US announces new sectoral sanctions targeting Russia’s financial services and energy sectors, sixth round of Ukraine-related designations, and strengthened US export controls targeting Russia

On Wednesday, 16 July 2014, the Office of Foreign Assets Control in the US Treasury Department announced new sectoral sanctions targeting Russia’s financial services and energy sectors and a sixth group of “Specially Designated Nationals” related to the crisis in Ukraine with the designation of 11 entities and 5 individuals in Crimea and Russia. On the same day, the Bureau of Industry and Security in the US Commerce Department also announced plans to add the same 11 entities to the Entity List.

1.  New Sectoral Sanctions Targeting Russia

On Wednesday, 16 July 2014, the Office of Foreign Assets Control (“OFAC”) in the US Treasury Department announced the imposition of sectoral sanctions to target the financial services and energy sectors in Russia under Executive Order 13662.  Under these new sectoral sanctions, limited and targeted restrictions have been placed on “US-Person” dealings in new debt or new equity of two Russian banks (Gazprombank OAO and VEB) and in new debt of two Russian energy companies (OAO Novatek and Rosneft). 

None of these four Russian companies has been designated as a “Specially Designated National” (“SDN”) or had its property or interests in property blocked/“frozen.”  Instead, pursuant to Executive Order 13662, these four Russian companies have been added to a new “Sectoral Sanctions Identifications List” pursuant to Directives 1 (financial services sector) and 2 (energy sector).

For purposes of the sectoral sanctions, “US Persons” include (i) entities organized under US laws and their non-US branches, (ii) individuals or entities in the United States, or (iii) US citizens or permanent resident aliens (“Green Card” holders) wherever located or employed.  Non-US Persons, including separately incorporated foreign subsidiaries of US companies, may be subject to US jurisdiction if they cause prohibited transactions to occur in whole or in part in the United States or anywhere by US Persons.

Under Directive 1, US Persons are prohibited, as of July 16, from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity in relation to Gazprombank OAO, VEB, or any entity 50% or more owned by either company.  Other than these specific restrictions, US Persons are generally permitted to engage in transactions and dealings with Gazprombank OAO or VEB, including dealings in debt or equity that predates July 16, 2014.

Under Directive 2, US Persons are prohibited, as of July 16, from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity in relation to OAO Novatek, Rosneft, or any entity 50% or more owned by either company.  Other than these specific restrictions, US Persons are generally permitted to engage in transactions and dealings with OAO Novatek or Rosneft, including dealings in debt that predates July 16, 2014.  Directive 2 does not impose restrictions on US-Person dealings in new equity of OAO Novatek or Rosneft.

As part of its announcement, OFAC issued General License No. 1 to authorize US-Person dealings in derivative products linked to underlying assets that constitute new debt described above.  OFAC also published FAQs about these developments.

2.  New SDNs

On the same day, OFAC also announced its sixth group of SDNs related to the crisis in Ukraine and added 11 entities and 5 individuals in Crimea and Russia to the US SDN List pursuant to Executive Order 13660 or Executive Order 13661.  US Persons are now prohibited from dealing (directly or indirectly) with these SDNs and any entity 50% or more owned by an SDN. 

According to the US Treasury Department press statement, the new SDNs have been designated for the following reasons:

• Eight companies for operating in the arms or related materiel sector in Russia under Executive Order 13661:

1. JSC Concern Almaz-Antey
2. Federal State Unitary Enterprise State Research and Production Enterprise Bazalt
3. JSC Concern Sozvezdie
4. JSC MIC NPO Mashinostroyenia
5. Kalashnikov Concern
6. KBP Instrument Design Bureau
7. JSC Concern Radio-Electronic Technologies
8. Uralvagonzavod

• Four individuals for their status as Russian government officials under Executive Order 13661:

1. Sergey Beseda
2. Oleg Savelyev
3. Sergei Neverov
4. Igor Shchegolev 

• Three entities and one individual under Executive Order 13660:

1. Luhansk People’s Republic
2. Donetsk People’s Republic
3. Feodosiya Enterprise
4. Aleksandr Borodai

 3.  New Designations on the Entity List

In a coordinated statement, the Bureau of Industry and Security (“US BIS”) in the US Commerce Department also announced that it plans to add the same 11 entities designated as SDNs to the Entity List pursuant to the Export Administration Regulations (“EAR”).  (The four Russian companies subject to Executive Order 13662’s sectoral sanctions were not added to the Entity List.) 

The inclusion of the 11 entities on the Entity List means that a US BIS licence will be required for the export, reexport or in-country transfer by any US or non-US person of items (i.e., goods, software, technology) subject to the EAR to any of these entities, with a presumption of denial.  Based on previous Entity List designations under US sanctions targeting Russia, the new EAR licensing requirements are likely to apply to both controlled and non-controlled (aka “EAR99”) items intended for any of these entities.