At multiple points since March 2014, the Obama administration has expanded sanctions in response to the ongoing crisis in Ukraine. Commercial enterprises need to understand how these expanded sanctions apply to their direct or indirect business in Russia.
The administration’s “sectoral sanctions” target key sectors of the Russian economy. This is a new type of economic sanction, and it raises novel questions and compliance challenges for the business community. To be sure, the sectoral sanctions are not the only sanctions that the administration has imposed in response to the Ukraine crisis. The administration also continues to add Russian companies and individuals to the List of the Specially Designated Nationals and Blocked Persons (SDN List http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx) and new restrictions on exports to Russia under the Export Administration Regulations. U.S. persons are prohibited from engaging in virtually all business dealings with SDNs and are required to block (freeze) any assets in which an SDN has an interest.
Sectoral sanctions are meant to be more tailored. They allow the administration to craft more limited sanctions targeted at particular companies in sensitive sectors of the Russian economy. Companies targeted for sectoral sanctions are not added to the SDN List, but to the new Sectoral Sanctions Identifications List (SSI List http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/ssi_list.aspx). The administration has repeatedly made the point that, unlike SDNs, the companies on the SSI List are subject only to specified sanctions, while U.S. persons may continue to engage in other forms of business with listed companies.
Sectoral sanctions have been implemented through four directives targeting three economic sectors: energy, finance, and defense. As detailed below, U.S. persons are prohibited from dealing in many types of new debt and new equity issued by targeted persons (or companies in which a targeted person holds a sufficiently large stake). Other sectoral sanctions require U.S. persons to withdraw their goods and services from certain Russian petroleum exploration projects.
Sectoral sanctions apply not only to the companies named on the SSI List, but also to any other company that is 50% or more owned by a listed company. In this regard, the SSI List works like the SDN List. The Office of Foreign Assets Control (OFAC) has published formulas for calculating ownership percentages of indirectly-owned companies and for aggregating ownership percentages when more than one SSI List company has a stake. When OFAC speaks of a sectoral sanction applying to a targeted person, its “property” or its “interest in property,” U.S. persons must consider the holdings and subsidiaries of targeted persons.
Directive 1: Targets six companies in the Russian financial services sector. Bars U.S. persons from engaging in all transactions in, provision of financing for, and other dealings in new debt of longer than 30 days maturity or new equity of targeted persons, their property, or their interests in property. (The Directive originally allowed debt up to 90 days.) Directive 1 has been interpreted as not allowing U.S. persons to engage in transactions where a targeted person is acting as an underwriter (but not issuer) of new equity. Current targets: Bank of Moscow, Gazprombank, Russian Agricultural Bank, Sberbank (but not its subsidiary DenizBank), VEB, and VTB Bank.
Directive 2: Targets four companies in the Russian energy sector. Bars U.S. persons from engaging in all transactions in, provision of financing for, and other dealings in new debt of longer than 90 days maturity of targeted persons, their property, or their interests in property. Current targets: Gazprom Neft, Rosneft, Novatek, Transneft. (Directive 4 also targets energy companies, including several of the same companies subject to Directive 2.)
Directive 3: Targets one company in the Russian defense sector. Bars U.S. persons from engaging in all transactions in, provision of financing for, and other dealings in new debt of longer than 30 days maturity of targeted persons, their property, or their interests in property. Current target: Rostec.
Directive 4: Targets five persons in the Russian energy sector. Bars U.S. persons from the provision, exportation, or reexportation, directly or indirectly, of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in Russia or in maritime area claimed by Russia and extending from its territory, and that involve any targeted person, its property, or its interests in property. The Administration gave U.S. persons a limited time, until September 26th, to wind down pre-existing operations and contracts prohibited by this Directive. Current targets: Gazprom, Gazprom Neft, Lukoil, Rosneft, Surgutneftegas.
While Directives 1-3 appear to be aimed mostly at financial transactions, they also have important implications for other trade. The time limits on debt that U.S. persons may extend to SSI List companies apply to payment terms and other extensions of credit.
Sectoral sanctions seem to be designed both to put economic pressure directly on the targeted companies and also to signal to Russia the prospect that more Russian companies will be sanctioned.
These new sanctions may continue to evolve. We encourage companies to keep a close eye on the news, including new types of sanctions, new targets for the sanctions, sanctions imposed by the European Union and other countries, and Russian retaliatory actions.