on Equity of an SSI Entity. US persons may issue and deal in depository receipts that are based on equity issued by an entity subject to the SSI List (an SSI Entity) prior to, but not on or after, July 16, 2014.
- Equities with Identical Identifier. Equities that utilize the same International Securities Identification Number (ISIN) or other identifier may nonetheless have separate issue dates for purposes of determining whether such equities are subject to restrictions.
- Counterparty Credit Risk. Normal counterparty credit exposure facing a US person associated with derivatives transactions that are authorized pursuant to General License No. 1 to Executive Order 13662 is not deemed to be an unauthorized extension of credit by a US person.
- Drawdowns from Revolving Credit Facility or Long-Term Loan Arrangement. If a US person has entered into a long-term credit facility or loan agreement with an SSI Entity before July 16, 2014, then drawdowns and disbursements under such an agreement are permitted provided the repayment terms are either 90 days or less, or, if exceeding 90 days, the terms of such a drawdown and disbursement were contractually agreed before July 16, 2014 and not modified since then. But drawdowns and disbursements under an agreement negotiated on or after July 16, 2014 with repayment terms of longer than 90 days are prohibited.
- Letter of Credit. US persons may not advise or confirm a letter of credit issued on or after July 16, 2014 that carries a term of longer than 90 days maturity if an SSI Entity is the applicant (i.e., the importer or buyer of the underlying goods or services), but may advise or confirm such letter of credit issued on behalf of non-sanctioned entity in which an SSI Entity is the beneficiary (i.e., the exporter or seller of the underlying goods or services).
The EU has introduced a range of new sanctions against Russia focused on (i) certain new oil industry projects, (ii) exports for military use, (iii) issuance of securities by five big banks and (iv) investment in Crimea. With a focus on these same policies, the EU has also significantly expanded the list of entities and individuals targeted by its Russia-related asset freeze.
These new measures have been imposed by the following EU legislation:
- Council Decision 2014/512/CFSP and Council Regulation No. 833/2014 (July 31, 2014) – addressing points (i), (ii) and (iii) above
- Council Decision 2014/507/CFSP and Council Regulation No. 825/2014 (July 30, 2014) – addressing point (iv) above
- Council Decision 2014/499/CFSP and Council Regulation No. 811/2014 (July 25, 2014), and Council Decision 2014/508/CFSP and Council Regulation No. 826/2014 (July 30, 2014), amending Council Regulation No. 269/2014 – new person and entity designations
Oil IndustryExport Sanctions
The sanctions restrict export of technologies listed in Annex II to Council Regulation No. 833/2014, which includes technologies “suited to the oil industry for use in deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia.” Exports of the Annex II items for projects in these targeted sectors – deep water, Arctic and shale (Restricted Sectors) – are prohibited, and exports of Annex II items for other end uses now requires Member State authorization. Authorization is also required for technical assistance, financial assistance, and brokering services related to such items.
There are a couple of significant differences between these EU “oil industry” sanctions and the US “oil and gas industry” sanctions. First, the EU has specifically excluded gas projects from the core focus of the sanctions – essentially because such prohibitions would have been politically impossible given the heavy dependence of many European countries on Russian gas. Second, EU Member State authorities may authorize exports of Annex II items for Restricted Sectors arising from contracts concluded before August 1, 2014.
In sum, the new EU sanctions are targeted at impairing development of the Russian oil industry by depriving it of Western technology in the sectors seen as most crucial to its future (i.e. the Restricted Sectors), rather than fully derailing current projects. Nevertheless, the substantial scope of the new sanctions, including the general authorization requirements for Annex II items and other aspects discussed below, is already producing substantial uncertainty even for existing oil and gas projects.
Military Export Restrictions
Council Regulation No. 833/2014 also restricts exports and related activities related to military end-uses:
- It is prohibited to export to Russia dual-use goods and technology – i.e., items listed in Annex I to the EU Dual-Use Regulation (Council Regulation No. 428/2009) – for military end-use or for a military end-user. Member States authorities may not issue authorization for such exports, except for those arising from contracts concluded before August 1, 2014.
- It is prohibited to provide (a) technical or financial assistance relating to the goods and technology listed in the Common Military List to any person in Russia or for use in Russia or (b) technical or financial assistance or brokering services related to dual-use goods and technology to any person in Russia or for use in Russia, where such items are intended for military end-use or a military end-user. However, these prohibitions do not extend to (1) exports arising out of contracts executed before August 1, 2014, or (2) “provision of assistance necessary to the maintenance and safety of existing capabilities within the EU.”
Issuance of Securities by Major Banks
The new EU sanctions prohibit dealing, brokering or assistance related to “transferable securities” and “money market instruments” with a maturity longer than 90 days, issued after August 1, 2014 by five major Russian banks listed in Annex III to Council Regulation No. 833/2014: Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB), and Rosselkhozbank. The restrictions also apply to (a) entities owned more than 50% by the listed banks and (ii) entities that act on behalf of or at the direction of these banks.
These EU sanctions are highly significant for the Russian financial system, but have stopped short of entirely isolating these banking groups from European and global financial markets – and focus on the capital markets activities of the targeted banks. “Transferable securities” is defined to include shares in companies, bonds and other securitized debt, and other securities giving the right to acquire or sell such transferable securities. “Money market instruments” include treasury bills, certificates of deposit, and commercial paper. Neither term includes instruments of payment.
Council Regulation No. 825/2014 introduces certain restrictions related to Crimea and the Crimean city of Sevastopol, prohibiting provision of:
- financing for, acquiring a participation in, or forming a joint venture related to development of transport, telecommunications, or energy infrastructure in Crimea or Sevastopol
- financing for, acquiring a participation in, or forming a joint venture related to exploitation of oil, gas, or mineral resources in Crimea or Sevastopol
- “key equipment or technology” (listed in Annex III) for use in the transport, telecommunications, energy, and oil/gas/mineral reserves exploitation sectors of Crimea and Sevastopol
Restricted Individual and Entity Designations
The EU has broadened the legal basis upon which Russian individuals and entities may be designated for asset freezing, including powers associated with (i) conduct in Ukraine, (ii) the annexation of Crimea and (iii) “Russian decision-makers.” The latter authority is an especially significant expansion of existing EU sanctions, allowing targeting of individuals and entities at the core of Russia power, rather than primarily those associated with Ukraine and Crimea.
The EU Council has used this expanded authority to ramp up designations, particularly with respect to individuals. The new designations for Ukraine and Crimea are in the Annex to Council Regulation No. 269/2014 and those for “Russian decision-makers” in the Annex to Council Regulation No. 826/2014.
Jurisdictional Scope of Sanctions
The new EU sanctions (like most previous EU sanctions) are on any activity satisfying any one the following jurisdictional bases:
- the activity occurs (in whole or in part) within the EU, or on board any aircraft or vessel under the jurisdiction of a Member State
- the activity involves a natural person who is a national of a Member State
- the activity involves a legal entity established under the law of a Member State
Jurisdiction to grant authorizations under the EU sanctions typically rests with designated authorities of the Member State(s) most closely connected to the activity at issue.
The United States and the European Union have significantly expanded economic sanctions against Russia by imposing export restrictions and designating individuals and entities. They have imposed export restrictions on certain items that were not previously controlled and are used in Russia’s energy sector. The US and EU have also designated additional entities for asset freeze. The EU in particular has significantly expanded the scope of its sanctions by allowing targeting of “Russian decision-makers” for freezing of assets. Both the US and EU have also targeted some Russian banks for certain transaction related restrictions.
There are some important differences between the two sanctions regimes. First, while the US has targeted Russia’s oil and gas industry, the EU has essentially excluded gas projects from the scope of its sanctions. Second, unlike in the EU, there does not appear to be any “savings clause” in the US that will allow export of covered items to Russia under existing contracts or orders. Third, there continue to be some differences in the lists of individuals and entities that are designated or subject to export restrictions under the US and EU sanctions regimes. Companies, therefore, need to regularly monitor the list of individuals and entities subject to various sanctions under the two regimes.
Given the close economic tie between the EU and Russia, the expansion of the EU sanctions in particular could be significant for the Russian financial sector and the economy as a whole. Both the US and EU could further expand sanctions against Russia – e.g., by sanctioning additional sectors or targeting more Russian power elites directly – if the crisis in Ukraine continue to escalate. Companies should continue their due diligence regarding compliance under both regimes for activities related to Russia and Ukraine.