Following weeks of diplomatic discussions, on July 16 the United States and European Union announced a new round of sanctions against Russia over the continued crisis in Ukraine. Although the US and EU have coordinated these announcements in an effort to present a united front, the sanctions vary in scope and legal implications for US, EU, and Russian companies as well as global financial institutions. This client alert provides an update to a series of international economic sanctions alerts on the situation in Ukraine.
United States Escalates Sanctions against Russia
On July 16, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposed new sanctions against two large Russian financial institutions, two major Russian energy companies. The sanctions imposed on these entities fall short of the full-scale sectoral sanctions authorized by Executive Order (E.O.) 13662, but, given the significance of the entities involved, they could be quite disruptive. OFAC also designated as Specially Designated Nationals (SDNs) eight Russian defense industry entities, four Russian government officials, three Ukrainian separatists, and one Crimean company.
The Obama administration imposed these new sanctions pursuant to its authority under the following three Executive Orders announced in March 2014.
E.O. 13660: E.O. 13660 authorizes the imposition of sanctions against individuals and entities the US government determines to be undermining the sovereignty, peace, security, stability, or territorial integrity of Ukraine. Several separatists and a Crimean company were sanctioned pursuant to E.O. 13660. These individuals and entities are designated as Specially Designated Nationals (SDNs), their assets are frozen, they are prohibited from accessing the US financial system, and individuals are prohibited from traveling to the US.
E.O. 13661: E.O. 13661 authorizes the imposition of sanctions against individuals the US government determines to be Russian government officials and entities determined to operate in the Russian arms sector. The administration announced new sanctions against government officials and defense companies pursuant to E.O. 13661. Similarly, these individuals and entities are designated as SDNs, their assets are frozen, they are prohibited from accessing the US financial system, and individuals are prohibited from traveling to the US.
E.O. 13662: Perhaps most importantly, OFAC imposed a new set of sanctions pursuant to E.O. 13662, which authorizes the imposition of sanctions against individuals and entities determined by the U.S. government to operate in certain sectors of the Russian economy, including the financial services, energy, metals and mining, engineering, and defense industries. In imposing sanctions against two Russian financial entities and two Russian energy companies pursuant to E.O. 13662, OFAC created a new type of economic sanction with a new set of permissible and prohibited transactions. Notably, OFAC did not block the property of these four entities or place them on the SDN list. Instead OFAC placed them on a new list called the Sectoral Sanctions Identifications List (SSI List).
US persons cannot undertake the following activities with respect to entities on the SSI List:
providing or transacting any business – involving either the banks or the energy companies – with respect to new debt with a maturity of more than 90 days (pre-existing short term debt is not affected);
transacting in new equity issued by the banks; and
performing any of the above activities with respect to entities owned 50 percent or more by entities sanctioned pursuant to E.O. 13662.
Other transactions involving any property in which one or more of these entities has an interest remain permitted, and OFAC explicitly stated that US banks may continue to provide these Russian banks with correspondent banking services. OFAC also issued General License No. 1, which permits US persons to continue to transact business with respect to derivatives linked to debt or equity of any of the listed entities even if that debt or equity is issued on or after July 16, 2014 or has a maturity of longer than 90 days.
The new sanctions, which different than the targeted asset freezes and travel bans previously imposed by the Obama administration, chart a middle course and appear strategically designed not to impact US companies that had lobbied against unilateral US sanctions. Faced with this pressure from the business community, the Obama administration made repeated efforts to act in concert with the EU. Despite diplomatic pressure from Washington, strong economic ties between Russia and some of the EU member states resulted in some disagreement among the 28-member bloc over imposing the more punitive measures sought by Washington.
Increasing U.S. Congressional Pressure
The announcement of these new sanctions comes as the Obama administration faces mounting pressure from the U.S. Congress to impose stronger sanctions against Russia. In a recent Senate Foreign Relations Committee hearing, committee leaders Chairman Robert Menendez (D-NJ) and Ranking Member Bob Corker (R-TN) expressed concern that the Obama administration had not acted faster in levying tougher sanctions on Russia. The Senators suggested a willingness to introduce a new bipartisan sanctions bill if the Obama administration did not enact stronger sanctions against Russia before the EU left for summer break and the U.S. Congress adjourned for August recess. The Obama administration’s July 16 sanctions announcement will likely prevent further action by Congress until it returns in September.
European Union Announces Sanctions Package against Russia
On July 16, the EU also announced that it will expand its sanctions regime against Russia to include certain Russian entities, which is a policy change from prior sanctions that only targeted Russian, Ukrainian, and Crimean individuals and expropriated Crimean entities connected to Russia’s annexation of Crimea and the crisis in Ukraine. Although the EU sanctions were not expected to go as far as those announced in Washington, they will target entities “that are materially or financially supporting actions undermining or threatening Ukraine’s sovereignty, territorial integrity and independence.” The European Council will enact the necessary legal instruments, compile the new list of entities by the end of July, and will consider “the possibility of targeting individuals or entities who actively provide material or financial support to the Russian decision-makers responsible for the annexation of Crimea or the destabilisation of eastern Ukraine.”
Moreover, the European Council has asked the European Investment Bank to suspend any new financing operations in Russia, and EU members are negotiating a similar suspension with the European Bank for Reconstruction and Development. The European Union External Action Service is proposing additional measures to restrict investment in Crimea and Sevastopol. In addition, the European Commission will re-assess EU-Russia cooperation programs and determine whether to suspend the implementation of EU bilateral and regional cooperation programs with Russia.
The Russian Federation Considers Responses to US and EU
With new sanctions from both the US and EU, Russia may respond with similar countermeasures against the US and EU member states. On July 8, Deputy Finance Minister Sergey Storchak said that Russia would prepare “serious countermeasures” if the sectorial sanctions are imposed. Russia already sanctioned a number of Obama administration officials and members of Congress for their support of US sanctions against Russia and targeted two American credit card companies, Visa and MasterCard. Therefore, it is possible that Russia could target US and EU government officials as well as companies and financial institutions.
Squire Patton Boggs’ offices in Washington, London, Brussels and Moscow are continuing to monitor all developments.