This week, the United States announced new sanctions against
Russia in response to what the Obama Administration describes as
Russia's continued attempts to destabilize Ukraine. This
represents a significant expansion into new territory for US
sanctions policy: in addition to blocking or "freezing"
the assets of newly listed Ukrainian separatists and Russian
individuals and entities, the United States has now also
established a new category of "targeted, sector-specific
sanctions" that initially includes four of the largest Russian
energy and financial firms: OAO Novatek and Rosneft, and
Gazprombank OAO and Vnesheconombank (VEB), respectively. While
narrower than previous designations of Russian entities, these new
sanctions are designed to be "targeted and designed to have
the maximum impact" while minimizing the "spillover"
effect on the US economy by limiting the entities' access to US
capital markets.
The EU, meanwhile, has reached political agreement to expand
sanctions—including, potentially, by targeting Russian
entities—but the precise scope of such expansion is currently
unclear.
I. New US SDN Designations
The US Department of the Treasury's Office of Foreign Assets
Control (OFAC) added new Russian and Ukrainian individuals and
entities to its Specially Designated Nationals and Blocked Persons
(SDN) list, including eight Russian state-owned defense technology
firms, four Russian government officials, two entities and one
individual determined to threaten the peace and security of
Ukraine, and one key oil shipping facility in the Crimean
Peninsula. As a result of these designations, any property or
property interests of the new SDNs that are within US jurisdiction
must be blocked, and transactions by US persons or within the
United States involving the SDNs are generally prohibited.
II. A New Sanctions Front: Sectoral Sanctions
Identifications (SSIs)
OFAC has also created a new category of sanctions by
establishing the Sectoral Sanctions Identifications (SSI)
list.1 Under Executive Order 13662 (Mar. 20, 2014), the
President had authorized sanctions against various sectors of the
Russian economy due to instability in Ukraine, including financial
services, energy, metals and mining, engineering, and defense and
related materiel.2
On July 16, 2014, OFAC acted under that authority to add four major
Russian energy and financial firms to its SSI list for the purpose
of limiting their access to US financial markets for new issues of
debt and/or equity. These hybrid "targeted,
sector-specific" sanctions are much narrower than those
imposed against SDNs because the SSI-designated firms are not
blocked (e.g., US persons are not required to block their
property interests) and only certain longer-term financial
transactions have been prohibited.
Specifically, Directive 1 issued pursuant to Executive Order 13662,
which applies to the two financial firms, Gazprombank and VEB,
prohibits transacting in, providing financing for, or otherwise
dealing in (including the provision of services in support of) new
debt of longer than 90 days maturity or new equity of the two firms
or their interests in property.3
Directive 2 issued pursuant to Executive Order 13662, which applies
to the two energy firms, OAO Novatek and Rosneft, prohibits
transacting in, providing financial for, or otherwise dealing in
(including the provision of services in support of) new debt of
longer than 90 days maturity, but establishes no prohibitions with
respect to equity.4
Importantly, the SSI sanctions are prospective in nature,
prohibiting dealings in "new" debt or equity
(i.e., debt or equity issued as of July 16, 2014), as well
as the rollover of certain existing debt, described
below.5 US financial institutions may continue to
maintain correspondent accounts and process US dollar-clearing
transactions for the SSI designees, so long as those activities do
not involve prohibited transactions.6 The same
requirements also extend to "new" debt or equity issued
by entities owned 50 percent or more by the SSI designees.
A. Special Issues for the Financial Sector
The SSI designations raise new compliance obligations for the US
financial sector. OFAC has published initial guidance and granted a
new general license so that firms may begin to assess how to
address SSI-related risks and challenges.
OFAC's Frequently Asked Questions (FAQs) cover several
technical aspects of compliance with the new SSI list, including
key definitions and further information on the parameters of the
prohibitions.7 Highlights include:
- "Equity" is defined to include "stocks, share
issuances, depositary receipts, or any other evidence of title or
ownership;"
- "Debt" is defined broadly and includes "bonds,
loans, extensions of credit, loan guarantees, letters of credit,
drafts, bankers acceptances, discount notes or bills, or commercial
paper;"
- "New debt" and "new equity" are debt and
equity, respectively, "issued after {sic} on or after July 16,
2014" and that are "by, on behalf of, or for the benefit
of" the SSI designee;
- US financial institutions may continue to provide correspondent
services—including dollar clearing—for the SSI
designees, provided that the "activities do not involve
transacting in, providing financing for, or otherwise dealing in
prohibited transaction types identified by these
directives;"
- OFAC clarified that the SSI sanctions extend to the
"provision of services" related to the prohibited
activities. For example, this restriction would encompass custodial
services;
- OFAC also emphasized that SSI sanctions do not include asset-blocking requirements. Rather, if US financial institutions or other US persons identify a possible prohibited transaction, they must reject the transaction and report the event to OFAC within 10 business days.
OFAC has also issued a general license authorizing transactions "involving derivative products whose value is linked to an underlying asset that constitutes [] debt with a maturity of longer than 90 days or equity issued on or after July 16, 2014" by either entity.8 The general license does not authorize the holding, purchasing, or selling of underlying assets.
B. Special Issues for the Energy and other Sectors
US energy firms and those in other sectors must also consider
the implications of new prohibitions on long-term debt transactions
with OAO Novatek and Rosneft, key players in the Russian energy
sector. The new prohibition could significantly complicate or
imperil the formation of new joint ventures by US energy firms in
Russia. Formation of such enterprises will require careful
scrutiny, and we recommend that firms undertake a review of their
existing relationships with SSI designees to determine whether they
present sanctions compliance issues (e.g., obligations to
deal in "new" debt of the SSI designee or entities
majority- owned by them).
III. EU Sanctions
The European Council has agreed to expand restrictive
measures "with a view to targeting entities, including from
the Russian Federation, that are materially or financially
supporting actions undermining or threatening Ukrainian
sovereignty, territorial integrity and independence." It also
tasks the Council with "consider{ing} the possibility of
targeting individuals or entities who actively provide material or
financial support to the Russian decision-makers responsible for
the annexation of Crimea or the destabilisation of
Eastern-Ukraine." Such an expansion will require the
negotiation and drafting of a new legal instrument and the
agreement of the Council over which specific individuals and
entities to designate. If this occurs—the European Council
contemplates new measures by the end of July—then it would be
the first EU sanctions designation of Russian entities.
The European Council is also seeking additional restrictions,
including the suspension of new financing by the European
Investment Bank in public sector projects in Russia and restricting
European investment in Crimea.
IV. Conclusion
Until Russia meets key benchmarks established by the
Obama Administration, viz., de-escalation—halting the flow of
weapons, return of border checkpoints to Ukrainian authorities,
release of hostages, and progress on peace talks—the US
Administration has signaled its intent to impose further sanctions.
In the meantime, OFAC's new sanctions against Russia have given
rise to numerous questions and concerns about applicable compliance
requirements, which may result in further guidance issued by OFAC.
The EU has also agreed, in principle, on extension of its sanctions
regime. These developments warrant close monitoring, and we urge
firms to assess the extent to which expanded US and/or EU sanctions
against Russia create new business risks and compliance
challenges.
1 OFAC Sector Sanctions Identifications List
, July 16, 2014, available at
http://www.treasury.gov/ofac/downloads/ssi.pdf.
2 Executive Order 13662, Blocking Property of Additional
Persons Contributing to the Situation in Ukraine, Mar. 20,
accessed at
http://www.treasury.gov/resource-center/sanctions/Programs/Documents/ukraine_eo3.pdf.
3 Directive 1 Pursuant to EO 13992, available
at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/eo_13662_directives.pdf.
4 Directive 2 Pursuant to EO 13992, available
at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/eo_13662_directives.pdf.
5 See "Questions Related to Sectoral
Sanctions under Executive Order 13622," #371, available
at http://www.treasury.gov/resource-center/faqs/Sanctions/Pages/answer.aspx#371.
6 Id.
7 See "Questions Related to
Sectoral Sanctions under Executive Order 13622," available
at http://www.treasury.gov/resource-center/faqs/Sanctions/Pages/ques_index.aspx#sectoral.
8 General License No. 1 Authorizing Certain
Transactions Related to Derivatives under Directive 1 and Directive
2 of Executive Order 13662, July 16, 2014, available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/ukraine_gl1.pdf.
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