In response to recent events in Ukraine, the United States and European Union imposed yet another round of sanctions this week. In response, Russia is considering a number of countermeasures that may affect U.S. and EU companies operating in Russia. The new measures are introduced after the perceived failure of the 17 April pact in Geneva to deescalate the situation in Ukraine. Below we discuss the specific sanctions imposed by the U.S., EU and Russia and highlight screening solutions that companies should implement as part of a broader compliance program.
The United States, acting pursuant to previous executive orders, designated additional Russian individuals and entities and has implemented a new policy with regard to export licenses on high technology items and services that may have military application. The United States strategy remains one of gradual ratcheting of pressure against Russia and notably did not include any sector-wide economic sanctions.
The U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) designated seven Russian officials and seventeen Russian companies on the List of Specially Designated Nationals and Blocked Persons (SDN List) pursuant to previous Executive Orders. Two key individuals designated include Igor Sechin, President and Chairman of Rosneft, the giant state-owned oil company, and Sergey Chemezov, head of Rostec, a large holding company for military and industrial assets. Despite the designation of Sechin and Chemezov, neither Rosneft nor Rostec were sanctioned. All of the Russian companies designated are or are related to entities owned or controlled by individuals sanctioned previously—Arkady and Boris Rotenberg, Gennadi Timchenko, and Yuri Kovalchuk. The entities include a handful of financial institutions, but none of them is considered major. In sum, the U.S. has now designated 46 individuals and 18 companies since the crisis in Ukraine started. The new designations are in keeping with the gradual approach of U.S. economic sanctions against Russia, and include certain additional Russian individuals that were not targeted previously.
New Export Policy for High Technology Items
In conjunction with the additional sanctions, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) announced a new export policy expanding export restrictions on items subject to the Export Administration Regulations (EAR) and adding 13 Russian companies to the Entity List, which imposes additional export licensing restrictions on transactions involving such listed parties. BIS also announced that it would deny any pending applications for licenses to export or re-export any “high technology item” subject to the EAR to Russia or Crimea that contributes to Russia's military capabilities. While BIS has not publicly provided any information regarding what items are considered to be “high technology items” subject to the new policy of denial, we understand that certain microelectronics, at a minimum, are within scope. In addition, BIS announced that it would take actions to revoke any existing export licenses which meet these conditions. All other pending applications and existing licenses are expected to receive a case-by-case evaluation to determine, among other factors, their contribution to Russia's military capabilities.
Similarly, the U.S. Department of State’s Directorate of Defense Trade Controls (DDTC) announced a new export policy stating that it will deny all pending applications for the export or re-export of any high technology defense articles or services subject to the International Traffic in Arms Regulations (ITAR) to Russia or occupied Crimea that contribute to Russia’s military capabilities. DDTC, like BIS, is taking action to revoke any existing licenses which meet these conditions and will review all other pending applications and existing licenses on a case-by-case basis to determine, among other factors, their contribution to Russia’s military capabilities.
On 28 April, the Council of the European Union acting pursuant to Council Regulation (EU) No 269/2014 of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, designated 15 additional Russian officials. The extension of the EU’s sanctions list includes Deputy Prime Minister Dmitry Nikolayevich Kozak, the Deputy Chairman of the Duma (the lower house of Russia's parliament) Ludmila Ivanovna Shvetsova and Valery Vasilevich Gerasimov, Chief of Staff of Russia's armed forces. Council Implementing Regulation (EU) No 433/2014 was published in the Official Journal of the European Union on 28 April and entered into force on 29 April.
The implementation of additional EU measures, extending those persons subject to EU economic sanctions and travel bans, increases the number of individuals subject to EU measures to 48. As yet, the EU has not implemented any additional sector specific restrictions or prohibitions. However, should the current situation escalate, the EU is advanced in its consideration of potentially wide-ranging economic sanctions against certain sectors of the Russian economy, including the financial and energy sectors. Nor has the EU designated any Russian entities (state-owned or otherwise). However, under the existing EU measures any entity which is owned or controlled by any of the listed Russian individuals may also be deemed to be subject to the EU’s asset-freezing provisions. Any such assessment would be considered on a “case-by-case” basis by individual EU member states’ relevant competent authorities. As such, appropriate due diligence should be carried out to ensure that any potential transaction with any Russian (or wider) entity does not indirectly lead to an economic benefit accruing to those individuals designated under the EU measures.
The funds or wider assets of an individual subject to the EU measures which are either held in the European Union or held by any EU incorporated entity outside of the EU must be “frozen” (i.e. they cannot be dealt with in any way unless licensed). In addition, EU entities and EU nationals wherever they are located are prohibited from making any funds or assets available to or for the benefit of designated persons.
The additional EU designations follow on from wider EU trade measures aimed at restricting sensitive equipment, including military and high-tech dual use goods and technology or equipment which might be used for internal repression, for transfer either directly or indirectly from the EU to Russia. EU member states’ export control authorities are currently reviewing all outstanding export license applications and existing export licenses for the transfer of controlled goods and technology to Russia, as well as those for the transfer to and incorporation in wider third country destinations for eventual Russian end use. The impact on those companies currently exporting controlled goods and technology either directly or indirectly to Russia is likely to include the suspension of existing export authorisations and considerable delays in any outstanding export license applications.
Russia has been considering countermeasures against U.S. and EU sanctions. To date, these measures, such as visa bans on public officials, have been targeted only at U.S. and Canadian public officials and do not currently include any EU public officials. Russia also has not yet targeted officials of other countries (such as Australia or Japan) that have imposed various degrees of sanctions against Russia. No law or draft law has been announced or adopted in Russia specifically targeting foreign businesses and President Putin has indicated that he is generally against imposing countersanctions at this stage, although members of his government have brought such proposals to him. In response to the EU’s designation of 15 Russian officials, the Russian Ministry of Foreign Affairs expressed its deep “disappointment” with the EU’s actions, stating that instead of following the U.S. lead on sanctions, the EU should have acted to cause the authorities in Kiev to negotiate with representatives of Ukraine’s eastern regions.
In a separate development, last week, in response to the previous designation of Bank Rossiya by the United States on the SDN List, the Russian Federation assigned to Bank Rossiya the right to process payments made on the Russian wholesale electricity market, which should enable the bank to earn more than $100 million per year from commissions. The move raises potential issues regarding compliance with U.S. sanctions laws for any U.S. person that acquires electricity in Russia. The U.S. Government’s views on whether this action may cause a problem for U.S. persons directly or indirectly transacting with Bank Rossiya as a result of wholesale or retail purchases of electricity in Russia remains under review by the State Department and OFAC.
Recommended Compliance Measures
In order to comply with the new U.S. and EU measures, we recommend that companies:
Assess exposure to certain sectors of the Russian economy in particular, including but not limited to financial services and energy
Assess whether they engage in exports of high technology items to Russia or Crimea that may be covered by revised U.S./EU export policies
Check that their current screening procedures or those provided by any third party service provider are immediately updated to include the additional designations
Screen all parties to contemplated transactions involving Russians or Ukrainians for connections to designated individuals or entities
Assess the risk that they currently maintain any accounts or hold any funds (including shares, derivative products or debt instruments) or economic resources for or on behalf of a designated person
Consider whether they are currently engaged in any commercial activity with any entity which may be “owned or controlled” by any designated person and undertake an immediate assessment as to whether such activity should be suspended
Immediately freeze any such accounts, and other funds or assets held for or on behalf of any designated person
Refrain from dealing with the funds or assets held for or on behalf of any designated person
Prevent the making available of any funds or assets to such persons unless licensed by a relevant competent U.S./EU authority
Report any relevant findings to the appropriate U.S./EU competent authority, if necessary