The Office of Foreign Assets Control (OFAC) has imposed additional Ukraine-related sanctions on major Russian defense, financial, and energy institutions including Gazprombank and VEB, two of its largest banks, Novatek, Kalashnikov Concern, and OAO Rosneft, the world's largest publicly traded oil producer, as well as on additional Russian officials and separatist groups in Ukraine.1 Unlike previous rounds of U.S. sanctions, the new sanctions impose different levels of restrictions.

First, OFAC added sixteen individuals and entities to the Specifically Designated Nationals (SDN) List.2The newly designated persons included Russian defense companies, Russian officials, and pro-Russian separatists operating in the Donetsk and Luhansk regions of Ukraine. U.S. persons and persons subject to U.S. jurisdiction are prohibited from conducting any business or engaging in any transactions involving persons named on the SDN List, or their property.

Second, OFAC issued two directives imposing "sectoral" sanctions that target major institutions in the Russian energy and financial sectors.3 Transactions with these entities, which are listed on OFAC's newly created Sectoral Sanctions Identification (SSI) List and not the SDN List, are not blocked in their entirety. Instead, the sectoral sanctions prohibit U.S. persons and persons subject to U.S. jurisdiction from engaging in certain debt and equity transactions (described below). Although these sectoral sanctions are not as sweeping as those that affect persons blocked by OFAC, they may have a significant impact on the Russian economy.  

Additions to the SDN List

With the recent additions, the SDN List now includes 57 individuals and 30 entities blocked under the Ukraine-related sanctions regime.4 OFAC's new round of designations target three categories of persons. First, OFAC has designated four additional high ranking Russian officials. Second, the SDN List now includes the "Donetsk People's Republic" (and its leader, Alexandr Borodai) and the "Luhansk People's Republic," two separatist groups operating in Eastern Ukraine. Finally, OFAC has blocked several major Russian defense companies, including Kalashnikov Concern, the Federal State Unitary Enterprise State Research and Production Enterprise Bazalt, and Uralvagonzavod. OFAC has also clarified that trading in Kalashnikov products on the secondary market is not prohibited, "so long as Kalashnikov Concern has no interest in the transaction."5 If, however, Kalashnikov does have an interest in a U.S. person's inventory (for example, if the products are being sold on consignment), OFAC is advising that such person contact OFAC "for further guidance on handling of the inventory."6

How Do the New Sectoral Sanctions Work?

The third and most recent Ukraine-related sanctions order issued by the President, Executive Order 13662 (March 24, 2014), authorized sanctions on persons who "operate in such sectors of the Russian Federation economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, such as financial services, energy, metals and mining, engineering, and defense . . . to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to [the] order."7 OFAC's two new directives, issued pursuant to this authority, sanction certain entities only to a limited extent. The first, which targets the Russian financial services sector, prohibits: "transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity for" specifically identified persons and "their property, or their interests in property." The second directive targets the Russian energy sector, and prohibits transacting, financing, or dealing new debt for identified persons, but does not contain a prohibition related to equities. The persons affected by these directives are not named on OFAC's SDN List (if they were, all transactions with such persons would be prohibited). Instead, OFAC has created the new SSI List, which identifies those entities affected by the directives.

What is the Scope of the Sectoral Sanctions?

OFAC defines the terms "debt" and "equity" broadly: "debt" is any "bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper"; "equity" includes "stocks, share issuances, depositary receipts, or any other evidence of title or ownership."8 Importantly, however, the sanctions apply only to "new" debt created after the issuance of the directives on July 16, although the rollover of existing debt is prohibited if the rollover creates new debt with a maturity of longer than 90 days. When it issued the directives, OFAC also simultaneously issued a General License authorizing transactions "involving derivative products whose value is linked to an underlying asset" constituting debt or equity that would otherwise be prohibited under the directives.9

Finally, OFAC has expressly stated that the "provision of services" in support of new debt and equity is also prohibited under the directives, but that "U.S. financial institutions may continue to maintain correspondent accounts and process U.S. dollar-clearing transactions for the persons identified in the directives, so long as those activities do not involve transacting in, providing financing for, or otherwise dealing in prohibited transaction types identified by these directives."10 Nevertheless, because the directives encompass a broad array of transactions and financial services, the sectoral sanctions are not necessarily as limited as they first appear, even if they do not fully block transactions with the identified persons.

Additional Sanctions are Likely

Early press reports indicate that the new sanctions are having an immediate effect on the Ruble and Russian markets.11 In addition, the EU recently imposed sanctions on 11 individuals involved in separatist activities in Ukraine,12 and it appears that the EU is also considering a "dramatic" escalation of its sanctions against Russia.13 In light of the tragic downing of the Malaysian airliner over Ukraine, President Obama has stated that the United States will impose additional sanctions if the conflict continues to escalate.14

U.S. firms and investors must continue to carefully scrutinize their current relationships with the entities named on the SDN and SSI Lists to ensure compliance with the sanctions regime. In addition, U.S. firms must consider how the sanctions will impact anticipated investments or obligations with entities on the SSI List, recognizing that the ability of U.S. persons to structure new joint ventures or secure new financing with such entities is now significantly impaired.