September 22, 2014
Subsequent to the Russian Federation’s annexation of Crimea in March 2014, President Obama issued three 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 the first two of these Executive Orders, E.O.s 13660 and 13661 In addition, on July 16, 2014, OFAC imposed its first set of sectoral-based sanctions authorized by the third Executive Order, E.O. 13662, and named several entities in Russia’s financial services and energy sectors to a newly-published Sectoral Sanctions Identification List ("SSI List"). In response to Russia’s continued activities in eastern Ukraine and its occupation of Crimea, on September 12, 2014, OFAC announced it was both expanding the scope of these sanctions and further adding to the number of sanctioned individuals and entities.
Through the amendment of one Directive and the addition of two further Directives issued pursuant to E.O. 13662, OFAC tightened its restrictions on SSI List entities in the financial services sector, added the defense and related materiel sector to the list of sanctionable sectors, and instituted trade restrictions on energy sector entities involved in specified oil exploration and production activities. In addition, OFAC added several entities to both the SDN List and SSI List pursuant to E.O.’s 13661 and 13662 (and its Directives) respectively.
As the crisis continues to unfold, OFAC may continue to place additional individuals and entities on the SDN List or SSI List, and may further 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 Executive Orders 13660, 13661, and 13662. 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. have also continued to expand their sanctions programs in response to the situation in Ukraine. The individuals and entities sanctioned by foreign governments do not fully overlap with U.S. sanctions. In addition, many EU sanctions contain "grandfathering" clauses that exempt pre-existing contracts from EU sanctions on Russia. U.S. sanctions on Russia do not contain such clauses and pre-existing contracts are not exempt. 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.
The Revised SSI List
As discussed in our previous client alerts on this subject, 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. Pursuant to this Executive Order, OFAC established the SSI List, and issued two Directives (Directive 1 and Directive 2) that limited U.S. persons from providing particular financing to SSI-listed Russian entities in the financial services and energy sectors. On September 12, 2014, OFAC added Directives 3 and 4 and revised the existing two Directives 1 and 2 (although the amendments to Directive 2 governing the energy sector are largely technical and non-substantive).
Directive 3 restricts U.S. persons from transacting or dealing in new debt of entities operating in the Russian defense and related materiel sector which OFAC has designated on the SSI List, where such debt has a maturity of longer than 30 days. Any such transaction occurring within the U.S. is similarly prohibited. As with Directive 1, these sanctions effectively cut off access for designated entities to much of the U.S. capital markets, as all but short-term debt financing is prohibited. OFAC designated a single entity, Rostec, under this Directive.
Directive 4 prohibits U.S. persons from providing, exporting, or reexporting, directly or indirectly, goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory, and that involve any person determined to be subject to this Directive, its property, or its interests in property. This Directive prohibits U.S. persons from engaging in such trade with Russian companies designated by OFAC on the SSI List, which now includes Gazprom, Gazprom Neft, Lukoil, Rosneft, and Surgutneftegas. Note that this prohibition applies to oil-related–and not gas-related–projects.
Concurrent with Directive 4, OFAC also issued General License No. 2, which permits U.S. persons to wind-down their activities that would be in violation of Directive 4. In particular, the General License clarifies that "all activities prohibited by Directive 4 under Executive Order 13662 of March 20, 2014, that are ordinarily incident and necessary to the wind-down of operations, contracts or other agreements involving persons determined to be subject to Directive 4 under Executive Order 13662 and that were in effect prior to September 12, 2014, are authorized through 12:01 a.m. eastern daylight time, September 26, 2014." Note however, that the General License does not authorize any new such activities except as needed to cease operations involving projects covered by Directive 4. In addition, U.S. persons participating in transactions authorized by the General License are required, within 10 business days after the wind-down activities conclude, to file a detailed report with OFAC.
OFAC also amended Directive 1 to tighten the access to capital market restrictions on SSI-listed entities in the financial services sector. Directive 1 still prohibits transacting, financing or otherwise dealing in new equity for these entities. But the amended Directive now prohibits such dealings in new debt with a maturity of longer than 30 days, which is a significant reduction from the previous threshold of 90 days. This new threshold applies only to debt issued on or after September 12, 2014. OFAC added Russia’s largest bank, Sberbank of Russia, to the SSI List pursuant to this Directive.
Directive 2 remains substantively unchanged, but OFAC added two energy sector entities, Gazprom Neft and Transneft, to the SSI List, which will now restrict U.S. persons from transacting or dealing in any new debt with a maturity of longer than 90 day of these entities.
OFAC released a number of "FAQs" that provided additional insight into the operation of the Directives, but also highlighted potential challenges for entities attempting to remain compliant. For example, in August OFAC clarified that entities owned a total of 50 percent or more by one or more SDNs were similarly blocked (the "50 Percent Rule"). OFAC clarified that this guidance applies to persons identified as subject to a Directive. As a result, the prohibitions set forth in a Directive apply to entities owned 50 percent or more by one or more persons subject to the Directive whether or not the owned-entities are separately listed.
OFAC also issued General License No. 1A, superseding and replacing former General License No. 1, which authorizes transactions by U.S. persons involving derivative products whose value is linked to an underlying asset that constitutes new debt with a maturity of longer than 30 days or new equity issued by a person subject to Directive 1 under E.O. 13622, new debt with a maturity of longer than 90 days issued by a person subject to Directive 2, or new debt with a maturity of longer than 30 days issued by a person subject to Directive 3. General License No. 1A supersedes and replaces General License No. 1 which provided similar authorization with respect to Directives 1 and 2 only.
In addition to these new Directives and associated designations, the Bureau of Industry and Security ("BIS") at the U.S. Department of Commerce ("Commerce") issued a final rule adding certain Russian companies to its Entity List. BIS added the same five companies designated by OFAC under Directive 4: Gazprom, Gazprom Neft, Lukoil, Rosneft, and Surgutneftegas. A license is now required if an exporter or transferor has reason to know the item being supplied to these companies will be used for exploration of, or production from, deepwater, Artic offshore, or shale projects in Russia. Such license applications are subject to a presumption of denial. BIS has also added a number of Russian defense companies to the Entity List, including: Almaz-Antey Air Defense Concern Main System Design Bureau, Tikhomirov Scientific Research Institute of Instrument Design, Mytishchinski Mashinostroitelny Zavod, Kalinin Machine Plant, and Dolgoprudny Research Production Enterprise.
Pursuant to its authority under E.O. 13661, which authorized Treasury to sanction individuals and entities that threaten the peace, sovereignty, and territorial integrity of Ukraine, or who operate in the arms or related materiel sectors in the Russian Federation, OFAC added five 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:
Allies In-Step: Parallels between U.S. and EU Sanctions
The Unites States and the 28 governments of the European Union member states are increasingly implementing parallel sanctions, which will magnify their impact on the Russian economy. The latest round of EU sanctions targeting sectoral cooperation and exchanges with Russia also took effect on September 12, 2014 and reflected the formal adoption by the European Council of enhanced measures related to access to European capital markets, defense, dual use goods and sensitive technologies.
As with the U.S. restrictions, the EU sanctions prohibit the trade in new bonds, equity or similar financial instruments with a maturity exceeding 30 days issued by five Russian state-owned banks (Sberbank, VTB Bank, Gazprombank, VEB and Rosselkhozbank), three Russian defense companies (OPK Oboronprom, United Aircraft Corporation and Uralvagonzavod) and three energy companies (Rosneft, Transneft and Gazprom Neft). The granting of loans issued after September 12, 2014, to these banks and companies is prohibited. The EU sanctions also restricted Russian access to certain services related to deep water oil exploration and production, Arctic oil exploration or production and shale oil projects in Russia. These services include drilling, well testing, logging or completion services and supply of specialized floating vessels. Further, the EU measures reinforce the existing export ban for dual-use goods and technology for military end users to include nine mixed defense companies.
Implications and Recommendations
By imposing new restrictions on certain Russian entities, the United States and the European Union have significantly increased the pressure on Russia to cease its activities in Crimea and eastern Ukraine. The imposition of these sanctions 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, additional sanctions may be likely. Yet, should all 12 points of the September 5th Minsk Peace Plan be implemented, the U.S. has agreed that the latest sanctions may be rolled back.
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. U.S. companies should carefully review existing and prospective projects that might be implicated by these sanctions, keeping in mind the September 26, 2014 general license expiration for winding down activities with restricted entities. Looking ahead, U.S. companies should be aware of at least three potential issues.
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. In monitoring SDN designations and SSI List additions, note that other entities that do not appear on the SDN List or SSI List may be subject to the applicable sanction under the 50 Percent Rule.
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.
Finally, the increasing number of SSI List-related Directives and designations have created a patchwork of regulations which require careful due diligence efforts by U.S. companies. For example, certain Russian companies are subject to the sanctions contained in particular Directives, but not others. Others may be subject to multiple Directives carrying different restrictions based on the underlying trade-related activity involved. As a result, our clients and friends should ensure that they are complying with each Directive, as well as with BIS’s Entity List.
 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; 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. 19, 2014), available at https://federalregister.gov/a/2014-06141. For a more in-depth discussion of these Executive Orders, 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; 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.
 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 https://federalregister.gov/a/2014-06612. 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.
 Press Release, U.S. Department of the Treasury, Announcement of Expanded Treasury Sanctions within the Russian Financial Services, Energy and Defense or Related Materiel Sectors (Sept. 12, 2014), available at http://www.treasury.gov/press-center/press-releases/Pages/jl2629.aspx.
 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).
 Office of Foreign Assets Control, Sectoral Sanctions Identifications List (July 16, 2014), available at http://www.treasury.gov/ofac/downloads/ssi.pdf. For a more in-depth discussion of the Sectoral Sanctions Identifications List, see Client Alert, Gibson, Dun & Crutcher, LLP, 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), http://www.gibsondunn.com/publications/pages/US-Treasury-Sanctions-Russian-Entities-in-Financial-Services-and-Energy-Sectors-in-Response-to-Evolving-Ukraine-Crisis.aspx.
 Note that sanctions were previously imposed against the CEO of Rostec, Sergey Chemezov, on April 28, 2014.
 SSI List, supra note 3, at 9-10
 Office of Foreign Assets Control, General License No. 2: Authorizing Certain Activities Prohibited by Directive 4 under Executive Order 13662 Necessary to Wind Down Operations (Sept. 12, 2014), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/ukraine_gl2.pdf.
 SSI List, supra note 3 at 1.
 OFAC FAQ, Questions Related to Sectoral Sanctions Under Executive Order 13662, Question 416, http://www.treasury.gov/resource-center/faqs/Sanctions/Pages/answers2.aspx#sectoral (last updated Sept. 12, 2014).
 With this latest round of sanctions, U.S. persons are prohibited from purchasing or otherwise dealing in any new debt from a total of six large Russian banks: Sberbank, VTB Bank, Gazprombank, VEB, Russian Agricultural Bank and Bank of Moscow.
 OFAC Revised Guidance on Entities Owned by Persons Whose Property and Interests in Property are Blocked, available at http://www.treasury.gov/resource-center/sanctions/Documents/licensing_guidance.pdf
 OFAC FAQ, Questions Related to Sectoral Sanctions Under Executive Order 13662, Question 373, wwwx.treasury.gov/resource-center/faqs/Sanctions/Pages/answers2.asp (last updated Sept. 12, 2014).
 Office of Foreign Assets Control, General License No. 1A: Authorizing Certain Transactions Related to Derivatives Prohibited by Directives 1, 2, and 3 under Executive Order 13662 (Sept. 12, 2014), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/ukraine_gl1a.pdf.
 Russian Sanctions: Addition of Persons to the Entity List and Restrictions on Certain Military End Uses and Military End Users, 79 Fed. Reg. 55,608 (Dep’t of Commerce, Sept. 17, 2014), available at http://www.bis.doc.gov/index.php/forms-documents/doc_download/1064-79-fr-55608.
 Council Regulation (EU) No 960/2014 of 8 September 2014 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine, 2014 O.J. (L 271) 3, available at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0960&from=EN.
 Id., Annex III.
 Id., Annex V.
 Id., Annex VI.
 Id., art. 1.
 JSC Sirius; OJSC Stankoinstrument; OAO JSC Chemcomposite; JSC Kalashnikov; JSC Tula Arms Plant; NPK Technologii aschinostrojenija; OAO Wysokototschnye Kompleksi; OAO Almaz Antey and OAO NPO Bazalt. Id., Annex IV.
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