U.S. and EU Ratchet Up Coordinated Sanctions on Russia

Kelley Drye Client Advisory

The United States and European Union recently implemented enhanced, coordinated sanctions on Russia in response to the continuing situation in Ukraine.

New U.S. measures

The U.S. measures include new restrictions on Russia’s energy sector and enhanced capital restrictions.  The new energy restrictions generally bar U.S. persons from providing goods, services, or technology to Lukoil, Gazprom Neft, Gazprom, Surgutneftegas, or Rosneft in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in Russia.  The Office of Foreign Assets Control (OFAC), the agency primarily responsible for administering U.S. sanctions, issued a general license to wind down activities that are newly prohibited.  All wind down activities must be concluded before September 26, 2014 and be reported to OFAC within 10 business days.  These measures come on top of restrictions previously issued by the Commerce Department on the supply of certain dual use items for use by the energy sector in Russia. Recent discussions with Commerce Department licensing personnel indicate that the agency is interpreting its prior round of sanctions on Russia to apply to a broad range of deepwater, Arctic offshore, and shale (fracking) activities in Russia, including sales of certain items (e.g. pumps and chemicals) that would assist with downstream production from those sources.  Licensing personnel said that U.S. Customs and Border Protection officers are seizing many outbound shipments from the U.S. destined for Russian oil and gas production.  They recommended that proposed exports to the sector obtain formal export licenses in many cases, or risk seizure.  The seizure process triggers a Commerce Department  license review and can potentially result in forfeiture proceedings and/or accusations of export violations.

New U.S. measures also include updates to previously issued financial sanctions, barring U.S. persons from dealing in new equity or debt of longer than 30 days maturity issued by targeted parties in the defense and financial sectors.  OFAC added Sberbank and Rostec as companies subject to these restrictions. The prohibition on dealing in new debt of longer than 90 days remains in place for targeted companies in the energy sector.  OFAC added AK Transneft and Gazprom Neft as companies subject to the energy sector financing prohibitions.  OFAC also added explicit prohibitions on conspiracies to violate the sanctions and on transactions that evade or avoid, have the purpose of evading or avoiding, cause violations of, or attempt to violate the sanctions.

Five new entities were added to OFAC’s Specially Designated Nationals list and ten new entities were added to the Commerce Department’s Entity List of prohibited parties.

New EU measures

The EU’s most recent sanctions impose new restrictions on the export of dual use goods and services to certain Russian companies, expands restrictions on services related to oil exploration and production, tightens restrictions on services related to military goods, further restricts Russian access to capital markets, and expands the list of Designated Persons.

The expanded dual use restrictions prohibit the export of any dual use goods or technology to listed Russian companies. The new rule expands on a prior prohibition barring the provision dual use goods when intended for military use or by a military end user. The current list of businesses subject to the expanded prohibition are all involved in Russia’s defense sector: JSC Sirius; OJSC Stankoinstrument; OAO JSC Chemcomposite; JSC Kalashnikov; JSC Tula Arms Plant; NPK Technologii Maschinostrojenija; OAO Wysokototschnye Kompleksi; OAO Almaz Antey; and OAO NPO Bazalt.

The new EU rules on oil exploration and production services prohibit the provision of drilling, well testing, logging and completion services, and supply of specialized floating vessels for deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia.

The EU also tightened its restrictions on the provision of services related to military goods and technology, barring the provision of insurance and reinsurance related to goods and technology listed in the Common Military List.

The new capital market restrictions expand existing sanctions on Sberbsnk, VTB bank, Gazprombank, Vnesheconombank, and Rosselkhozbank to prohibit the provision of services to or the dealing in transferable securities and money-market instruments with a maturity exceeding 30 days. The new rules also expand these prohibitions to transferable securities and money-market instruments issued by OPK OBORONPROM, United Aircraft Corporation, Uralvagonzavod, Rosneft, Transneft or Gazprom Neft and any entity that is 50% or more owned by the listed companies or acting on their behalf.

Finally, the EU added 24 individuals to its list of Designated Persons, barring dealings with those individuals and any entities owned or controlled by the designated person. The newly added individuals include separatists in eastern Ukraine, Russian politicians, and oligarchs.

The new EU provisions include grandfathering provisions for certain activities occurring prior to September 12, 2014.