Starting in March of this year, the United States imposed economic sanctions in response to Russian-led actions in Ukraine. Since March, responding to the deteriorating situation, US sanctions have continued to escalate. For companies with business relationships in or related to Russia, this alert provides a recap of the current US sanctions.
The President is empowered to impose sanctions via general statutes, primarily the International Emergency Economic Powers Act (IEEPA). Under IEEPA, the President declares a threat to the national security and foreign policy of the United States and then orders sanctions whereby “US persons” are prohibited from doing business with the specific named targets of the sanctions. Between March 6, 2014 and March 20, 2014, President Obama issued three Executive Orders imposing sanctions related to the Ukraine situation. The three executive orders can be found here.
Pursuant to his powers under IEEPA, the President can identify persons or parties that are the target of sanctions and also delegates authority to the Treasury Department’s Office of Foreign Assets Control (OFAC) to administer the sanctions, promulgate regulations and add names to the list of targeted persons or entities. As a result, on May 2, 2014, OFAC published the Ukraine-Related Sanctions Regulations, 31 CFR Part 589.
From March 6 through this writing, either specifically by the three Executive Orders or by determination of OFAC, numerous persons and entities have been listed as the target of the Ukraine-related sanctions. These names have been added to OFAC’s Specially Designated Nationals (SDN) List. All the Ukraine-related listings can be found by searching OFAC’s SDN List here.
Any and all transactions by US persons with the parties on the SDN List are prohibited. Thus, to the extent a US person was already involved in a transaction with a person or entity that is subsequently listed, the US person has an obligation to “block” (i.e., freeze, stop, etc.) the transaction involving the listed person or entity. US persons are also prohibited from “facilitating” a non-US persons’ dealing with persons or entities on the SDN List. Civil and criminal penalties can be imposed against persons or entities that violate the sanctions’ prohibitions.
On July 16, 2014 and on July 21, 2014, under the authority delegated to it, OFAC announced certain additions to the Ukraine-related sanctions.
First, on each of those dates, OFAC added several new persons and entities to the SDN List. Any and all existing and future transactions with these persons or entities are prohibited.
Second, OFAC issued two directives pursuant to Executive Order 13662 of March 20, 2014. In E.O.13662, President Obama specifically authorized OFAC to target “such sectors of the Russian Federation economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, such as financial services, energy, metals and mining, engineering, and defense and related materiel.” The two directives carry out this authorization by prohibiting certain transactions on a going-forward basis. The persons or entities targeted by Directives 1 and 2 in the Sectoral Listing Under Directive 1 and 2 can be found here.
Directive 1 of E.O. 13662 prohibits transacting in, providing financing for or otherwise dealing in debt with a maturity of longer than 90 days or equity if that debt or equity is issued after on or after July 16, 2014 (the applicable sanctions effective date) (“new debt” or “new equity”) by, on behalf of, or for the benefit of the persons operating in Russia’s financial sector named under Directive 1, their property, or their interests in property. The persons or entities targeted by Directive 1 are listed in the directive.
Directive 2 of E.O. 13662 separately prohibits transacting in, providing financing for or otherwise dealing in new debt – issued on or after July 16, 2014 – of greater than 90 days maturity by, on behalf of or for the benefit of the persons operating in Russia’s energy sector named under the Directive 2, their property, or their interests in property. (Note that Directive 2 does not contain the new equity provision.) The persons or entities targeted by Directive 2 are listed in the directive.
These two directives are not a blocking action; therefore, at this time, pre-existing transactions are not affected. Nor are the persons or entities identified in Directives 1 and 2 added to the SDN list.
As of the date the persons or entities are placed on the Sectoral Listing (July 14 or July 21), US persons cannot enter into and must reject transactions or dealings that are described and prohibited by the two directives.
Concurrent with the directives, OFAC has published guidance addressing items such as (1 ) the definition of debt, (2) the maintenance of correspondent accounts and processing of U.S. dollar-clearing transactions, (3) derivative products, (4) the 50 percent ownership rule and other useful topics.
The United States has also imposed other targeted sanctions on Russian entities through its export and reexport control regime. In particular, the US Department of Commerce's Bureau of Industry and Security has added certain parties to its Entity List and suspended export licenses for certain items and has imposed controls on certain items for use in Russia's energy sector intended for exploration or production from deepwater (greater than 500 feet), Arctic offshore or shale projects that have the potential to produce oil or gas in Russia.
Will the sanctions expand?
Finally, the conflict related to Ukraine does not appear to be subsiding. Indeed, all indications are to the contrary. For example, on August 6, Russia retaliated against sanctions by prohibiting, for one year, all imports of meat, fish, fruit, vegetables, milk and milk products from the US, Canada, all 28 EU countries, Norway and Australia.
If the issues underlying the conflicts related to Ukraine are not resolved diplomatically, it is expected that the US (as well as the EU and others) will further expand the economic sanctions. If the program becomes more expansive, it is not unreasonable to expect additional prohibitions on US persons dealing with other categories of transactions, industries or sectors. US persons should prepare accordingly and continue to monitor this evolving sanctions program.
This summary only encompasses the basic concepts embodied in the Ukraine-related sanctions. Sanctions compliance is a factually intensive exercise and our team of sanctions professionals will be pleased to help you navigate these thorny issues.
In addition, to the extent that your company has business relationships in or related to Russia that have not yet been impacted by sanctions, you should consider:
Cataloging any and all business ties to Russia
Assessing the business consequences (up and down the transactional chain) of any prohibitions that may impact your business.
Assessing the legal consequences (up and down the transactional chain) of any prohibitions that may impact your business.
Implementing appropriate business and legal measures to protect against or minimize the consequences of future sanctions prohibitions.