On Friday, September 12, 2014, the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) expanded Ukraine-related sanctions by taking several actions to broaden the scope of US “sectoral” sanctions issued pursuant to Executive Order 13662 to cover the Russian defense sector and additional parties and activities in the Russian energy sector and by designating 5 Russian defense companies as Specially Designated Nationals (“SDNs”). On the same day, the US Commerce Department’s Bureau of Industry and Security (“BIS”) announced plans to expand US export controls targeting Russia by adding 5 Russian energy companies and 5 Russian defense companies to the Entity List.
US Sanctions Developments
1. New SDNs
Effective September 12, 2014, OFAC announced the addition of the following 5 Russia defense companies to the US Specially Designated Nationals and Blocked Persons List (“SDN List”) pursuant to Executive Order 13661:
“US Persons” are prohibited from dealing, directly or indirectly, with these SDNs, their property, and their interests in property as well as with any entities 50% or more owned by one or more SDNs. For purposes of the Ukraine-related sanctions, “US Persons” include (i) entities organized under US laws and their non-US branches, (ii) individuals or entities in the United States, and (iii) US citizens or permanent resident aliens (“Green Card” holders) wherever located or employed. While non-US persons, including separately incorporated foreign subsidiaries of US companies, are generally not subject to US Ukraine-related sanctions, non-US persons may trigger US sanctions prohibitions if they cause any SDN-related transactions to occur in whole or in part in the United States or elsewhere by US Persons.
2. Expanded US Sectoral Sanctions
Under the expanded US sectoral sanctions, several Russia parties have been added to the Sectoral Sanctions Identification List pursuant to the directives described below. OFAC issued FAQs regarding the expanded sectoral sanctions. Our previous posting described the initial US sectoral sanctions.
a. Directive 1 (financial sector sanctions)
As part of the expansion of US sectoral sanctions, the scope of Directive 1 has been expanded to now target new debt of longer than 30 days (not 90 days) maturity, and Sberbank has been added to the list of Russian banks subject to this directive. Effective September 12, 2014, Directive 1 prohibits US Persons from:
- all transactions in, provision of financing for, and other dealings in
- new debt of longer than 30 days maturity or
- new equity for
- the parties subject to this directive (i.e., Bank of Moscow; Gazprombank; Russian Agricultural Bank; Sberbank; Vnesheconombank; VTB Bank) as well as any entities 50% or more owned by those parties.
Under Directive 1, US Persons remain prohibited from:
- all transactions in, provision of financing for, and other dealings in new debt of longer than 90 days maturity
- issued between the date each party was sanctioned under this directive (i.e., July 16 or 29, 2014) and September 12, 2014 for
- the parties previously subject to this directive (i.e., Bank of Moscow; Gazprombank; Russian Agricultural Bank; Vnesheconombank; VTB Bank).
The restrictions in Directive 1 apply not only to the banks designated under Directive 1, but also to any entity 50% or more owned by these banks.
b. Directive 2 (energy sector sanctions)
Unlike Directive 1, the scope of Directive 2 was not substantively changed, although certain amendments were made to conform it to the other directives and two new sanctioned parties were added. Directive 2, prohibits US Persons from all transactions in, provision of financing for, and other dealings in new debt of longer than 90 days maturity for parties subject to this directive (i.e., AK Transneft (new); Gazprom Neft (new); Novatek; Rosneft) as well as any entities 50% or more owned by those parties. No restrictions have been placed on the equity of parties subject to Directive 2.
US Persons must comply with the restrictions under both Directives 2 and 4 with respect to parties that are subject to both directives (i.e., Gazprom Neft; Rosneft). Novatek is not subject to Directive 4.
c. Directive 3 (defense sector sanctions)
As part of the expansion of US sectoral sanctions, OFAC also implemented Directive 3, which prohibits US Persons from:
- all transactions in, provision of financing for, and other dealings in
- new debt of longer than 30 days maturity of
- the party subject to this directive (i.e., Rostec) as well as any entities 50% or more owned by this party.
No restrictions have been placed on the equity of Rostec.
d. Directive 4 (energy sector sanctions)
As part of the expansion of US sectoral sanctions, OFAC also implemented Directive 4, which prohibits US Persons from directly or indirectly:
- providing, exporting, or reexporting any US or non-US goods, services (except for financial services), or technology to
- the parties subject to this directive (i.e., Gazprom; Gazprom Neft; Lukoil; Rosneft; Surgutneftegas)
- in support of exploration or production for deepwater (greater than 500 feet), Arctic offshore, or shale projects in Russia or maritime areas claimed by Russia
- that have the potential to produce oil.
If a targeted project in Russia has the potential to produce oil and gas, it is subject to Directive 4. Projects that have the potential to only produce gas are not subject to Directive 4.
The types of services targeted by Directive 4 include (but are not limited to) drilling services, geophysical services, geological services, logistical services, management services, modeling capabilities, and mapping technologies. Financial services such as clearing transactions or providing insurance for the above activities are not covered by Directive 4.
Furthermore, OFAC issued General License No. 2 to authorize activities that are ordinarily incident and necessary to wind down operations, contracts, or other agreements prohibited under Directive 4 through 12:01 EDT on September 26, 2014 (i.e., a total of 14 days). Parties using General License No. 2 must report on their activities within 10 business days after the wind-down activities conclude.
Again, the restrictions in Directive 4 apply not only to the entities designated under Directive 4, but also to any entity 50% or more owned by these entities.
e. Summary Chart
Below is a table showing the Russian entities subject to one or more of the directives, as described above:
|
Sectoral Sanctions Identifications List Directives |
||
|
Entity Name |
Date Sanctioned |
Directive No. |
|
AK Transneft (new) |
9/12/14 |
2 |
|
Bank of Moscow |
7/29/14 |
1 |
|
Gazprom (new) |
9/12/14 |
4 |
|
Gazprom Neft (new) |
9/12/14 |
2 & 4 |
|
Gazprombank |
7/16/14 |
1 |
|
Lukoil (new) |
9/12/14 |
4 |
|
Novatek |
7/16/14 |
2 |
|
Rosneft |
7/16/14 |
2 & 4 |
|
Rostec (new) |
9/12/14 |
3 |
|
Russian Agricultural Bank |
7/29/14 |
1 |
|
Sberbank of Russia (new) |
9/12/14 |
1 |
|
Surgutneftegas (new) |
9/12/14 |
4 |
|
Vnesheconombank |
7/16/14 |
1 |
|
VTB Bank |
7/29/14 |
1 |
|
An entity 50% or more owned by one or more of the above sanctioned parties is subject to the same directives. |
||
US Export Control Developments
In a press release, BIS announced that it was expanding US export controls targeting Russia, although these new controls have not yet been implemented.
1. Energy Sector Controls
BIS announced that it would add the following five (5) Russian energy companies to the Export Administration Regulations’ (“EAR’s”) Entity List.
- Gazprom OAO;
- Gazpromneft;
- Lukoil OAO;
- Rosneft; and
- Surgutneftegas.
These parties are expected to be added to the Entity List sometime next week. Inclusion of these entities on the Entity List will impose a specific licensing requirement
- for the export, reexport, or transfer to these parties of
- items subject to the EAR when the exporter knows or has reason to know
- that the items will be used directly or indirectly
- in exploration for, or production from, deepwater, Arctic offshore, or shale projects in Russia.
We expect this licensing requirement to apply to both controlled and non-controlled (i.e., “EAR99”) items, as has been the case with previous Russia-related Entity List designations.
License applications for such transactions will be subject to a presumption of denial when for use directly or indirectly in targeted projects in Russia that have the potential to produce oil. This licensing policy appears to mirror the one for the Russia Oil Industry Sanctions program (EAR Section 764.5) (see previous posting).
2. Defense Sector Controls
BIS also announced that it would add the following five (5) Russian defense companies to the EAR’s Entity List:
- Almaz-Antey Air Defense Concern Main System Design Bureau;
- Tikhomirov Scientific Research Institute of Instrument Design;
- Mytishchinski Mashinostroitelny Zavod OAO;
- Kalinin Machine Plant, JSC; and
- Dolgoprudny Research Production Enterprise.
These parties are expected to be added to the Entity List sometime next week. Inclusion of these entities on the Entity List will impose a specific licensing requirement
- for the export, reexport, or transfer to these parties of
- any items subject to the EAR.
Again, we expect this licensing policy to apply to both controlled and non-controlled items.
License applications for such exports, reexports, and transfers to these parties will be subject to a presumption of denial. BIS announced that it will impose a separate licensing requirement for a separate group of items subject to the EAR destined for military end uses or end-users in Russia.
