Events are rapidly evolving with respect to Russia’s recent military incursion into, and subsequent annexation of, Ukraine’s Crimean Peninsula. The Obama Administration considers Russia’s acts to be clear violations of international law and believes Russia should incur significant costs for threatening the peace, stability and security of Ukraine and the region. To that end, the United States and other nations have implemented sanctions against Russia.
Initially, the U.S. sanctions targeted particular individuals engaging in or responsible for the conduct in Ukraine. However, as Russian President Vladimir Putin continues to move forward with annexing Crimea, sanctions are being rapidly increased. President Barack Obama’s most recently issued Executive Order (EO) sets out a framework for sanctioning key sectors of Russia’s economy.
This update summarizes the U.S. sanctions issued to date, additional sanctions that may be forthcoming, and provides practical steps U.S. businesses may wish to take now in light of the changing circumstances in Ukraine.
Summary of U.S. Sanctions
U.S. sanctions currently include three EOs issued by President Obama under the International Emergency Economic Powers Act (IEEPA), among other legal authorities. The EOs are as follows:
This initial EO, issued on March 6, declared a national emergency and imposed sanctions targeted at persons involved in the following four activities:
Undermining the democratic processes or institutions of Ukraine;
Threatening the peace, security, stability, sovereignty or territorial integrity of Ukraine;
Misappropriating state assets of (or an economically significant entity in) Ukraine; or
Having asserted governmental authority over Ukraine without the authorization of the Ukrainian government.
These sanctions block (i.e., “freeze”) the property and interests in property of such persons, which are to be designated under the EO by the Secretary of the Treasury, in consultation with the State Department. Such persons are added to the Treasury Department’s Office of Foreign Assets Control’s (OFAC) Specially Designated Nationals (SDN) List. Also blocked is the property, and interests in property, of any persons owned or controlled by, or acting or purporting to act for, or on behalf of, such listed persons. OFAC considers a person controlled by an SDN if, among other factual scenarios, the SDN has a 50% or more ownership interest in the person. Such a person is blocked even if the person is not specifically listed on the SDN list. The entry into the United States of such blocked persons has also been suspended.
As a result of being placed on the SDN list, U.S. persons are prohibited from dealing with such persons and are required to block any property of such person in their possession. At the time of issuance, EO 13660 was only a framework and no individuals were listed as targets of the sanctions.
On March 17, EO 13661 was issued to expand sanctions on Russia for its action in Crimea. This EO directly targets Russia and allows the Treasury Department to block the assets of individuals in the following three categories:
Officials of the government of the Russian Federation;
Persons found to operate in arms or a related materiel sector in the Russian Federation; and
Persons owned or controlled by, or acting on behalf of, such persons, or that have materially assisted, sponsored or provided financial, material or technological support for, or goods or services to, or in support of, such persons.
EO 13661 sanctions seven high-ranking Russian officials, including a presidential adviser to President Putin, the deputy prime minister of the Russian Federation, and two State Duma deputies, among others.
At the same time, OFAC designated four individuals under the original EO 13660, including Crimean separatists, as well as ousted Ukrainian President Viktor Yanukovych.
Most Recent EO
On March 20, President Obama issued a new EO that further expands sanctions against Russia. This EO creates a sanctions framework aimed at disrupting the Russian economy. These new sanctions target sectors of the Russian economy and those persons and entities working within such sectors. The EO states that the Russian sectors and entities to which the sanctions will actually be applied are to be determined by the Treasury Department in consultation with the State Department. The Obama administration has stated that this is part of a process to address the threat of a further Russian incursion into southern and eastern Ukraine, outside the Crimean Peninsula.
No such determinations have yet been made, although the EO lists examples of key sectors of the Russian economy that could be targeted for sanctions:
Metals and mining
Defense and related materiel
At the same time, OFAC also issued a list of additional names for inclusion under EO 13661. The list includes 20 individuals that are senior Russian government officials and associates that wield significant power and influence in Russia and its economy. It also designates a bank, Bank Rossiya, because of its apparent holding of significant resources associated with such Russian officials.
Possible Additional Sanctions
The Obama administration has continued to emphasize that it is considering a wide range of options in response to developing events in Ukraine. As a result, additional sanctions may be implemented and will depend largely on the actions of the Russian government going forward in Crimea and elsewhere in Ukraine.
As noted, the present sanctions target individuals and now include a framework for sanctioning key sectors of the Russian economy. This sanctions structure does not amount to an embargo of Russia and does not block U.S. persons from entering into transactions in or with Russia, or with state-owned enterprises, or investing in Russia (except with respect to the blocked individuals). If Russia continues its course of action in Ukraine, however, additional restrictions, including a full embargo, could be implemented. Other options may include suspension of export licenses or license applications for defense articles and dual-use items to Russia.
The European Union and others have also issued Ukraine-related sanctions against Russia. The EU sanctions target individuals, placing them on a list similar to the U.S. SDN list. The United Kingdom has suspended licenses and license applications for exports to the Russian military that could be used against Ukraine. Because the United States is coordinating sanctions with its European allies, the sanctions of such allies and the United States are likely to proceed along similar lines.
The U.S. Congress could also enact sanctions in addition to those imposed by the Obama administration. Some members of Congress have urged immediate and broad sanctions against Russia. Congressional sanctions against Russia could be effective immediately upon enactment.
Finally, Russia has responded by imposing very limited sanctions on U.S. persons and indicated it may impose more sanctions against the United States. Thus, it is possible that U.S. persons or assets in Russia could be subject to restrictions imposed by the Russian government. The Russian government has signaled that it will continue to impose sanctions against the United States in tit-for-tat retaliation, although President Putin’s most recent statements indicate an unwillingness to impose further restrictions.
Steps U.S. Companies Can Take Now
Make certain your company’s prohibited party screening list is up to date and reflects new names and entities that rapidly are being sanctioned. The Obama administration has stated that the current designations are only the beginning of additional ones that will be included on the U.S. SDN list.
Review all your current or in-progress investments, operations or transactions in or involving Russia; in particular, consider whether your involvement in Russia is within the sectors named in the most recent EO.
Carefully consider the possibility that future sanctions put at risk existing or new business opportunities in Russia. To the extent possible, consider delaying current investment plans in Russia.
If your company has assets or personnel located in Russia, consider what to do with them in the event further U.S. sanctions prohibit transactions in or with Russia generally. In addition, consider the impact of any retaliatory Russian sanctions on the status of U.S.-owned assets and U.S. personnel located in Russia.
Review current contracts with Russia and determine what would need to be done to terminate them if needed. With the rapidly expanding sanctions, the termination of contracts may need to be done quickly.
Global companies need to keep apprised of, and compliant with, non-U.S. sanctions that may impact their business, such as those issued by the EU, UN, Canada and others.