On December 11, 2014, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) released new guidance related to existing U.S. sanctions against Russian entities designated on the Sectoral Sanctions Identification List (“SSI List”). Specifically, OFAC released the following three Frequently Asked Questions (FAQs) on its website:
- FAQ 419 providing guidance regarding the treatment of deferred payment terms under Directives 1, 2 and 3
- FAQ 420 clarifying the meaning of “production” in Directive 4
- FAQ 421 explaining the meaning of “Arctic offshore” projects in Directive 4.
FAQ 419 – Commercial Payment Terms with SSI Entities
Pursuant to Directives 1, 2 and 3 of the SSI List, U.S. persons are prohibited from engaging in transactions involving new debt of longer than either 30 or 90 days’ maturity and, in certain cases, are also prohibited from engaging in transactions of new equity. Whether the 30-or 90-day period applies depends on whether an SSI entity is designated pursuant to Directive 1, 2 or 3. OFAC has previously stated that prohibited extensions of debt include bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers’ acceptances, discount notes or bills, or commercial paper.
FAQ 419 clarifies that U.S. persons may be prohibited from entering into deferred payment terms for commercial transactions with entities designated on the SSI List pursuant to Directives 1, 2 or 3 because such payment terms may constitute a prohibited extension of debt. Specifically, OFAC defines limits of payment terms that would not constitute prohibited “debt” as follows:
- With respect to sales of goods, U.S. persons may “extend payment terms of up to 30 or 90 days from the point at which title or ownership of the goods transfers to the SSI entity.”
- With respect to the provision of services to, subscription arrangements involving, and progress payments for long-term projects involving SSI entities, U.S. persons may “extend payment terms of up to 30 or 90 days from the point at which a final invoice (or each final invoice) is issued.”
This FAQ serves as an important reminder that these restrictions apply beyond large capital-market transactions. Indeed, U.S. persons must carefully review the terms of payment for all commercial transactions with SSI entities to determine whether they are prohibited under U.S. sanctions.
FAQ 420 – Clarification of the Term “Production”
Pursuant to Directive 4 of the SSI List, U.S. persons are prohibited from providing, exporting or reexporting, directly or indirectly, goods, services or technology in support of exploration or production for deepwater, Arctic offshore or shale projects that have the potential to produce oil in the Russian Federation or a maritime area claimed by the Russian Federation and extending from its territory, to SSI entities designated pursuant to Directive 4, their property or interests in property.
FAQ 420 explains that the term “production” in this Directive 4 refers to “the lifting of oil to the surface and the gathering, treating, field processing, and field storage of such oil.” The production stage ends “when extracted oil is transported out of a field production storage tank or otherwise off of a field production site.” Furthermore, the FAQ clarifies that Directive 4 does not restrict transactions limited to “transportation, refining, or other dealings involving oil that has already been extracted from a deepwater, Arctic offshore, or shale project and transported out of a field production storage tank or otherwise off of a field production site.”
Consequently, OFAC has clarified that this Directive applies to “upstream” activities and generally does not apply to the “midstream” and “downstream” oil and gas sector. For example, Directive 4 does not restrict U.S. persons from providing a vessel or other equipment to transport oil that was extracted from a deepwater project in Russia and that is no longer located at a field production site. This Directive also does not prohibit U.S. persons from being involved in the refining of such oil.
FAQ 420 – Clarification of the Term “Arctic Offshore”
As noted above, the prohibitions under Directive 4 of the SSI List apply to “deepwater,” “Arctic offshore” or “shale projects” with the potential to produce oil in the Russian Federation or in a maritime area claimed by the Russian Federation and extending from its territory. With the issuance of this FAQ, OFAC has now clarified the scope of all categories of projects subject to restrictions under Directive 4, as follows:
- Deepwater: Projects involving underwater activities at depths of more than 500 feet (FAQ 413);
- Arctic offshore: Projects that have the potential to produce oil in areas that involve drilling operations originating offshore and are located above the Arctic Circle; however, the Directive does not apply to “horizontal drilling operations originating onshore where such drilling operations extend under the seabed to areas above the Arctic Circle” (FAQ 421)
- Shale: Projects that have the potential to produce oil from resources located in shale formations; consequently, unless it is a “deepwater” or “Arctic offshore” project, Directive 4 does not apply to exploration or production through shale to locate or extract oil or gas in reservoirs (see FAQ 418).
The scope of the projects above generally aligns with the scope of the same projects under European Union sanctions against Russia.