Last week, the United States and European Union (EU) significantly escalated financial and trade sanctions against the Russian Federation in response to what US Treasury Secretary Jacob Lew described as Russia's "blatant efforts to destabilize Ukraine." The US and EU have designated additional Russian defense firms subject to wide-ranging asset freezes and transaction prohibitions; expanded the list of Russian financial, energy, and defense firms subject to capital market restrictions; and further controlled the provision of certain goods and services to the Russian energy sector. Although the new US and EU measures are broadly similar, important differences remain between the two regimes. We expect other jurisdictions to implement similar sanctions over the coming days.
I. New US SDN Designations
The US Department of the Treasury's Office of Foreign Assets Control (OFAC) added five new Russian defense firms to its Specially Designated Nationals and Blocked Persons (SDN) list. As a result of these designations, any property or property interests of the new SDNs that are within US jurisdiction or held by US persons must be blocked, and US persons are generally prohibited from engaging in dealings with these SDNs.
II. Expansion of Capital Market Sectoral Sanctions Identifications
OFAC has also tightened capital market restrictions for entities
on its Sectoral Sanctions Identifications List (SSIL) and added
firms in the Russian defense sector. First, OFAC has revised
Directive 1, issued pursuant to Executive Order 13662,1
which remains applicable to SSIL designees in the Russian financial
sector. Directive 1 now prohibits transactions in new issuances of
equity or debt with a maturity exceeding 30 days (instead of the
previous 90-day period).2 OFAC also listed Sberbank
under Directive 1, as the EU had previously done under its
equivalent measures.
Second, OFAC has designated additional energy firms subject to
Directive 2, issued pursuant to Executive Order 13662. Directive 2
prohibits US persons from engaging in transactions involving new
debt with a greater than 90-day maturity.3 New designees
under Directive 2 are Transneft and OJSC Gazprom Neft.
Third, OFAC has issued Directive 3 pursuant to Executive Order
13662, covering new SSILs in the defense sector. Directive 3
prohibits US persons from engaging in transactions involving new
debt with a greater than 30-day maturity. The only designee thus
far is the Russian defense firm Rostec.
Finally, OFAC issued General License 1a, authorizing transactions
involving derivative products linked to the underlying debt/equity
of the SSIL designees falling under Directives 1, 2, and 3 (General
License 1a is substantially similar to the previously issued
General License 1, which covered only Directives 1 and
2).4
III. New Sectoral Sanctions Against the Provision of Certain Goods, Services or Technology to the Russian Energy Sector
OFAC has also issued a new directive pursuant to Executive Order
13662, which is unrelated to capital markets. Directive 4 prohibits
"the provision, exportation, or reexportation, directly or
indirectly, of 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"
involving any new SSIL designee under this Directive.5
OFAC has also added five energy firms under Directive 4: Lukoil,
Gazprom Neft, Gazprom OAO, Surgutneftegas, and Rosneft. Some of
these firms are now cross-designated under both Directive 2 and
Directive 4.
OFAC has also issued General License 2, authorizing activities
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 by September 26, 2014, and
requiring a report to OFAC within 10 business days of the
completion of the wind-down activities.6
IV. US Export Controls
The US Department of Commerce's Bureau of Industry and
Security (BIS) has also increased export controls involving several
Russian defense and energy firms. First, BIS added five Russian
defense firms to its "Entity List." This action imposes a
license requirement for the export, reexport or foreign transfer of
items subject to the Export Administration Regulations (EAR) to the
designated entities, with a presumption of
denial.7
Second, BIS added five Russian energy companies (Gazprom OAO,
Gazpromneft, Lukoil, Rosneft, and Surgutneftegas) to the Entity
List, which requires prior licensing for the export, reexport or
foreign transfer of items subject to the EAR to those companies
when the exporter, reexporter or transferor knows those items will
be used directly or indirectly in exploration for, or production
from, deepwater, Arctic offshore, or shale projects in
Russia.8
V. EU Sanctions
The EU has also expanded financial and trade sanctions against
Russia. First, the EU added 24 persons to its
"blacklist," prohibiting any national or company of an EU
Member State from making any "funds and economic
resources" available to the designees, and requiring the
freezing of their assets under EU Member State
jurisdiction.9 This brings the total number of persons
and entities subject to EU asset freeze requirements under
Ukraine-related sanctions to 142 (119 individuals and 23
entities).
Second, the EU has extended its ban on the sale, supply, transfer
or export, directly or indirectly, of certain dual-use goods and
technologies to nine mixed Russian defense firms.10 The
new measures also restrict the provision of technical assistance,
brokering and other services, and financing and financial
assistance related to those goods and technologies to the listed
defense firms. These measures do not apply with respect to
contracts or agreements concluded before September 12, 2014. They
also do not apply to the sale, supply, transfer or export of
dual-use goods and technologies intended for the aeronautics and
space industry, as well as to non-military end users.
Third, the EU has imposed restrictions on the provision, directly
or indirectly, of the following services necessary for deepwater
oil exploration and production, arctic oil exploration and
production, or shale oil projects in Russia: drilling, well
testing, logging and completion services, and supply of specialized
floating vessels.11 Unlike the US energy services
sanctions, the EU has grandfathered all contracts concluded prior
to September 12, 2014.
Fourth, the EU has expanded its sectoral sanctions in a number of
respects.12 It has reduced the maturity date (from 90 to
30 days) of new "transferable securities and money market
instruments" issued after September 12, 2014 by certain
previously designated Russian financial firms (Sberbank, VTB Bank,
Gazprombank, Vnesheconombank, and Rosselkhozbank),13
with which nationals or companies of EU Member States may have
almost no direct or indirect involvement. The EU regulations also
utilize financial terminology that is not identical to the US
terminology. The EU has also prohibited all EU nationals from
involvement with such financial instruments issued by three Russian
energy firms (Rosneft, Transneft, and Gazprom Neft), and three
Russian defense firms (OPK Oboronprom, United Aircraft Corporation,
and Uralvagonzavod). For all sectoral sanctions designees
(including the five Russian banks previously sanctioned), the EU
has also prohibited involvement with any new loans or credit with a
maturity exceeding 30 days, with certain limited exceptions.
Fifth, the EU has expanded the existing prohibition concerning
goods and technologies included in the Common Military List to
prohibit the provision of insurance and reinsurance services for
the sale, supply, transfer or export of those goods and
technologies, and related technical assistance to Russia.
VI. Conclusion
The new US and EU sanctions represent a significant escalation of sanctions against Russia by both tightening existing restrictions and broadening the scope of targeted activities and Russian entities. Although the US and EU sanctions regimes have become increasingly harmonized, differences in specific terms and scope remain, and they both contain provisions that have not yet been fully clarified in their application. Nevertheless, last week's actions indicate that both Washington and Brussels are prepared to use similar sets of measures—a combination of expanding designations, export restrictions, and sectoral sanctions—to address concerns about Russia's involvement in unfolding events in Ukraine. These developments warrant careful monitoring by firms engaged in business in Russia to ensure that ensuing compliance risks and requirements are properly taken into account.
Footnotes
1 See Executive Order 13662 (March 20, 2014), accessible
at: http://www.treasury.gov/resource-
center/sanctions/Programs/Documents/ukraine_eo3.pdf.
2 See Directive 1 as Amended Under Executive Order 13662
(September 12, 2014), accessible at: http://www.treasury.gov/resource-center/sanctions/Programs/Documents/eo13662_directive1.pdf.
3 See Directive 2 as Amended Under Executive Order 13662
(September 12, 2014), accessible at: http://www.treasury.gov/resource-center/sanctions/Programs/Documents/eo13662_directive2.pdf.
4 See General License Number 1A (September 12, 2014),
accessible at: http://www.treasury.gov/resource-center/sanctions/Programs/Documents/ukraine_gl1a.pdf.
5 See Directive 3 Under Executive Order 13662 (September 12,
2014), accessible at: http://www.treasury.gov/resource-center/sanctions/Programs/Documents/eo13662_directive3.pdf.
6 See General License Number 2 (September 12, 2014), accessible
at: http://www.treasury.gov/resource-center/sanctions/Programs/Documents/ukraine_gl2.pdf.
7 Department of Commerce, Bureau of Industry and Security, U.S.
Commerce Department Expands Export Restrictions Aimed at
Russia's Defense Sector (September 12, 2014), accessible at: http://www.bis.doc.gov/index.php/about-bis/newsroom/press-releases/107-about-bis/newsroom/press-releases/press-release-2014/742-u-s-commerce-department-expands-export-restrictions-aimed-at-russia-s-defense-sector.
8 Id.
9 See Council Implementing Regulation (EU) No. 961/2014 (September
8, 2014), accessible at: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2014.271.01.0008.01.ENG.
10 See Council Regulation (EU) No. 960/2014 (September 8, 2014),
accessible at: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2014.271.01.0003.01.ENG.
11 Id.
12 Id.
13 See Council Regulation (EU) No. 833/2014 (July 31, 2014),
accessible at: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2014.229.01.0001.01.ENG.
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