United States: OFAC Implements Changes To Ukraine-/Russia-Related Directives 1 And 2

On September 29, 2017, the US Treasury Department's Office of Foreign Assets Control ("OFAC") amended and re-issued Ukraine-/Russia-related sanctions Directives 1 and 2. The amendments were made pursuant to the Countering Russian Influence in Europe and Eurasia Act of 2017 ("CRIEEA"), which was part of the recent omnibus Russia-Iran-North Korea sanctions package entitled the Countering America's Adversaries Through Sanctions Act ("CAATSA").  See Dentons' alert " US enacts significant sanctions legislation against Iran, Russia and North Korea: Key takeaways" for more information on CAATSA.

CRIEEA reduced the permissible maturity period of new debt from 30 days to 14 days for entities on the Sectoral Sanctions Identifications List ("SSI List") under Directive 1 (Russian financial services sector). CRIEEA also reduced the permissible maturity period of new debt from 90 days to 60 days for entities on the SSI List under Directive 2 (Russian energy sector). The amended Directives phase in these reductions, with full implementation for debt issued on or after November 28, 2017.

The revised Directives further expand the restrictions the US imposes against Russia, even though the Directives do not entirely prohibit all transactions and dealings. Thus, although the US does not maintain a general commercial embargo on Russia (as compared to, for example, Cuba, Iran, North Korea and Syria), the scope of what the US does prohibit or restrict regarding Russia has continued to expand significantly. Sanctions will further expand when the US implements amendments made by CRIEEA to Directive 4 of the Ukraine-/Russia-related sanctions, and to the extent that the US identifies additional persons for inclusion on the SSI List and the Specially Designated Nationals List.

The Ukraine/Russia sanctions program, including the sectoral sanctions implemented via the Directives, governs US persons1 and any conduct that takes place within the United States. While US law specifically authorizes the President to impose extraterritorial sanctions over all persons (US and non-US), President Obama did not implement these provisions, and President Trump has not yet done so to date.

Reduced permissible debt tenor under Directive 1

Directive 1 prohibits US persons from transacting in, providing financing for, or otherwise dealing in debt2 of specified tenors - or equity3 - if that debt or equity was issued on or after the relevant sanctions effective date by, on behalf of, or for the benefit of entities designated under Directive 1. The restrictions in Directive 1 also apply to entities that are owned 50% or more by SSI-Listed persons, or entities that OFAC determines to be "controlled" by a SSI-Listed person.

As amended on September 29, 2017, Directive 1 now reduces the permissible maturity period of new debt issued on or after November 28, 2017 to 14 days from 30 days. When Directive 1 was first issued, the permissible maturity period was 90 days; it was subsequently reduced to 30 days.

OFAC has phased in this reduction as follows, with the permissible debt tenor dependent on the period when the debt was issued:

Reduced permissible debt tenor under Directive 2

Directive 2 prohibits US persons from transacting in, providing financing for, or otherwise dealing in debt of specified tenors if that debt was issued on or after the relevant sanctions effective date by, on behalf of, or for the benefit of entities designated under Directive 2. The restrictions in Directive 2 also apply to entities that are owned 50% or more by SSI- Listed persons, or entities that OFAC determines to be "controlled" by a SSI-Listed person.

As amended on September 29, 2017, Directive 2 now reduces the permissible maturity period of new debt issued on or after November 28, 2017 to 60 days from 90 days. When Directive 2 was first issued, the permissible maturity period was 90 days.

OFAC has phased in this reduction as follows, with the permissible debt tenor dependent on the period when the debt was issued:

Applicability of Directives to certain financial arrangements involving SSI entities

OFAC published a revised set of Frequently Asked Questions ("FAQ") alongside the amended Directives. These updated FAQ revise existing guidance provided by OFAC regarding the treatment of certain financial arrangements and products under the sectoral sanctions. Key points highlighted by the FAQ include the following.

Sale of goods. US sanctions do not prohibit the sale or provision of goods to SSI-Listed entities, so long as such transactions do not involve Specially Designated Nationals. However, the Directives limit permissible payment terms. For the sale of goods to a SSI-designated entity, US persons may extend payment terms of up to 14 days (for entities subject to Directive 1) or 60 days (for entities subject to Directive 2) "from the point at which title or ownership of the goods transfers to the designated entity."

Provision of services and subscription agreements. US sanctions do not prohibit the sale or provision of services to SSI-Listed entities, so long as such transactions do not involve Specially Designated Nationals. However, as with the sale of goods, the Directives limit permissible payment terms for services. US persons may only extend payment terms of up to 14 days (for entities subject to Directive 1) or 60 days (for entities subject to Directive 2) "from the point at which a final invoice (or each final invoice) is issued" for the provision of services to, subscription arrangements involving, and progress payments for long-term projects involving SSI-designated entities.

Revolving credit facility or long-term loan arrangement. US persons may not deal in a drawdown or disbursement initiated after the sanctions effective date with a repayment term longer than 14 days (for entities subject to Directive 1) or 60 days (for entities subject to Directive 2), if the terms of the drawdown or disbursement were negotiated on or after the sanctions effective date (i.e., November 28, 2017). However, drawdowns and disbursements from a long-term credit facility or loan agreement for a designated entity that have repayment terms of 14 days or less (for entities subject to Directive 1) or 60 days or less (for entities subject to Directive 2) are permitted, as long as the long-term credit facility or loan agreement was entered into prior to when the entity was designated.

Letter of credit. US persons may not deal in or process transactions under a letter of credit if the letter of credit was issued on or after the sanctions effective date, carries a term of longer than 14 days maturity (for entities subject to Directive 1) or 60 days maturity (for entities subject to Directive 2), and an SSI entity is the applicant of the letter of credit. However, US persons may deal in (including acting as the advising or confirming bank or as the purchaser of the underlying goods or services) or process transactions under a letter of credit in which an entity designated under Directive 1 or 2 is the beneficiary (i.e., the exporter or seller of the underlying goods or services).

Deferred purchase payment plans. US persons may not enter into deferred purchase payment plans that extend payment terms of longer than 14 days or 60 days, depending on the applicable Directive, to a designated entity. OFAC considers such payment plans to constitute a prohibited extension of credit to a designated entity if the terms are longer than the permissible number of days and the payment plans were agreed to on or after the date the entity was designated on the SSI List.

Conclusion

Additional sanctions targeting Russia are expected to be implemented soon. CRIEEA also directs OFAC to revise Directive 4 on or before October 31, 2017. The revised version of Directive 4 will extend the restrictions on the provision of goods or services related to oil exploration and production to include any new deep-water, Arctic offshore or shale projects that have the potential to produce oil anywhere in the world in which a SSI-designated entity has a "controlling interest" or a "substantial non-controlling ownership interest." Currently, the restrictions in Directive 4 apply only to such projects within Russia that involve designated entities. Thus, the CRIEEA amendments have the potentially to expand significantly the reach of Directive 4, both by removing the geographic limitation to Russia, as well as by setting a new 33% threshold for determining that a project has a SSI-Listed interest triggering restrictions.

While the US does not maintain a general commercial embargo on Russia, the scope of US sanctions targeting that country - and several of its key sectors - has continued to expand. The further restrictions on the permissible debt tenor in the amended Directives create new challenges for Russian companies seeking longer-term or medium-term financing. These new restrictions may also exacerbate or intensify existing challenges for US companies that sell ordinary goods or services to Russian customers who happen to be on the SSI List, including in circumstances where those customers fail to make payment within the specified term.

Accordingly, US persons with exposure to the Russian financial services or energy sector should closely scrutinize transactions involving Russia to ensure compliance with the new restrictions and consider amendments to ensure that payment terms align with applicable law.

Footnote

1. The Ukraine Related Sanctions Regulations (31 CFR Part 589) define a US person as "any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States."

2. For the purposes of both Directive 1 and Directive 2, "debt" includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper.

3. Under Directive 1, "equity" includes stocks, share issuances, depository receipts, or any other evidence of title or ownership.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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