On July 16, 2014, the United States Treasury Department's Office of Foreign Assets Control ("OFAC") unveiled new Ukraine-related sanctions. As a result of these sanctions, five individuals and eleven entities were added to OFAC's list of Specially Designated Nationals and Blocked Persons (the "SDN list"). US persons are prohibited from engaging in or facilitating virtually any commerce with any person on the SDN list, absent OFAC licensure.
In a significant expansion of the Ukraine-related sanctions, OFAC also established a new Sectoral Sanctions Identification ("SSI") list, and designated two major Russian banks and two large energy companies for immediate inclusion. US Persons may not provide debt financing longer than 90 days to any person on the SSI list; and in the case of the two banks, US Persons are also prohibited from providing them with new equity. Unlike the SDN list, however, US Persons generally remain able to conduct business with persons on the SSI list, and the entities' assets under US jurisdiction remain unblocked. The new SSI list is significant for several reasons, including:
- The four entities added to the SSI list are among Russia's largest financial and energy enterprises: banks Gazprombank and VEB (formerly Vneshecononombank), and petroleum companies Rosneft and Novatek.
- This is the first time that the US has imposed "Ukraine-related" sanctions on Russian firms which do not have a clear expressed link to the ongoing events in Ukraine and Crimea.
Accordingly, for US firms doing business in Russia, and for non-US firms with a US subsidiary or other US presence, the potential for further unlimited expansion of the sanctions creates unsettling concerns regarding business in Russia or with major Russian companies. It is expected, moreover, that the EU will impose specific new sanctions in the near future.
Key Elements of the July 16 US sanctions
The US Department of Treasury added five individuals and eleven entities to the SDN list. These individuals and entities join a growing list of SDNs which were added in five previous rounds of Ukraine-related sanctions.1
Of the five individuals designated on July 16, four are Russian government officials, including a senior Federal Security Service official; the fifth is a separatist "prime minister" of Donetsk. The eleven entities designated on July 16 include the two self-proclaimed separatist republics of Donetsk and Luhansk, eight Russian firms which Treasury states to be "responsible for the production of . . . small arms, mortar shells, and tanks", and a Crimean shipping enterprise, "Feodosiya." Among the entities designated is "Kalashnikov Concern." According to a set of Frequently Asked Questions (and their answers) released by OFAC simultaneously with the new sanctions, Kalashnikov Concern products possessed by US persons are not blocked if they have been fully paid for prior to July 16. However, if Kalashnikov Concern has any current interest in such product, for example if it was purchased on consignment, the US person is advised to contact OFAC for further guidance.
The SSI list
The SSI was created pursuant to EO 13662 and its Directives 1 and 2. Under EO 13662, the US Secretary of the Treasury, in consultation with the US Secretary of State, is authorized to identify sectors of the Russian economy "such as financial services, energy, metals and mining, engineering, and defense and related materiel" and to determine any person operating in those sectors whose property and interests in property should be blocked. EO 13662 also permits the Treasury Department to "take such actions . . . as may be necessary to carry out the purposes" of EO 13662.
The SSI list and its related OFAC directives prohibit US Persons, defined as any US citizen, permanent resident alien, entity organized under the laws of the US or any jurisdiction within the US (including foreign branches) or any person in US territory, from "transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity" for two energy companies, Rosneft and Novatek, and for two banks, Gazprombank and VEB. The SSI list and its related directives further prohibit US Persons from transacting in, providing financing for, or otherwise dealing in new equity of Gazprombank and VEB (but not Rosneft or Novatek).
The ban on US Persons from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity for four major Russian firms, and in the cases of the two banks, new equity, effectively limits their available sources of financing. The prohibition moreover works both ways: the four SSI entities cannot themselves provide debt or equity to any US Persons.
Nonetheless, OFAC has confirmed that US financial institutions may continue to maintain correspondent accounts and process US dollar-clearing transactions for Gazprombank, VEB, Rosneft, and Novatek "so long as those activities do not involve transacting in, providing financing for, or otherwise dealing in prohibited transaction types identified by these directives." Furthermore, OFAC has clarified that the property and interests in property of Gazprombank, VEB, Rosneft, and Novatek are not frozen for sanctions purposes, and that US Persons may continue to otherwise transact business with those four entities. Also, debt obligations with a term of 90 days or less are permitted.
OFAC has also provided guidance as to the nature of "debt" and "equity," but there remains uncertainty about the potential breadth of these prohibitions. Although OFAC has granted General License 1, which authorizes many transactions in derivatives, it is already apparent that US companies may need to revisit existing or proposed transactions involving the SSI list entities to determine whether they are restricted. It is not certain, for example, how the SSI list restricts complicated financial arrangements involving investments which are not loans per se but could be deemed "debt". Such arrangements, not uncommon in the petroleum industry, warrant closer scrutiny.
But the ultimate effect of these prohibitions may be to cause US companies generally to rethink their engagement in the Russian market. For example, for US businesses with whom Rosneft and Novatek may have joint ventures or are otherwise jointly engaged on projects, these US businesses are now barred from providing, but also facilitating or guaranteeing, certain debt to Rosneft or Novatek or their subsidiaries or affiliates.
For persons outside of the United States, the financing restrictions may also have important repercussions. Although the new sanctions do not reach those who are not "US persons," foreign businesses with a US branch or subsidiary, and/or US national employees, must be careful that such US branches or subsidiaries, or US national employees, do not violate the new restrictions.
This new limited financing ban therefore creates a range of legal uncertainties. The SSI prohibitions potentially include, for example, rollovers of existing debt or accelerated equity payments by the US party to a joint venture, or financial arrangements with components that may be deemed "debt" or "equity" under the sanctions. US persons may face situations where, by complying with the sanctions, they are forced to breach material terms of ongoing contracts.
The July 16, 2014 Ukraine-related sanctions not only added Russian and Ukrainian individuals and entities to the SDN list, but also created a new category of sanctioned entities based on sector, not relationship to the events in Ukraine and Crimea. This fast-moving and challenging regulatory landscape requires heightened diligence by US Persons and non-US Persons alike, and active monitoring of the policy landscape.