11 August 2014
The United States Further Increases Ukraine-Related Sanctions and Implements the Russian Oil Industry Sanctions Program
As the political unrest in Ukraine escalates, the United States has recently expanded sanctions targeting Russian and Ukrainian parties alleged to be involved in the unrest in Ukraine, as follow:
The US Treasury Department’s Office of Foreign Assets Control (“OFAC”) has announced new sectoral sanctions targeting Russia’s financial services and energy sectors.
OFAC has added parties to its Specially Designated Nationals (“SDN”) and Blocked Persons List.
The US Department of Commerce has added several more entities to the Entity List, added licensing requirements and restricted its licensing review policies pursuant to the Export Administration Regulations (“EAR”).
These measures expand upon US sanctions and export control restrictions imposed on Russian and Ukrainian parties described in our client alerts of 7 March 2014 (available here), 18 March 2014 (available here), 24 March 2014 (available here), 2 May 2014 (available here), and 19 May 2014 (available here).
New Sectoral Sanctions Targeting Russia
On Wednesday, 16 July 2014 and then again on 29 July 2014, OFAC announced the imposition of sectoral sanctions under Executive Order 13662 (“EO 13662”) targeting the financial services and energy sectors in Russia. Under these new sectoral sanctions, limited and targeted restrictions have been placed on dealings by “US Persons” in “new debt” or “new equity” of seven Russian entities, as described below. These targeted sectoral sanctions represent a novel approach to the implementation of US sanctions. As a result, many issues related to the sectoral sanctions are still unclear and have not been addressed in the limited guidance from OFAC so far.
None of these seven Russian companies has been designated as an SDN or had its property or interests in property blocked/ “frozen”. Instead, pursuant to EO 13662, these seven Russian companies have been added to a new “Sectoral Sanctions Identifications List” pursuant to Directives 1 (financial services sector) and 2 (energy sector).
For purposes of the sectoral sanctions, “US Persons” include (i) entities organized under US laws and their non-US branches, (ii) individuals or entities in the United States, and (iii) US citizens or permanent resident aliens (“Green Card” holders) wherever located or employed. Non-US Persons, including
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separately incorporated non-US subsidiaries of US companies, are not included within the definition of US Person but may be subject to US jurisdiction if they cause prohibited transactions to occur in whole or in part in the United States or anywhere by US Persons.
Under Directive 1, US Persons are prohibited from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity in relation to (i) Gazprombank OAO, VEB, or any entity 50% or more owned by any of these companies, effective 16 July 2014, or (ii) Bank of Moscow, Russian Agricultural Bank, VTB Bank OAO, or any entity 50% or more owned by any of these banks, effective 29 July 2014. Other than these specific restrictions, US Persons are generally permitted to engage in transactions and dealings with these parties, including dealings in debt or equity that were issued prior to the noted effective dates.
Under Directive 2, US Persons are prohibited, as of 16 July, from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity in relation to OAO Novatek, Rosneft, or any entity 50% or more owned by either company. Other than these specific restrictions, US Persons are generally permitted to engage in transactions and dealings with OAO Novatek or Rosneft, including dealings in debt that predates 16 July 2014. Unlike Directive 1, Directive 2 does not impose restrictions on US-Person dealings in new equity of OAO Novatek or Rosneft.
As part of its announcement, OFAC issued General License No. 1 to authorize US-Person dealings in derivative products linked to underlying assets that constitute new debt described above. General License No. 1 does not, however, authorize the holding, purchasing, or selling of the underlying assets otherwise prohibited by Directives 1 and 2 by US Persons.
Furthermore, OFAC has published FAQs about these developments which help clarify some of the ambiguity with respect to the sectoral sanctions. Of particular significance is the broad definition given to the terms “equity” and “debt” in FAQ 371. According to this FAQ, the term “equity” includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership. The term “debt” includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper. OFAC has also informally confirmed that repurchase agreements can also constitute “debt.”
Given the broad definition of “debt” for purposes of the sectoral sanctions, making sales to SSI List entities on open account for more than 90 days would appear to be prohibited if engaged in by US Persons on or after the effective date of the sanctions. As a related issue, US Persons should exercise caution in dealing with late payments after 90 days from an SSI List entity related to “new debt,” even if the payment terms called for the payment of the debt within a 90-day period. US Persons should not agree, explicitly or implicitly, to accept late payments after 90 days from an SSI List entity under these circumstances.
Other FAQs appear to rein back on and limit the scope of the seemingly-broad restrictions of the sectoral sanctions. According to FAQ 395, for example, US Persons may advise or confirm a letter of credit (i.e., debt) issued on or after the effective date of the sanctions on behalf of a non-sanctioned entity in which an SSI List entity is the beneficiary (i.e., the exporter or seller of the underlying goods), because the subject letter of credit does not represent an extension of credit to the SSI List entity. US Persons would generally not
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trigger prohibitions under the sectoral sanctions by dealing with an SSI List entity as a counterparty to transactions where equity or debt is issued by or for the benefit a non-sanctioned party, e.g., letter of credit issued on behalf of a non-sanctioned entity in which an SSI List entity is the beneficiary (the exporter or seller of the underlying goods).
New SDN Designations
Also on 16 July 2014, OFAC announced its sixth group of SDNs related to the crisis in Ukraine and added 11 entities and 5 individuals in Crimea and Russia to the US SDN List pursuant to Executive Order 13660 (“EO 13660”) or Executive Order 13661 (“EO 13661”). On 29 July 2014, OFAC added a Russian entity (i.e., United Shipbuilding Corporation) to the US SDN List pursuant to EO 13661. United Shipping Corporation designs and constructs ships for the Russian Navy and is the largest shipbuilding company in Russia. US Persons are now prohibited from dealing (directly or indirectly) with these SDNs and any entity 50% or more owned by an SDN.
According to the US Treasury Department press statements of 16 July and 29 July, the new SDNs have been designated for the following reasons:
Nine (9) companies for operating in the arms or related materiel sector in Russia under EO 13661;
Four (4) individuals for their status as Russian government officials under EO 13661; and
Three (3) entities and one (1) individual for their alleged involvement in Ukraine’s political unrest under EO 13660.
One of the new entities added to the SDN List is Kalashnikov Concern, one of the world’s largest weapons and motor vehicle manufacturers. According to FAQ 374, if a US Person is in possession of a Kalashnikov Concern product that was bought and fully paid for prior to July 16, 2014, then that product is not blocked and US sanctions would not prohibit the US Person from keeping or selling the product in the secondary market, so long as Kalashnikov Concern has no interest in the transaction. Any new transactions by US Persons with Kalashnikov Concern are prohibited. According to FAQ 375, if a US Person has Kalashnikov Concern products as inventory, OFAC recommends that US Person to contact OFAC for further guidance.
New Designations on the Entity List
In a coordinated statement, the Bureau of Industry and Security (“US BIS”) in the US Commerce Department also announced that it planned to add the same 11 entities designated by OFAC as SDNs on 16 July to the Entity List pursuant to the Export Administration Regulations (“EAR”). (The seven Russian companies subject to EO 13662’s sectoral sanctions were not added to the Entity List.) In addition, on 29 July 2014, United Shipbuilding Corporation was added to the Entity List.
By including these parties on the Entity List, a US BIS license will be required for the export, reexport or in-country transfer by any US or non-US person of items (i.e., goods, software, technology) subject to the EAR to any of these entities, with a presumption of denial. According to the Federal Register Notice related to this development, the new EAR licensing requirements applies to both controlled and non-controlled (aka “EAR99”) items intended for any of these entities.
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Expanded Export Restrictions on Russia
On 1 August 2014, the US BIS issued an advance copy of regulations imposing significant new restrictions on certain exports, reexports, and transfers of goods, software, technology and data related to deepwater, Arctic offshore, and shale exploration and production operations in Russia’s oil and gas sector. These regulations, which are the latest in a broad array of economic sanctions imposed by the United States and its allies on Russian and Ukrainian individuals and entities as a response to the deteriorating situation in Ukraine, went into effect on 6 August 2014 when they were published in the Federal Register, and apply immediately to all current contracts and orders as well as subject items not yet exported or reexported. The new rule raises a number of ambiguities and questions as to scope of coverage, which will likely require further guidance from BIS on its scope and how it will be enforced.
The key features of the new restrictions are as follows:
1. Licensing Requirement and De Facto Prohibition of Certain Goods, Software, Technology and Data for Russian Deepwater, Offshore Arctic, and Shale Projects
In a new § 746.5 of the EAR, BIS will establish a licensing requirement for the export, reexport, and transfer (including in-country transfers) of certain goods, software, technology and data (collectively, “items”) that do not currently require a license for export to Russia when (1) it is known that those items “will be used directly or indirectly in the exploration for, or production of, oil or gas in Russian deepwater (greater than 500 feet) or Arctic offshore locations or shale formations in Russia,” or (2) if it cannot be determined whether the items will be used in such projects. Except for defining deepwater projects as those at depths of greater than 500 feet, the new rule does not clarify the scope of the three types of projects falling under the new restrictions.
What is Subject to the New Rule?
The items subject to this new licensing requirement include (i) items listed in a new Supplement 2 to EAR Part 746 (as set forth by Schedule B numbers), (ii) those classified under currently existing Export Control Classification Numbers (“ECCNs”) 1C992, 3A229, 3A231, 3A232, 6A991, and 8A992, and (iii) items listed in two new ECCNs created by the regulation, 0A998 (which as described further includes data related to oil and gas exploration) and 8D999. These items include but are not limited to drilling rigs, parts for horizontal drilling, drilling and completion equipment, drill pipe, casing and tubing, line pipe, subsea processing equipment, software for hydraulic fracturing, high-pressure pumps, seismic acquisition equipment, remotely operated vehicles, expanders, valves, and risers. Notably, many of the items are currently classified as EAR99, and no license exceptions will be available except under License Exception GOV (EAR § 740.11(b)).
Policy of License Denial
The new rule explicitly states that applications for the export, reexport, or transfer (including in-country transfers) of “any item that requires a license for Russia” will be subject to a presumption of denial “when for use directly or indirectly for exploration or production from deepwater (greater than 500 feet), Arctic offshore, or shale projects in Russia that have the potential to produce oil.” This means that this license denial policy applies not only to the above items subject to the new licensing requirement, but also any other items on the Commerce Control List (“CCL”) that already require a license to Russia and are for use directly or indirectly for these particular end-uses. Notably,
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while the license denial policy itself refers only to oil projects, the above licensing requirement appears more broad in that it applies to items destined for oil and gas projects. This suggests that parties dealing in items subject to the new rule may be able to obtain approval for shipments to deepwater, Arctic offshore, and shale projects in Russia provided they can confirm that those projects are only for the production of natural gas and do not have the capability of also producing oil.
New Controls on Data
Potentially challenging for some parties will be new ECCN 0A998, which includes “[o]il and gas exploration data, e.g., seismic analysis data,” and “[h]ydraulic fracturing design and analysis software and data.” This ECCN is subject only to the new Russia controls and not other controls, such as anti-terrorism controls. Acknowledging that ECCN 0A998 data fall outside the EAR’s definition of “technology,” BIS notes that “[m]any US companies are hired to provide or analyze seismic or other types of data in order to assist in oil exploration,” and that “this data product obtained through the analysis of raw seismic or other types of data is a commodity sold by companies.” This new control presents a number of questions requiring further clarification, such as what defines data subject to the EAR versus non-EAR data, and how BIS would treat controlled data that are further processed outside the United States or aggregated with non-controlled data.
New Controls on Unmanned Vessel-Related Software
Also created by the rule is new ECCN 8D999, which includes software specially designed for the operation of unmanned vessels used in the oil and gas industry. These controls apply only for purposes of the Russia sanctions.
Because of the foreign policy objective of the rule, BIS is not allowing grandfathering for current contracts and orders, including for any items destined for a port of export or reexport on the effective date of the rule. BIS is also not allowing grandfathering for transfers (in-country) within Russia.
2. Withdrawal of Favorable License Review Status
The regulation also announces BIS’s removal of Russia from the list of countries with favorable license review status for national security reasons under EAR § 742.4(b)(5). For purposes of national security controls, Russia will be accorded the general licensing policy for countries in Country Group D:1 as set forth in EAR § 742.4(b)(2).
Recommended Action: Reassess Your Potential Exposure
Companies should reassess the nature and extent of their Russia-related and/or Ukraine-related business to understand their potential exposure under these sanctions and export control measures and any that may follow. In particular, companies should confirm whether they have dealings with newly sanctioned parties as well as export/reexports to Russia and in-country transfers (i.e., within Russia) related to the country’s oil industry to evaluate potential exposure to the expanded sanctions and export controls. For a checklist of points that companies may wish to consider, please click here to see our dedicated Russia Sanctions Developments Blog This blog monitors Ukraine-related developments and provides commentary from our International Trade team as events unfold.
6 Client Alert 11 August 2014
The foregoing is intended only to provide a general summary of recent developments regarding the expansion of Ukraine-related sanctions and export control restrictions targeting Russia and “occupied Ukraine.” If you have any questions about how these changes might affect your company or if you require advice on any specific transactions or plans, please contact one of the members of Baker & McKenzie’s International Trade Practice Group.
Follow Baker & McKenzie’s Russia Sanctions Developments blog, by clicking here.
Other Baker & McKenzie Client Alerts issued on US Ukraine-related sanctions and export control developments:
EU, US and other countries impose sanctions in response to events in Ukraine
EU and US Sanction Russian and Ukrainian Individuals Following the Crimean Referendum
EU and US Expand Sanctions against Russia. Russia Retaliates.
The United States, European Union, and Canada Expand Ukraine-Related Sanctions
US Government Issues the Ukraine-Related Sanctions Regulations
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