International Trade & Compliance Alert | July.18.2014
On July 16, 2014, the United States announced another expansion of sanctions in response to events in southern and eastern Ukraine. The United States for the first time imposed sanctions against major Russian companies and banks – Gazprombank, Novatek, Rosneft, Vnesheconombank, which have been placed on a new Sectoral Sanctions Identification ("SSI") List. While SSI List sanctions are less far-reaching than standard "blocking" sanctions, they could represent a substantial challenge and complication for those doing business in and with Russia. The United States also extended "blocking" sanctions to an additional five Russian individuals, nine Russian/Ukrainian companies, as well as the Luhansk People's Republic and the Donetsk People's Republic. The European Union ("EU") is also reportedly considering broader sanctions against Russian and Ukrainian individuals and companies.
Apart from sanctions against a few dozen designated Russian and Ukrainian individuals and against 30 entities by the United States and two companies by the EU, U.S. and EU trade and investment with Russia generally remain unrestricted. While previously many observed that the sanctions prohibited only a tiny fraction of business involving Russia, the impact will become more substantial with establishment of SSI sanctions against four large Russian companies and banks and their 50%-or-more owned affiliates. 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 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 four principal forms. First, and most recently, the U.S. Treasury Department's Office of Foreign Assets Control ("OFAC") introduced the SSI List to designate as sanctioned certain persons operating in sectors of the Russian economy previously identified as potential targets for sanctions, which include financial services and energy. OFAC has issued a sanctions directive that applies to the two banks on the SSI List and a second directive that applies to the two energy companies on the SSI List. Directive 1 generally forbids U.S. persons to transact in, provide financing for, or otherwise deal in new debt of longer than 90 days maturity or new equity, if that debt or equity is issued on or after July 16, 2014, for two major Russian banks – Gazprombank and Vnesheconombank – and their property or interests in property. Directive 2 generally forbids U.S. persons to transact in, provide financing for, or otherwise deal in new debt of longer than 90 days maturity, if that debt is issued on or after July 16, 2014, for Russia's largest oil company, Rosneft, and a large natural gas producer, Novatek and their property or interests in property. These restrictions cover any 50%-or-more owned affiliates of the designated entities. The property and property interests of these entities are not blocked (unless later they are separately designated on the SDN List – see below). There are a variety of uncertainties about the scope of the SSI List sanctions, which Orrick is pursuing with U.S. officials.
Second, under executive orders promulgated in March 2014, OFAC has "blocked" a few dozen Russian and Ukrainian individuals and 30 entities, including several Russian banks and military sector companies, including Uralvagonzavod, Kalashnikov Concern, and Concern Almaz-Antey, as well as the Luhansk People's Republic and the Donetsk People's Republic. The most prominent individuals' 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 Rostec are not automatically blocked even though its CEO, Mr. Chemezov, is a sanctioned person. 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.
Third, the United States 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 24 Russian companies (including 11 entities added on July 16, 2014) 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 announced that it plans to revoke licenses for some exports and re-exports of advanced technology equipment, software and technology to Russia.
Fourth, individuals who are blocked by OFAC generally are not permitted to enter the United States.
EU Sanctions: The Council of the EU has recently added 11 individuals to the list of sanctioned Russian and Ukrainian persons, bringing the total count of sanctioned persons to 72. Two Crimean companies also appear on the list. Each member state of the EU may enact domestic measures in relation to matters such as offenses and penalties for breach. Importantly, 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 2014, the UK has suspended licenses 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 the 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 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. A variety of proposals also are under consideration in the Congress to further reinforce and expand sanctions.