U.S. Treasury Department Sanctions Russian Entities in Financial Services and Energy Sectors in Response to Evolving Ukraine Crisis; Expands List of Blocked Persons

July 21, 2014

Subsequent to the Russian Federation’s annexation of Crimea in March 2014, President Obama issued a series of Executive Orders ("E.O.s") authorizing the Office of Foreign Assets Control ("OFAC") at the U.S. Department of the Treasury ("Treasury") to impose economic sanctions in response to further attempts by the Russian Federation and Ukrainian separatists to destabilize eastern Ukraine, and the ongoing occupation of Crimea.  To date, OFAC has placed over 90 individuals and entities on the Specially Designated Nationals List ("SDN List") pursuant to these Executive Orders.  And in response to continued political upheaval in the region, on July 16, 2014, OFAC announced it was both expanding the scope of these sanctions and further adding to the number of sanctioned individuals and entities.[i] 

Through two Directives[ii] issued pursuant to E.O. 13662,[iii] which on March 20, 2014 authorized sectoral-based sanctions against the Russian Federation, OFAC has placed limited sanctions on four entities in the Russian financial services and energy sectors and identified these entities on a newly-published Sectoral Sanctions Identification List ("SSI List").[iv] 

In addition, OFAC expanded the list of SDNs pursuant to E.O.s 13660[v] and E.O. 13661[vi] which authorized Treasury to sanction individuals and entities that threaten the peace, sovereignty, and territorial integrity of Ukraine, as well as persons who operate in the arms or related materiel sectors in the Russian Federation.  To date, Treasury has primarily used E.O.s 13660 and 13661 to target Ukrainian separatists, Russian Federation officials and oligarchs, and corporations associated with these individuals.

As the crisis continues to unfold, OFAC may continue to place additional individuals and entities on the SDN List or SSI List, and may expand the scope of the sanctions applicable to those entities placed on the SSI List.  In addition, OFAC may begin undertaking enforcement actions against U.S. companies who violate the prohibitions set forth in the Executive Orders described above.  U.S. companies should pay close attention to further announcements by OFAC and ensure that they comply with the requirements of these E.O.s. 

The European Union (EU) and several countries in addition to the U.S. also have continued to expand their sanctions programs in response to the situation in Ukraine.  These individuals and entities sanctioned by foreign governments may or may not overlap with U.S. sanctions.  U.S. persons with operations in Europe or elsewhere who are subject to foreign legal authority should ensure that they are complying with local sanctions laws in addition to screening for persons designated by OFAC. 

Upon request, a complete country-by-country comparison of sanctions actions and a list of sanctioned individuals and entities may be obtained from Gibson Dunn attorneys. 

E.O. 13662 and the SSI List

As discussed in detail in our previous client alert on this subject,[vii] E.O. 13662 significantly expanded the President’s authority to target Russian persons, regardless of whether they are determined to threaten the peace, sovereignty, and territorial integrity of Ukraine. 

The E.O. authorized OFAC to sanction any person determined by the Secretary of the Treasury to operate in particular sectors of the Russian Federation economy, such as financial services, energy, metals and mining, engineering, and defense and related materiel.[viii] 

OFAC’s July 16, 2014 issuance of the two Directives pursuant to E.O. 13662 was the first exercise of this authority.  Directive 1 prohibits U.S. persons from transacting in, providing financing for, or otherwise dealing in (i) new debt with longer than 90 days maturity or (ii) new equity for SSI-listed entities in the Russian financial services sector, these entities’ property, or their interests in property.  It also prohibits any such transactions which occur in the United States.  Two Russian banks were designated in Directive 1:  Vnesheconombank (Bank for Development and Foreign Economic Affairs), or VEB, and Gazprombank. 

Directive 2 addresses the Russian energy sector and prohibits U.S. persons from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity for SSI-listed entities, their property, or their interests in property.  Directive 2 also prohibits any such transactions which occur in the United States.  The two Russian companies so listed are Novatek and Rosneft.

For the purposes of the SSI List, debt is considered to include 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.  The prohibitions also extend to debt issued by entities owned 50% or more by the four named entities (and to equity issued by entities owned 50% or more by the two banks identified in Directive 1).   

OFAC clarified that identification of these four entities on the SSI List does not prohibit (i) transactions in debt or equity that was issued prior to July 16, 2014, (ii) transactions dealing in new equity instruments for the two companies identified in Directive 2 and (iii) U.S. financial institutions from maintaining correspondent accounts and processing U.S. dollar-clearing transactions (so long as such activities do not involve dealing in the prohibited transaction types). 

Note that OFAC Frequently Asked Question ("FAQ") #370 states that the prohibitions under Directive 1 of E.O. 13662 extend to transactions and dealings by U.S. persons or within the U.S. in new debt with a maturity of longer than 90 days and equity by, on behalf of, or for the benefit of the persons operating in Russia’ financial sector named on the SSI List, their property and their interests in property.[ix]  Similar language is found in the FAQ relating to new debt for energy sector entities included on the SSI List pursuant to Directive 2.[x]  Therefore, the language of the FAQ would seem to indicate that even if a letter of credit, for example, is not issued to SSI-listed entities, it could still be prohibited if it is issued by or for the benefit these entities.  However, this broad language in the FAQ–"by, on behalf of, or for the benefit of"–is inconsistent with the language of the Directives, which instead use the word "for."  The latter construction would likely have a much narrower effect and likely would be interpreted to limit the prohibitions of Directives 1 and 2 to cover debt and equity transactions more directly tied to the SSI-listed entities.  Unofficial guidance from OFAC officials has indicated that the correct language should indeed be "for," and that the FAQ will be updated accordingly.

Note as well that the property and interests in property of those persons identified on the SSI List are not blocked unless those persons are also designated as SDNs.  Rather, U.S. persons must reject transactions or dealings that are prohibited under these Directives.   

Additional Designations

Pursuant to its authority under E.O.s 13660 and 13661, OFAC added five individuals and 11 entities to the SDN List.  As with other designated individuals and entities, U.S. persons are now generally prohibited from conducting transactions or dealings with any of the following:

Individuals:

• BESEDA, Sergey – Commander of the Fifth Service of the FSB; Commander of the Service for Operational Information and International Communications of the FSB; FSB Colonel General; Colonel-General
• BORODAI, Aleksandr – Leader of pro-Russia separatists in Donetsk, Ukraine (the "Donetsk People’s Republic")
• NEVEROV, Sergei Ivanovich – Deputy Chairman of the State Duma of the Russian Federation; Member of the State Duma Committee on Housing Policy and Housing and Communal Services
• SAVELYEV, Oleg Genrikhovich – Minister for Crimean Affairs
• SHCHEGOLEV, Igor – Aide to the President of the Russian Federation

Entities:

• DONETSK PEOPLE’S REPUBLIC
• FEDERAL STATE UNITARY ENTERPRISE STATE RESEARCH AND PRODUCTION ENTERPRISE BAZALT
• FEODOSIYA ENTERPRISE
• JOINT STOCK COMPANY CONCERN RADIO-ELECTRONIC TECHNOLOGIES
• JOINT STOCK COMPANY CONCERN SOZVEZDIE
• JOINT STOCK COMPANY MILITARY-INDUSTRIAL CORPORATION NPO MASHINOSTROYENIA
• JOINT STOCK COMPANY CONCERN ALMAZ-ANTEY
• KALASHNIKOV CONCERN
• KONSTRUKTORSKOE BYURO PRIBOROSTROENIYA OTKRYTOE AKTSIONERNOE OBSHCHESTVO (INSTRUMENT DESIGN BUREAU)
• LUHANSK PEOPLE’S REPUBLIC
• URALVAGONZAVOD

Implications and Recommendations 

By creating the SSI List–as well as designating additional persons–the United States significantly increased the pressure on Russia to cease its activities in Crimea and eastern Ukraine.  The imposition of these sanctions–which primarily target certain Russian companies’ access to U.S. financial and capital markets–was the result of Russia’s unwillingness to relinquish its control over Crimea and its continued support of separatist activities in Ukraine.  As the crisis continues to escalate, with the recent crash of a Malaysia Airlines passenger aircraft reportedly shot down by Russian-supplied separatists in eastern Ukraine,[xi] as well as cross-border shelling and Russian military incursions into eastern Ukraine,[xii] additional sanctions may be likely.

U.S. persons–as well as companies considering conducting transactions in the United States–should be cautious in conducting any transactions with those entities listed on the SSI List, and should continue to utilize rigorous compliance systems to ensure that they are not transacting with SDNs.  Looking ahead, U.S. companies should be aware of at least two potential developments.    

First, U.S. companies should ensure that they are in compliance with the new directives on the SSI List, as well as closely monitor any additional designations, Executive Orders, legislation, or regulations. 

Second, U.S. companies–or foreign companies that conduct transactions in the United States–should be cautious about conducting any business with companies on the SSI List.  OFAC has not yet commenced public enforcement proceedings against U.S. persons for violating the recent sanctions on Russia, but may be looking to show that these sanctions have teeth.  U.S. companies should avoid engaging in any activities that could run afoul of OFAC regulations and that garner significant public attention, as this may result in increased OFAC scrutiny.   

[i] Press Release, U.S. Department of the Treasury, Announcement of Treasury Sanctions on Entities Within the Financial Services and Energy Sectors of Russia, Against Arms or Related Materiel Entities, and those Undermining Ukraine’s Sovereignty (July 16, 2014), available at http://www.treasury.gov/press-center/press-releases/Pages/jl2572.aspx.

[ii] Office of Foreign Assets Control, Sectoral Sanctions Identifications List (July 16, 2014), available at http://www.treasury.gov/ofac/downloads/ssi.pdf. 

[iii] Exec. Order No. 13,662 of March 20, 2014, Blocking Property of Additional Persons Contributing to the Situation in Ukraine, 79 Fed. Reg. 16,167 (Mar. 24, 2014), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/ukraine_eo3.pdf.  For a more in-depth discussion of that Executive Order, see Client Alert, Gibson, Dunn & Crutcher, LLP, President Obama Signs Third Executive Order Blocking Property of Additional Persons Contributing to the Situation in Ukraine and Targeting Certain Russian Economic Sectors (Mar. 25, 2014), http://www.gibsondunn.com/wp-content/uploads/documents/publications/President-Obama-Signs-Third-Executive-Order-Blocking-Property-of-Additional-Persons-Contributing-to-Situation-in-Ukraine.pdf.

[iv] SSI List available at http://www.treasury.gov/ofac/downloads/ssi.pdf.

[v] Exec. Order No. 13,660 of March 6, 2014, Blocking Property of Certain Persons Contributing to the Situation in Ukraine, 79 Fed. Reg. 13,491 (Mar. 10, 2014), available at https://federalregister.gov/a/2014-05323.  For a more in-depth discussion of that Executive Order, see Client Alert, Gibson, Dunn & Crutcher, LLP, President Obama Signs Executive Order Targeting Persons Threatening Peace, Sovereignty, and Territorial Integrity of Ukraine; European Union Sanctions Former Ukrainian Leaders (Mar. 10, 2014), http://www.gibsondunn.com/wp-content/uploads/documents/publications/President-Obama-Signs-Executive-Order-Targeting-Persons-Threatening-Peace-Territorial-Integrity-of-Ukraine.pdf.

[vi] Exec. Order No. 13,661 of March 16, 2014, Blocking Property of Additional Persons Contributing to the Situation in Ukraine, 79 Fed. Reg. 15,535 (Mar. 16, 2014), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/ukraine_eo2.pdf.  For a more in-depth discussion of that Executive Order, see Client Alert, Gibson, Dunn & Crutcher, LLP, President Obama Signs Executive Order Blocking Property of Additional Persons Contributing to the Situation in Ukraine and Designates Russian and Former Ukrainian Officials (Mar. 18, 2014), http://www.gibsondunn.com/publications/pages/President-Obama-Signs-Executive-Order-Blocking-Property-of-Additional-Persons-Contributing-to-Situation-in-Ukraine.aspx. 

[vii] Exec. Order No. 13,662 of March 20, 2014, Blocking Property of Additional Persons Contributing to the Situation in Ukraine.

[viii] Id.

[ix]  Office of Foreign Assets Control, Frequently Asked Questions and Answers, Question 370, available at http://www.treasury.gov/resource-center/faqs/Sanctions/Pages/answer.aspx#370 (last updated July 16, 2014).

[x] Id.

[xi]  Michael Shear, Somini Sengupta, and Sabrina Tavernise, Obama Points to Pro-Russia Separatists in Downing of Malaysia Airlines Plane, N.Y. Times, July 18, 2014, http://www.nytimes.com/2014/07/19/world/europe/malaysia-airlines-plane-ukraine.html?hp&action=click&pgtype=Homepage&version=Banner&module=span-ab-top-region&region=top-news&WT.nav=top-news.

[xii]  Kathrin Hille and Roman Olearchky, Ukraine Accuses Russia of Attacking Its Army, Financial Times, July 13, 2014, http://www.ft.com/cms/s/0/fde8243a-0a93-11e4-be06-00144feabdc0.html#axzz37r1FC5TL.