Although Obama Administration officials undoubtedly recognize the need to punish Russia and Russian-backed rebels for their alleged role in the MH17 tragedy, they also will continue to weigh the effects of further sanctions on U.S. entities (see “June 30th post” – ADD LINK PLEASE). The Administration is truly caught between a rock and a hard place on this one: expand sanctions and you risk hurting your own economy; fail to act and you’re telling Moscow that there are no real consequences for Russian actions. Thus, the Ukraine-related sanctions likely will expand slowly, with each new round of sanctions becoming increasingly nuanced in order to minimize any damage to U.S. businesses. So, in the interest of understanding what the most recent changes to these sanctions means for your business before they are further expanded, keep the following highlights and advice in mind:
The latest round of Ukraine-related sanctions were imposed on June 16th, 2014 (one day before the downing of commercial flight MH17), pursuant to (existing) Executive Order 13662 (dated March 20, 2014).
11 parties have been added to OFAC’s SDN List, including Kalashnikov Concern (makers of AK-47s), the Russian state research and production enterprise “Bazalt,” as well as both the rebel Donetsk People’s Republic and Luhansk People’s Republic (rebel-established governments in eastern Ukraine).
A new list dubbed the “Sectoral Sanctions Identification List” (SSI List) has been created to target the Russian energy and banking industries. Among the notable additions to this list are Gazprombank (financial arm of Russian state-controlled gas producer Gazprom) and Vnesheconombank (state economic development bank). However, these entities are not ‘blocked parties’ like those on the SDN List so trading with them is generally allowed. Instead, two specific types of transactional prohibitions apply to SSI List entities:
Transactions involving the establishment of certain debt (with a maturity of longer than 90 days) or new equity are prohibited if they involve SSI entities that fall under Directive 1.
Transactions involving the establishment of certain debt (with a maturity of longer than 90 days) are prohibited if they involve SSI entities that fall under Directive 2.
These new “sectoral sanctions” have created a new list that you must run your potential trade partners against. If a potential trade partner is on the SSI List (or is 50% or more owned by entities on the SSI List, since the 50% rule applies to the SSI List as well) it does not automatically mean that a transaction involving them is prohibited. Rather, it means further due diligence is necessary to determine whether the transaction is of the particular type that SSI List Directives 1 or 2 (based on which one applies to the particular entity) prohibits. As you can see, this latest development does not amount to sectoral sanctions in the sense that trade with a given sector of the Russian economy has not been totally prohibited. Rather, these sanctions target a certain narrow set of transactions with certain named entities: that’s pretty good news for U.S. exporters doing business with Russia in that most transactions can still go forward for now! On the other hand, if you’re curious about how these sanctions are affecting the Russian economy check out this recent article by BBC News’ Katie Hope. And make sure to continue checking in for updates, because based on the big talk in Washington and around the globe, it’s likely this wasn’t the last round of sanctions.
Have a great weekend!