Worldwide: US And EU Issue And Then Expand Sanctions Targeting Specific Sectors Of The Russian Economy

US SSI Sanctions

In light of the ongoing conflict in Ukraine, on July 16, OFAC first issued sanctions pursuant to Executive Order (E.O.) 13662, which authorizes sanctions targeting specific sectors of the Russian economy (the SSI Sanctions). Additional entities were targeted pursuant to SSI Sanctions on July 29. Then, on September 12, OFAC amended the SSI Sanctions and expanded their scope, designating more SSI Entities in the process. The current landscape of the SSI Sanctions is detailed below. Each of the designated SSI Entities has been named pursuant to one or more of a total of four Directives, with each Directive containing specific restrictions. Overall, the SSI Sanctions effectively limit SSI Entities' access to medium- and long-term US sources of funding. However, they do not impose blocking restrictions and do not prohibit US Persons¹ from other dealings with SSI Entities; in fact, all transactions not expressly prohibited are permitted so long as no restrictions from other sanctions programs apply (e.g., if an SSI Entity has also been named as an SDN). US financial institutions are allowed to maintain correspondent accounts and process US dollar-clearing transactions for SSI Entities, insofar as those activities do not involve debt or equity transactions prohibited under SSI Sanctions. The prohibitions created by the SSI Sanctions also extend to debt and equity issued by entities that are 50 percent or more owned by SSI Entities (applying the new aggregation rule from OFAC).

Given the ongoing expansion of the scope of SSI Sanctions, OFAC has emphasized that each Directive issued pursuant to E.O. 13662 operates independently of the others. That is, if a transaction involves a person subject to multiple Directives, a US Person engaging in that transaction must comply with the requirements of each of those Directives. Exemptions in one Directive apply only to the prohibitions contained in that Directive and do not carry over to another Directive.

Directive 1

Directive 1, as amended, prohibits transactions in, provision of financing for, or other dealings in new debt of greater than 30 days maturity or new equity of the financial institutions designated as SSI Entities.² US Persons are also prohibited from all activities related to debt or equity issued before the date of Directive 1 (as amended) that would have been prohibited by the prior version of Directive 1.³ The six banks currently subject to these prohibitions are Gazprombank OAO (designated 7/16/14), Vnesheconombank (VEB) (7/16/14), Bank of Moscow (7/29/14),Russian Agricultural Bank (7/29/14), VTB Bank (7/29/14), and Sberbank (9/12/14).

Directive 2

Four Russian energy companies — Novatek (7/16/14), Rosneft (7/16/14), Gazprom Neft (9/12/14) and AK Transneft OAO (9/12/14) — have been designated as SSI Entities subject to Directive 2, which prohibits transactions in, provision of financing for, or other dealings in new debt of greater than 90 days maturity. No changes were made to Directive 2 on September 12.

Directive 3

OFAC issued Directive 3 on September 12 to target persons operating within Russia's defense and related material sector. Directive 3 prohibits transactions in, provision of financing for, and other dealings in new debt of greater than 30 days maturity issued by SSI Entities subject to the Directive. OFAC then designated Rostec as an SSI Entity subject to Directive 3.

Directive 4

On September 12, OFAC issued a new Directive 4, which prohibits the exportation of goods, services (not including financial services) or technology to designated SSI Entities in support of exploration or production for Russian deepwater,⁴ Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation. The prohibition on the exportation of services includes, for example, drilling services, geophysical services, geological services, logistical services, management services, modeling capabilities, and mapping technologies. The prohibition does not apply to the provision of financial services such as clearing transactions or providing insurance related to such activities. Five Russian energy companies were designated as SSI Entities subject to Directive 4 on September 12 — Lukoil OAO, OJSC Gazprom Neft, Gazprom, Surgutneftegas, and Rosneft.⁵

OFAC simultaneously issued General License 2 to authorize for fourteen days all services and activities prohibited by Directive 4 that are necessary to wind down operations, contracts, or other agreements involving these SSI Entities. In order to qualify under this General License, a transaction must have (1) occurred prior to 12:01 am EDT September 26, 2014, and (2) been related to operations, contracts, or agreements that were in effect prior to September 12, 2014. US Persons participating in transactions authorized by General License 2 were required, within 10 business days after the wind-down activities concluded, to file a detailed report, including the parties involved, the type and scope of activities conducted, and the dates of the activities, with the OFAC Licensing Division.

Directive 4 complements the August 6 final rule published by the Department of Commerce's Bureau of Industry and Security, which implemented a new restrictive licensing policy governing certain dual-use items to be used in Russian deepwater, Arctic offshore, or shale oil and gas projects. A license is now required to export, re-export, or transfer certain items when the exporter "know[s] that the item will be used directly or indirectly in exploration for, or production of, oil or gas in Russian deepwater (i.e., greater than 500 feet) or Arctic offshore locations or shale formations in Russia, or [is] unable to determine whether the item will be used in such projects." Among the items identified in the rule for export restrictions are drilling rigs, subsea processing equipment, fracking software, high-pressure pumps, valves, and risers. Notably, any restricted products that were in transit and would require a license as of August 6 under this new policy may give rise to violations if they are delivered on or after that date, even if they were originally exported under a license exception or did not require a license at the time. The Commerce Department also added a Russian shipbuilder to its Entity List, further restricting its access to US exports.

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OFAC has continued to update its answers to frequently asked questions about the SSI Sanctions program throughout this quarter. Amongst other clarifying statements, OFAC noted that Directives 1 and 2 prohibit US persons from dealing in debt of longer than 30 or 90 days maturity, respectively, issued on or after the effective date in cases where the new debt is issued by the SSI entity. However, Directives 1 and 2 do not prohibit US Persons from dealing with an SSI entity as counterparty to transactions involving debt issued on or after the effective date by a non-sanctioned party. For example, US Persons are not prohibited from dealing in a loan exceeding 30 or 90 days that is issued after the effective date of sanctions provided by an SSI Entity to a non-sanctioned third-party, dealing with an SSI Entity who is the underwriter on new debt of a non-sanctioned third party exceeding 30 or 90 days, or accepting payment under a letter of credit with terms exceeding 30 or 90 days that is issued, advised, or confirmed by an SSI Entity, so long as the SSI Entity is not the borrower. Likewise, US Persons are not prohibited from dealing in new equity with an SSI Entity sanctioned under Directive 1 if the SSI Entity is not the issuer of the equity.

On September 12, OFAC issued General License 1A, which authorizes certain transactions involving derivative products that would otherwise be prohibited pursuant to Directives 1, 2, or 3 (replacing and superseding General License 1, which allowed such transactions otherwise prohibited under Directives 1 and 2).

EU Sectoral Sanctions

Expanded EU sanctions targeting Russia also went into effect on September 12, becoming more closely aligned with those imposed by the United States.⁶ Accordingly, the European Union now prohibits the direct or indirect purchase, sale, provision of services, assistance in the issuance of, or any other dealing with bonds, equity, or similar financial instruments with a maturity exceeding 30 days, where such equity is issued by, or loans (subject to narrowly drawn exemptions) are issued to, five major Russian financial institutions or six entities in the Russian defense and oil sectors.⁷

The five banks affected by this new measure are Sberbank, VTB Bank, Gazprombank, VEB, and Russian Agriculture Bank. The affected defense and energy companies are Rosneft, Transneft, Gazprom Neft, Opk Oboronprom, United Aircraft Corporation, and Uralvagonzavod. Payment services and deposit business with (otherwise) sanctioned entities remain outside the scope of the financial sectoral restrictions.

Further, EU sanctions now prohibit the sale, supply, or transfer of arms-related material and dual-use items, including the provision of financial assistance in connection with such goods, to certain named entities, which currently include JSC Sirius, OJSC Stankoinstrument, OAO JSC Chemcomposite, JSC Kalashnikov, JSC Tula Arms Plant, NPK Technologii Maschinostrojenija, OAO Wysokototschnye Kompleksi, OAO Almaz Antey and OAO NPO Bazalt. EU sanctions also prohibit the provision of services necessary for deep water oil exploration and production, arctic oil exploration and production, or shale oil projects.

Earlier this quarter, the European Union instructed the European Investment Bank (EIB) to suspend new financing in Russia; in 2013, the EIB provided roughly EUR 1 billion to projects in Russia. EU Member States also declared that they will use their positions with the Board of the European Bank for Reconstruction and Development to work to suspend financing new operations in Russia.

Footnotes

1. "US Person" includes both US individuals and entities and persons present within the United States.

2. The original Directive 1, issued on July 16, prohibited transactions involving new debt or equity of longer than 90 days with the listed SSI Entities. Transacting in, providing financing for, or otherwise dealing in debt with maturity of 90 days or less issued by, on behalf of, or for the benefit of the persons identified under Directive 1 is not prohibited if such debt instruments were issued prior to September 12, 2014, and the terms of such instruments are not subsequently changed. However, rollovers of such instruments must comply with the 30-day maturity limit imposed on September 12.

3. More generally, OFAC has clarified that "sanctions effective date" means the date a person is determined to be subject to the prohibitions of the relevant Directive. When a person has been previously determined to be subject to a Directive and the prohibition in the Directive is subsequently amended, the sanctions effective date for the prohibitions of the original Directive remains the date on which the person was identified as subject to the prohibitions of that Directive, and the sanctions effective date for the amended Directive is the date of the amendment or other date specified in the amended Directives.

4. A deepwater project is defined as one involving underwater activities at depths of more than 500 feet.

5. OFAC previously named Rosneft as an SSI Entity subject to Directive 2 on July 17, 2014.

6. EU Member States may enact measures that are stricter than EU rules.

7. Dealings with debt or equity for these institutions that was issued after August 1, 2014 and before September 12, 2014 are limited to a maturity of less than 90 days.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.