Worldwide: US And EU Publish Yet Another Wave Of Russian Sanctions

Last Updated: September 24 2014
Article by Kay Georgi and Tina Termei

Investment Services Targeted, Sectoral Sanctions Move Debt Sanctions from 90 to 30 days, Certain Oil Exploration/Production Exports and Services Prohibited

Earlier today, September 12, 2014, the EU and US published yet more sanctions on Russia, increasing the pain particularly in the investment services, defense and oil exploration worlds. Short summaries of the sanctions are provided below, with differences between EU and US sanctions noted.

As this is a rapidly evolving situation, we are not providing background. Please see our earlier alerts (here, here, and here) for additional information and details on previous sanctions.

EU Sanctions

1) Prohibit the sale or supply of dual use items in Annex I to Regulation (EC) No 428/2009 to persons listed in Annex IV, and also prohibit technical assistance, brokering services, other services, financing, and financial services related to same. There is a complicated carve out for the aeronautics and space industry, existing civil nuclear capabilities within the EU and for non military end uses and non military end users. There is also a grandfather provision stating the prohibition is without prejudice to the execution of contracts or agreements concluded before September 12, 2014.

Annex IV lists:

  • JSC Sirius (optoelectronics for civil and military purposes)
  • OJSC Stankoinstrument (mechanical engineering for civil and military purposes)
  • OAO JSC Chemcomposite (materials for civil and military purposes)
  • JSC Kalashnikov (small arms)
  • JSC Tula Arms Plant (weapons systems)
  • NPK Technologii Maschinostrojenija (ammunition)
  • OAO Wysokototschnye Kompleksi (anti-aircraft and anti-tank systems)
  • OAO Almaz Antey (state-owned enterprise; arms, ammunition, research)
  • OAO NPO Bazalt (state-owned enterprise, production of machinery for the production of arms and ammunition).

US Comparison: There is some overlap with the US sanctions, but Annex IV and US entities are not identical, and the US BIS licensing requirement applies to all items subject to US export controls (which includes EAR99 items), not just dual-use control list items.

2) Prohibit the provision of the following services necessary for deep water 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

There is also a grandfather provision stating the prohibition is without prejudice to the execution of an obligation arising from a contract or framework agreement concluded before September 12, 2014 or ancillary contracts necessary for the execution of such contracts.

US Comparison: This provision is both broader and narrower than the US service restrictions below in that: it applies only to certain services (US applies to all services as well as all goods and technology), but it applies to all projects in Russia (US applies only to those involving listed entities). At the same time, it contains a significant grandfathering provision whereas the similar US provision only has a very limited wind-down license (for OFAC sanctions).

3) Adds insurance and reinsurance to the prohibited actions related to the supply of goods and technology on the Common Military List to Russia;

4) Substantially expands the financial sanctions by prohibiting:

  • The provision of "investment services"1 for or assistance in the issuance of, or otherwise dealing with transferable securities2 and money market instruments with a maturity exceeding 30 days issued after 12 September 2014 (90 days if issued between August 1, 2014 and September 12, 2014) by entities listed in Annex III, persons owned 50% or more by them or persons acting on their behalf of direction. Annex III is an old list which we do not copy here.
  • The provision of "investment services" for or assistance in the issuance of, or otherwise dealing with transferable securities and money market instruments with a maturity exceeding 30 days issued after 12 September 2014:

    1. by military entities listed in Annex V (except those active in space or nuclear energy sectors). Annex V entities are:
      OPK OBORONPROM
      UNITED AIRCRAFT CORPORATION
      URALVAGONZAVOD'
    2. by publicly controlled entities and those with 50% public ownership and estimated assets over 1 trillion rubles listed in Annex VI. Annex VI entities are:
      ROSNEFT
      TRANSNEFT
      GAZPROM NEFT'
    3. persons owned 50 percent or more by them or persons acting on their behalf or direction.

US Sanctions

Hours after the EU sanctions were published, both the US Department of Commerce's Bureau of Industry and Security (BIS) and the US Department of Treasury Office of Foreign Assets Control (OFAC) announced details of their sanctions.

BIS Sanctions: BIS expanded restrictions by adding two groups of five prominent Russian entities to the Entities List, with the first, a list of Russian military entities, requiring a license for all items subject to the EAR, and the second, a list of Russian energy companies, requiring a license for all items subject to the EAR 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.

Key parts of BIS's press release:

1) BIS will add five entities operating in the Russian Federation's defense sector to the BIS Entity List. Licenses will be required for all items subject to the EAR to these entities, and they will be subject to a presumption of denial. The entities are:

  • Almaz-Antey Air Defense Concern Main System Design Bureau, JSC (one of the world's largest defense industry complexes, specializing in development of anti-air, anti-missile and space defense systems).
  • Tikhomirov Scientific Research Institute of Instrument Design (specializes in the development of weaponry control systems for fighter planes and mobile medium range anti-aircraft surface to air missile (SAM) defense vehicles).
  • Mytishchinski Mashinostroitelny Zavod, OAO (manufactures and supplies ordnance and accessories, including naval, aircraft, anti-aircraft and field artillery products.).
  • Kalinin Machine Plant, JSC (designs and manufactures machines for military and civil applications.)
  • Dolgoprudny Research Production Enterprise (develops and manufactures high-technology defense products.)

2) BIS will also require licenses for an additional group of items destined to military end uses or end users in Russia. We are awaiting more details on these controls.

3) BIS also added five Russian energy companies to the Entity List to impose a license requirement 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. License applications for such transactions will be reviewed with a presumption of denial when for use directly or indirectly for exploration or production from deepwater, Arctic offshore, or shale projects in Russia that have the potential to produce oil.

The five Russian energy companies are:

  • Gazprom, OAO has major business lines that include geological exploration, production, transportation, storage, processing and sales of gas, gas condensate and oil, sales of gas as a vehicle fuel, as well as generation and marketing of heat and electric power.
  • Gazpromneft is a Russian oil company engaged primarily in oil and gas exploration and production, the sale and distribution of crude oil, and the production and sale of petroleum products.
  • Lukoil, OAO is a leader of Russia's petroleum industry.
  • Rosneft is a leader of Russia's petroleum industry. Rosneft activities include hydrocarbon exploration and production, upstream offshore projects, hydrocarbon refining, and crude oil, gas and product marketing in Russia and abroad.
  • Surgutneftegas is a Russian oil and gas company that was created in 1993 by merging several previously state-owned companies owning large oil and gas reserves in Western Siberia.

OFAC Sectoral Sanctions

OFAC expanded Sectoral Sanctions pursuant to Executive Order 13622 by revising Directive 1 to capture more shorter term debt(changing the maturity on debt from 90 to 30 days), and adding two new Directives 3 and 4 that apply to activities by US persons or within the United States. Directive 3 prohibits US persons from dealing in debt with a maturity of greater than 30 days of designated persons in the Russian defense sector, while Directive 4 prohibits US persons from providing goods, services, and technology to designated persons in the Russian energy sector for prohibited end users.

OFAC has added entities to Directives 3 and 4, as well as 1 and 2. For convenience, we provide the names only of the entities subject to each of the Directives here.

Please note that some entities are subject to multiple Directives, meaning (according to newly issued OFAC FAQ 415), that if a transaction involves a person subject to two or more Directives, a US person engaging in that transaction must comply with the requirements of all applicable Directives.

OFAC's new sanctions are attached here. More specifically:

  • Directive 3 prohibits all transactions in, provision of, financing for, or other dealings in new debt of longer than 30 days maturity of persons subject to the Directive, their property, or interests in property.
    Click here for all entities subject to Directive 3.
  • Directive 4 prohibits the provision, exportation or reexportation, directly or indirectly of goods, services (except financial services) and 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 that involve one of the entities designated under Directive 4.
    Click here for all entities subject to Directive 4.

In FAQ 412, OFAC further explains:

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, e.g., clearing transactions or providing insurance related to such activities.

In FAQ 414, OFAC explains that gas projects that have the potential to produce oil are covered by Directive 4:

If a deepwater, Arctic offshore, or shale project in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory, and involving a person named under Directive 4 has the potential to produce oil, then the prohibition applies, irrespective of whether the project also has the potential to produce gas. If the project has the potential to produce gas only, then the prohibition does not apply.

General license 2 provides a wind-down period for activities barred by Directive 4, but the wind-down is limited in time through 12:01 am EDT September 26, 2014. The wind down license specifically states that it "does not authorize any new provision, exportation or reexportation of goods, services (except for financial services), or technology except as needed to cease operations involving projects covered by Directive 4 ..." OFAC has traditionally not considered finishing off your shipments to be covered by this sort of wind down license. Consistent with this precedent, OFAC has published in FAQ 412 the following guidance: "General License 2 does not authorize any new provision, exportation, or re-exportation of goods, services, or technology except as needed to cease operations, contracts, or other agreements involving affected projects."

We will continue to provide updates as events unfold.

Footnotes

[1] "Investment services" means the following services and activities:

(i) reception and transmission of orders in relation to one or more financial instruments,

(ii) execution of orders on behalf of clients,

(iii) dealing on own account,

(iv) portfolio management,

(v) investment advice,

(vi) underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis,

(vii) placing of financial instruments without a firm commitment basis,

(viii) any service in relation to the admission to trading on a regulated market or trading on a multilateral trading facility.

[2] "Transferable securities" means the following classes of securities which are negotiable on the capital market, with the exception of instruments of payment:

(i) shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares,

(ii) bonds or other forms of securitised debt, including depositary receipts in respect of such securities,

(iii) any other securities giving the right to acquire or sell any such transferable securities.'

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.

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