On July 16, 2014, the U.S. Government imposed additional sanctions against Russian and Ukrainian individuals and companies as a result of the ongoing crisis in Eastern Ukraine. In addition to adding five individuals and 11 entities to the List of Specially Designated Nationals and Blocked Persons (“SDN List”), the U.S. Government also imposed more targeted sanctions against four major Russian financial and energy companies – Gazprombank OAO, State Corporation Vnesheconombank, OAO Novatek and OAO Rosneft – that, along with certain named affiliates, have been added to a newly-created Sectoral Sanctions Identification List (“SSI List”). These companies now will have significant trouble accessing U.S. capital markets, as explained below. From the perspective of U.S. (and other) companies who must comply with the sanctions, however, the newly-created restrictions involving parties on the SSI List differ significantly from – and are significantly less restrictive than – those involving parties on the SDN List.
European Union sanctions in view of the current situation in Ukraine remain under constant review and are likely to be significantly increased in the coming days. Until now, the EU was most concerned with the economic impact on its own economies and has targeted mainly Russian and Ukrainian individuals involved in activities considered as threatening the territorial integrity of Ukraine. In this most recent round, the EU has decided to target specific companies from the Russian Federation that are deemed to provide financial or material support to actions undermining or threatening Ukraine’s sovereignty, territorial integrity and independence. Therefore, any company currently doing business in the region or with those companies, or which maintains business contacts with individuals and entities who may risk becoming subject to EU asset freezing provisions, will need to carefully monitor the situation in order to ensure strict compliance and avoid criminal liability.
With respect to entities and individuals identified on the SDN List, prohibitions are identical to those related to other Russian and Ukrainian individuals and entities that previously have been added to the SDN List by the U.S. Government in connection with the ongoing Ukrainian crisis. U.S. persons generally are: (i) prohibited from dealing in all property and interest in property of such persons; and (ii) required to block all such property and interests in property of these entities under U.S. jurisdiction. Entities added to the SDN List include Kalashnikov Concern and Feodosiya Enterprise, among others.
The more noteworthy aspect of the U.S. action relates to the newly-created SSI List. Executive Order 13662 (issued in March 2014) authorized the U.S. Government to impose sanctions against Russian companies operating in certain sectors of the Russian economy. Today’s actions represent the first such designations under this sector-specific authority. Specifically, the Secretary of the Treasury has determined that persons operating within Russia’s financial services and energy sectors may now be subject to targeted sanctions. Importantly, however, the new sanctions do not broadly prohibit activities involving any entity operating in these sectors. Rather, the sanctions announced today target only two companies operating in Russia’s financial services sector and two companies operating in Russia’s energy sector (although these companies are all significant).
With respect to entities identified on the SSI List, U.S. persons are required to take more limited – but still significant – actions than would be required had the entities been added to the SDN List. In summary, SSI-listed entities will have difficulty accessing U.S. markets for medium- and long-term financing, although short-term borrowing will not be affected (at least not directly). The exact nature of prohibitions differs slightly depending on whether the relevant entity operates in the financial or energy sector:
1. Sanctions against Russian financial institutions added to the SSI List – Gazprombank OAO and State Corporation Vnesheconombank (a.k.a. VEB):
U.S. persons are prohibited from transacting in, financing, or otherwise dealing in any debt (with a maturity of more than 90 days) and equity issued on or after July 16, 2014 (“New Debt” and “New Equity,” respectively) issued by, on behalf of, or for the benefit of Gazprombank OAO, VEB, certain of their affiliates, and any of their property or interests in property.
“New Debt” includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper with a maturity of more than 90 days issued on or after July 16, 2014.
“New Equity” includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership issued on or after July 16, 2014.
U.S. persons are permitted to engage in any transactions involving any equity or debt issued prior to July 16, 2014 (or with a maturity of less than or equal to 90 days), and all other transactions involving Gazprombank OAO or VEB.
The inclusion of VEB on the SSI List is particularly significant given that it is one of the most important banks in Russia. In addition to providing general banking services, VEB is also one of the leading import-export credit organizations in Russia and is the principal financing agent for large-scale, state-backed projects (e.g. the 2014 Sochi Olympics). VEB also facilitates financings for Russian commercial banks and corporations by providing guarantees and other security, engages in public-private partnership initiatives, and manages the retirement savings of all Russian citizens without a private pension plan. The inclusion of Gazprombank OAO on the SSI List may also have a material impact on the Russian economy as it is the fourth largest Russian bank in terms of lending.
2. Sanctions against Russian energy institutions on the SSI List – OAO Novatek and OAO Rosneft:
U.S. persons are prohibited from transacting in, financing, or otherwise dealing in any New Debt issued by, on behalf of, or for the benefit of OAO Novatek, OAO Rosneft, certain of their affiliates, and any of their property or interests in property.
U.S. persons are permitted to engage in any other transactions involving any equity (including New Equity) of these entities, any debt issued prior to July 16, 2014 (or with a maturity of less than or equal to 90 days), and all other transactions involving OAO Novatek or OAO Rosneft.
Prohibitions also extend to any entity that is owned 50 percent or more by any entities on the SSI List.
OFAC has issued a new General License permitting U.S. persons to engage in all transactions involving derivative products whose value is linked to underlying New Debt or New Equity that is subject to sanctions. U.S. financial institutions also are permitted to maintain correspondent accounts and process U.S. dollar-clearing transactions for the Russian entities identified on the SSI List, so long as those activities do not involve the types of prohibited property discussed above.
In a statement announcing the new sanctions, the U.S. Department of the Treasury stated that it reserves the right to expand the scope of prohibited transaction types and the number of entities in the Russian financial services and energy sectors at any time. Executive Order 13662 also authorizes the imposition of similar sanctions against other sectors of the Russian economy, including the metals and mining, engineering, defense and defense-related material sectors.
On July 11, 2014, the Council of the European Union imposed additional sanctions in view of the current situation in Ukraine. Council Implementing Regulation (EU) No 753/2014 extends the scope of the current asset freezing measures implemented pursuant to Council Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine. In effect, Council Regulation No 753/2014 adds 11 individuals to Annex I to Council Regulation (EU) No 269/2014.
Failure to comply with EU sanctions legislation or to seek to circumvent its provisions is a criminal offence and carries significant criminal liability and reputation risk. Therefore, clients are advised to:
Check whether they maintain any accounts or assets for the newly-designated persons;
Freeze such accounts or assets which are in their control;
Assess whether they are engaged in any activity with such persons, or persons acting on their behalf;
Suspend any such activity until such time as the legal position is clarified; and
Report any findings to the relevant competent authorities.
There are clear signals that the European Union will decide to widen the list of persons designated under Council Regulation (EU) No 269/2014 by the end of July. Our expectation is that the European Union will significantly expand the list of those persons included in Annex I to target specific companies from the Russian Federation that are deemed to provide financial or material support to actions undermining or threatening Ukraine’s sovereignty, territorial integrity and independence.
In this regard, on July 16, 2014 the European Council agreed to adopt the necessary legal instruments and to decide by the end of July on a list of entities and persons, including from the Russian Federation, to be listed as subject to EU asset freezing provisions. This will have a significant impact on those clients currently doing business with such entities, individuals or wider entities “owned” or “controlled” by such persons. In addition, the European Council has requested that the European Investment Bank (EIB) suspend new financing operations in the Russian Federation, and European Union Member States will coordinate their positions within the European Bank for Reconstruction and Development (EBRD) Board of Directors with a view to also suspending financing of new operations in Russia. The U.S., Canada, and European G-7 countries jointly hold a majority share of 52.5% in the EBRD, while Russia holds a share of approximately 4%.
Finally, on June 23, EU Council regulation (EU) No 692/2014 introduced restrictions to the import into the European Union of goods originating in Crimea or Sevastopol. In general, the Regulation prohibits the import into the EU of goods originating in Crimea or Sevastopol; or to provide, directly or indirectly, financing or financial assistance as well as insurance and reinsurance to the import of those goods. It also regulates how exceptions to the general prohibition apply.
Potential Response From Russia
It is very likely that Russia will retaliate in some form against the U.S., and possibly against the EU, following yesterday’s respective announcements. The Russian Ministry of Foreign Affairs issued a strongly-worded statement noting that Moscow will not copy Washington in its approach, but will nevertheless aim to “hurt” the United States. President Putin, on the final leg of his Latin America tour in Brazil, said that U.S. sanctions will have a “boomerang effect” on the U.S. economy. The response, therefore, is likely to be asymmetrical. The targeting of U.S. companies with operations in Russia should not be excluded as a potential response by the Russian government.
Events in this regard continue to unfold rapidly and additional measures can be expected in light of today's events. Dechert’s International Trade and Government Regulation team members in Washington, London and Moscow will continue to provide updates and are ready to assist.