International Trade & Compliance Advisory | May.05.2014
On April 28, 2014, the United States and the European Union (EU) announced a fourth expansion of sanctions in response to events in southern and eastern Ukraine. The United States extended "blocking" sanctions to an additional 7 Russian individuals and 17 Russian companies. The United States also announced its intention to begin revoking export licenses for transfer of advanced technology items to Russia. The EU expanded blocking sanctions to another 15 Russian and Ukrainian individuals. Other jurisdictions such as Canada and Japan are also enlarging sanctions against Russia.
Apart from sanctions against Russian and Ukrainian individuals (66 by the United States and 45 by the EU) and against 19 companies by the United States, U.S. and EU trade and investment with Russia generally remain unrestricted. Many have observed that the sanctions prohibit only a tiny fraction of business involving Russia. But uncertainties about U.S. and EU authorities' application of existing sanctions and the likelihood of further expansion of sanctions present acute challenges for multinational companies, particularly given substantial legal penalties and reputational damage from sanctions violations.
In this fluid and uncertain environment, at least three steps are advisable as multinationals make decisions about whether to maintain or extend Russian business interests. First, companies should be as well informed as possible about facts relevant to sanctions compliance, such as ownership profiles of Russian counterparties, and about existing and anticipated sanctions prohibitions. Second, companies should insist on far-reaching contractual and other written protections to reduce potential sanctions liability. Finally, companies should have well developed plans to extricate themselves from Russian business arrangements as needed depending on sanctions developments.
U.S. Sanctions: United States sanctions relating to Russia have taken three principal forms. First, under executive orders promulgated in March 2014, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) has "blocked" 45 Russian and Ukrainian individuals and 19 companies, including several Russian banks and energy sector companies. Most recent designations involve politicians and businesspeople close to President Vladimir Putin, including most notably Mr. Igor Sechin, the head of Rosneft, the largest state-owned oil company, and Mr. Sergei Chemezov, CEO of the Russian state-holding company Rostec. When OFAC designates persons as being blocked, they appear on OFAC's List of Specially Designated Nationals (SDN List).
The "blocking" measures freeze designated individuals' and entities' assets located in the United States or otherwise held by U.S. persons and generally forbid U.S. persons to engage in transactions in which these sanctioned persons/entities have a direct or indirect interest. Apart from the designees themselves, blocking prohibitions extend to companies that are 50%-or-more owned by designated individuals and entities.
That a designated person might control a company by means other than ownership would not, in and of itself, cause the company to be treated like a blocked entity. Thus, assets of Rosneft and Rostec are not automatically blocked even though their CEOs, Mr. Sechin and Mr. Chemezov, have become sanctioned persons. Depending on the circumstances, however, application of blocking measures against senior managers could effectively prevent transactions with their companies since those transactions could be deemed indirect dealings with the blocked managers.
Second, the United States has intensified export controls relating to Russia. At the outset of March 2014, U.S. export control regulators stopped processing applications for licenses to export or re-export items to Russia. In addition, the U.S. Commerce Department, which administers controls on commercial "dual use" items, has added 13 Russian companies to its "Entity List," placing them off limits for transfers of items that are subject to the Commerce Department's export controls. As a result, even non-U.S. persons are forbidden to transfer such items from abroad to these sanctioned companies. Finally, the Commerce Department has announced that it plans to revoke licenses for some exports and re-exports of advanced technology equipment, software and technology to Russia.
Third, individuals who are blocked by OFAC generally are not permitted to enter the United States.
EU Sanctions: The Council of the EU has added 15 individuals to the list of sanctioned Russian and Ukrainian persons, bringing the total count of sanctioned persons to 48. Each member state of the EU may enact domestic measures in relation to matters such as offenses and penalties for breach. At this time, the EU's list includes only individuals, and there is some overlap with the U.S. designations. At the same time, companies owned or controlled by listed persons should already be considered frozen by the EU sanctions.
The EU sanctions block all funds and economic resources belonging to or owned, held or controlled by the listed persons and ban entry to the EU by such persons. Unlike the U.S. sanctions, the EU sanctions explicitly include control of a company by listed persons as a basis for treating that company as likewise being blocked. Each EU member state can adopt different interpretative rules regarding when a listed person controls a company (in the UK, e.g., a case-by-case approach is used).
The EU has not, as of today, announced any EU-wide restrictions on export licenses to Russia. However, since March 18, 2014, the UK has suspended licences for direct exports to Russia as well as for exports to third countries where there is a clear risk that items would be incorporated into equipment for export to Russia.
Steps to Protect Business Interests in Russia
As sanctions continue to expand, multinational companies face increasing challenges presented by sanctions' legal prohibitions and, often more importantly, uncertainties about interpretation of those prohibitions and prospects for additional sanctions. The Obama Administration has highlighted a new executive order's authorization of sanctions not just against additional individuals and entities but also against Russian business sectors. Depending on developments in Ukraine, broader embargo measures could emerge, which could intensify sanctions compliance challenges exponentially.
In these circumstances, it is advisable for multinationals to take the following steps:
2. Insist on far-reaching contractual and other written protections to guard against sanctions liability
3. Develop thorough plans to exit Russian business arrangements as needed
The U.S. Congress has enacted legislation codifying some U.S. sanctions. And a variety of proposals are under consideration in the Congress to further reinforce and expand sanctions.