The Obama Administration announced new sanctions on Wednesday, July 17, 2014, targeting key companies in Russia’s energy, financial and defense sectors, as well as other companies, regional separatist governments, and individuals associated with the unrest in Ukraine.
The new sanctions against Russia are the most severe so far and can be divided into two parts: (1) restrictions on certain financial transactions with four of Russia’s largest financial and energy companies, and (2) an expansion of the “Specially Designated Nationals and Blocked Persons” (“SDN”) list published by the Office of Foreign Assets Control (OFAC) to include additional entities and individuals whose property are now blocked. In addition, the EU is also likely to expand its sanctions criteria and designate additional Russian companies by the end of the month.
A. Sectoral Sanction Designations
For the first time since the Ukraine crisis began, OFAC sanctioned certain Russian companies under Executive Order 13662, which allows the Secretary of the Treasury to sanction companies that operate in strategic sectors of the Russian economy, including financial services and energy. Using this authority, OFAC announced certain restrictions on debt and equity transactions with four Russian companies, identifying them on a new “Sectoral Sanctions Identifications” (SSI) list, but did not block the property of these four companies.
Under the sanctions announced, U.S. persons and others within the United States are prohibited from “transacting in, providing financing for, or otherwise dealing in new debt1 of longer than 90 days maturity or new equity”2 of the following entities operating in Russia’s financial sector, their property, or their interests in property:
- Gazprombank OAO
- Vnesheconombank (a.k.a. Bank For Development And Foreign Economic Affairs (Vnesheconombank) State Corporation)
Furthermore, the above prohibitions, except for the restriction on dealing in new equity, also apply to the following energy companies:
- OAO Novatek
- Open Joint-Stock Company Rosneft Oil Company
The above entities are identified on the new Sectoral Sanctions Identifications (“SSI”) List; they have not been added to OFAC’s Specially Designated Nationals and Blocked Persons (“SDN”) List (described below). The SSI list includes persons determined by OFAC to be operating in sectors of the Russian economy identified pursuant to Executive Order 13662. This list provides identification information about these sanctioned entities, as well as the specific transactions that are prohibited with respect to them. The prohibitions above also apply to companies that are 50 percent or more owned by companies designated on the SSI list. However, unlike the SDN List (see below), the property and interests in property of persons identified on the SSI list (or entities 50 percent or more owned by such persons) are not automatically blocked, unless otherwise listed as an SDN or indicated as such in the SSI List.
OFAC states that all other transactions with entities designated on the SSI list or involving their property “are permitted, provided such transactions do not otherwise involve property or interests in property of a person” blocked under other sanctions authority. OFAC guidance also states that “transacting in, providing financing for, or otherwise dealing in any debt or equity issued prior to the sanctions’ effective date (July 16, 2014) by, on behalf of, or for the benefit of the entities operating in the financial and energy sectors that are identified in these directives is permissible.”
OFAC guidance further notes that “U.S. financial institutions may continue to maintain correspondent accounts and process U.S. dollar-clearing transactions for the persons identified in the directives, so long as those activities do not involve transacting in, providing financing for, or otherwise dealing in prohibited transaction types identified by these directives.”
B. Expansion of SDN List
In addition to the sanctions described above, OFAC also added additional entities and individuals to its SDN List, effectively blocking the property and any transactions by U.S. persons with such designated persons.
OFAC designated the following 11 entities as SDNs, including several prominent Russian defense and arms manufacturers, on July 16, 2014:
- Donetsk People’s Republic, Ukraine
- Federal State Unitary Enterprise State Research And Production Enterprise Bazalt, Russia
- Feodosiya Enterprise, Ukraine
- Joint Stock Company Concern Radio-Electronic Technologies, Russia
- Joint Stock Company Concern Sozvezdie, Russia
- Joint Stock Company Military-Industrial Corporation NPO Mashinostroyenia, Russia
- Joint-Stock Company Concern Almaz-Antey, Russia
- Kalashnikov Concern, Russia
- Konstruktorskoe Byuro Priborostroeniya Otkrytoe Aktsionernoe Obshchestvo, Russia
- Luhansk People’s Republic, Ukraine
- Uralvagonzavod, Russia
OFAC also designated the following five Ukrainian and Russian individuals as SDNs:
- Beseda, Sergey – Commander of the Fifth Service of the FSB; Commander of the Service for Operational Information and International Communications of the FSB; FSB Colonel General; Colonel-General
- Borodai, Aleksandr
- Neverov, Sergei Ivanovich – Deputy Chairman of the State Duma of the Russian Federation; Member of the State Duma Committee on Housing Policy and Housing and Communal Services
- Savelyev, Oleg Genrikhovich – Minister for Crimean Affairs
- Shchegolev, Igor – Aide to the President of the Russian Federation
To see the additional SDN designations, see here.
C. European Union (EU) Sanctions
The EU will also likely impose tougher sanctions against Russia as a result of further escalation in eastern Ukraine.
According to the Associated Press, the European Council is considering expanding the scope of European sanctions to target Russian companies and persons “who actively provide material or financial support to the Russian decision-makers responsible for the annexation of Crimea or the destabilization of Eastern Ukraine.” This additional designation authority would greatly expand the number of Russian companies that could be subject to EU asset freezes and travel bans.
The EU is also likely to designate Russian companies “that are supporting materially or financially actions undermining or threatening Ukraine’s sovereignty, territorial integrity and independence,” according to a leaked communique by the EU council. The European Council will request EU’s foreign ministers to develop a list of targeted persons and entities by the end of July.
The EU will all request that the European Investment Bank (EIB) suspend the financing of new public sector projects in Russia. Member states will also “coordinate their positions” within the European Bank for Reconstruction and Development (EBRD) to suspend financing of new projects in Russia. The EU also is considering cutting off funds for certain Russian development programs, with the exception of financing for programs designed to strengthen Russia’s civil society.
Finally, the European Council is considering further restrictions on transactions with Crimea and Sevastopol and has requested the European Commission and the European External Action Service (EEAS) to “present proposals for additional measures, in particular, on restricting investments.”
1 According to OFAC, “[t]he term debt includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper.”
2 According to OFAC, “[t]he term equity includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership.”