The U.S. Office of Foreign Assets Control (OFAC) issued a fifth round of designations imposing limited sanctions on two Russian banks and two major Russian energy companies.
OFAC also designated and blocked the assets of eight Russian companies that manufacture arms, as well as certain other entities and individuals.
On July 16, 2014, the U.S. began to implement the threatened industry sector sanctions by targeting certain entities in the Russian financial, energy and defense sectors. The following is a brief update. For an overview of prior sanctions and suggestions of risk mitigation strategies, see our Holland & Knight alert, "Coping with Rapidly Expanding U.S. Sanctions on Russia," May 13, 2014.
Limited Sanctions Against Russian Financial and Energy Companies
OFAC imposed limited sanctions against the following entities by prohibiting U.S. persons from transacting in, financing, or otherwise dealing in new debt or new equity in:
Gazprombank OA0, a Russian bank that provides financial services to the Russian energy sector
Vnesheconombank (also known as VEB and the Bank for Development and Foreign Economic Affairs), a Russian government-owned bank chaired by the Russian Prime Minister
Similar sanctions were imposed against two of the largest Russian energy companies, but this sanction applies only to new debt (not new equity):
Novatek, Russia’s largest independent gas producer
Rosneft, Russia’s largest petroleum company
OFAC has clarified that “new debt” is broadly construed to mean any bonds, loans, guarantees, letters of credit, etc., with a maturity of more than 90 days, and “new equity” includes stocks, share issuances, depository receipts, or any other evidence of title or ownership issued on or after July 16, 2014. Derivative products are exempted under a new general license. These restrictions would also apply to any entity in which the designated entity has a 50 percent or more equity interest.
These prohibitions apply prospectively and do not have a legal effect on current debt or equity U.S. persons may hold in these entities. U.S. persons will not be obligated to block assets of these companies that they currently hold, or cease doing business with them. Given the broad economic reach of Novatek and Rosneft in the petroleum and natural gas world markets, blocking of such assets would have had significant economic consequences in Europe and to a lesser extent in the U.S.
However, the practical impact of the designations will likely be more far reaching than the sanctions for these entities, as their business partners assess their risk in continuing to do business with them. Additionally, any wire transfer involving these entities is likely to be subject to enhanced scrutiny by U.S. and non-U.S. banks outside of Russia. In particular, an initial interpretation is that a U.S. bank would need to reject and report to OFAC any U.S. dollar transaction meeting the above criteria – even where the lender or investor is not a U.S. person. It is also entirely possible that major U.S. banks, for risk management reasons, may cease allowing transactions involving these entities to be processed through their networks.
Designations of Russian Arms Manufacturers and Others
The U.S. added eight Russian arms companies to its Specially Designated Nationals (SDN) list, requiring U.S. persons to block the assets of, and cease engaging in transactions with, these entities, including: Almaz-Antey, Federal State Unitary Enterprise State Research and Production Enterprise Bazalt, JSC Concern Sozvezdie, JSC MIC NPO Mashinostroyenia, Kalashnikov Concern, KBP Instrument Design Bureau, Radio-Electronic Technologies, and Uralvagonzavod. The designation of the KalashnikovConcern, which manufactures small arms sold around the world, will likely have an impact in many countries. OFAC has already issued guidance for persons who own or may be buying Kalashnikov weapons.
The U.S. also added other entities to the SDN list (which would require U.S. persons to block their assets). This includes the Feodosiya Enterprise, which operates a key shipping facility in Crimea for the oil imports and exports and which had been nationalized by the separatist government in Crimea, as well as the separatist Luhansk People's Republic and Donetsk People’s Republic, and several more key Russian officials and separatists, including Sergey Beseda, head of the Russian FSB, Oleg Savelyev, Russian Minister for Crimean Affairs, Sergei Neverov, Deputy Chairman of the Duma, Igor Shchegolev, an aid to the President, and Aleksandr Borodai, the self-declared prime minister of the Donetsk People’s Republic.
The entities designated as SDNs by OFAC (but not those subject to limited sanctions) were also added to the “Entity List” administered by the U.S. Department of Commerce Bureau of Industry and Security (BIS). This adds more restrictions in that no person (including foreign persons) can export, reexport, or sell U.S.-origin goods to these entities without a license from BIS. In fact, there would be a presumption of denial of such a license request.
What Is Next for Sanctions Against Russia?
As with past rounds of sanctions against Russia, these sanctions are measured and incremental and do not as yet target an entire Russian economic sector. The European Union (EU) will likely roll out more limited sanctions before the end of this month. The EU’s reluctance to impose broader sanctions will also likely constrain the Obama administration to some extent from unilaterally imposing broad sanctions against all entities in a Russian industry sector. Nevertheless, it is not unlikely that the Obama administration would ratchet-up sanctions again if Russia continues its thinly veiled support of Ukrainian separatists.
OFAC issued limited guidance with the release of these new sanctions, and as with other new sanctions, it is not unlikely that additional clarifications, general licenses, or informal guidance will follow as companies try to determine how to comply with these new sanctions.