On July 16, 2014, the US Department of the Treasury, Office of Foreign Assets Control ("OFAC") announced the first round of sector based sanctions targeting entities in Russia's financial and energy sectors. Targeted entities include Vnesheconombank, Gazprombank, Novatek, and Rosneft. While the new sectoral sanctions do not cut off entire sectors of the Russian economy as previously threatened, they do seek to substantially curtail the ability of targeted individuals and entities to obtain new debt or equity from the US capital markets. In addition to the new sectoral sanctions, OFAC identified eleven entities and five individuals in Crimea and Russia as Specially Designated Nationals ("SDNs"). The US Department of Commerce, Bureau of Industry and Security ("BIS") contemporaneously announced that the eleven newly designated SDN entities would be added to BIS' Entity List.
New Russian financial and energy sector sanctions
The new sectoral sanctions, issued pursuant to E.O. 13662, target individuals and entities determined by OFAC to be operating in either the financial or energy sectors in Russia. Individuals and entities designated under the new sanctions are included on a recently created "Sectoral Sanctions Identifications List" (the "SSI List") published by OFAC.1
The new sanctions include two directives that prohibit US persons2 from engaging in certain specified transactions involving "new" debt3 or equity4 for the designated individuals and entities on the SSI List. The first directive is aimed at individuals and entities operating in Russia's financial sector and the second addresses those operating in Russia's energy sector.
Directive 1 (financial sector) prohibits "US Persons" from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity in relation to the designated financial sector individuals and entities on the SSI List, as well as any entity 50% or more owned by an entity on the SSI List. Individuals and entities in the financial sector of Russia designated under Directive 1 are specifically identified in the SSI List and include both Vnesheconombank (a.k.a Bank for Development and Foreign Economic Affairs, a.k.a. Bank Razvitiya a.k.a. VEB) and Gazprombank OAO (a.k.a. GPB).
Directive 2 (energy sector) prohibits "US Persons" from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity in relation to the designated energy sector individuals and entities on the SSI List or any entity 50% or more owned by an entity on the SSI List. Directive 2, unlike Directive 1, does not include a prohibition on dealing in new equity of the designated individuals or entities. Individuals and entities in the energy sector of Russia designated under Directive 2 are specifically identified in the SSI List and include OAO Novatek (a.k.a. Finansovo-Investitsionnaya) and Rosneft (a.k.a. Open Joint-Stock Company Rosneft Oil Company, a.k.a. OJSC Rosneft Oil Company). The prohibitions in both directives extend to rollover of existing debt, if such rollover results in the creation of new debt with a maturity of longer than 90 days.
US persons are not otherwise prohibited from transacting with the designated entities and the designated individuals and entities on the SSI List are not blocked unless they are separately included on the SDN List. Thus, US persons may, assuming the individuals or entities are not on the SDN List and the assets not otherwise blocked, engage in transactions:
- with the individuals and entities on the SSI List unrelated to debt or equity
- relating to debt or equity of individuals or entities on the SSI List, regardless of maturity, so long as it was issued prior to July 16, 2014
- involving debt instruments with maturities of 90 days or less, even if issued after July 16, 2014
- relating to new equity instruments for designated individuals or entities on the SSI List operating in the Russian energy sector
- relating to the maintenance of correspondent accounts and processing of US dollar clearing transactions for designated entities so long as the transactions are not otherwise prohibited.
The scope of the prohibited transactions, however, and the number of designated individuals and entities could be expanded under E.O. 13662.
Contemporaneous with the new sanctions, OFAC also issued a general license5 related to derivative transactions that authorizes "all transactions by US Persons involving derivative products whose value is linked to an underlying asset that constitutes" (i) debt with a maturity of longer than 90 days or equity issued on or after July 16, 2014 by a sanctioned entity in the financial sector or (ii) debt with a maturity of longer than 90 days issued on or after July 16, 2014 by a sanctioned entity in the energy sector. The general license, therefore, authorizes transactions by US persons involving derivative products whose value is linked to an underlying asset of a designated entity or individual on the SSI List, regardless of when the debt/equity was issued or its maturity date. The general license does not, however, authorize US persons to hold, purchase, or sell the underlying derivative assets if otherwise prohibited under the two directives or to engage in derivative transactions with individuals or entities that are on the SDN List.
Additional SDN designations
OFAC also announced the addition of eleven entities and five individuals to the SDN List pursuant to E.O. 13660 and E.O. 13661. The specific individuals and entities that were designated are identified below. All property and interests in property of the new SDNs located in the United States or within the possession or control of a US person, wherever located, must be frozen. In addition, transactions by US persons or within the United States involving SDNs are generally prohibited. Similar restrictions apply to any entities owned 50% or more by an SDN.
The following three entities and one individual were designated as SDNs pursuant to E.O. 13660: (i) Luhansk People's Republic;(ii) Donetsk People's Republic; (iii) Aleksandr Borodai; and (iv) Feodosiya Enterprise.
The following eight entities and four individuals were designated as SDNs by OFAC pursuant to E.O. 13661: (i) Almaz-Antey; (ii) Federal State Unitary Enterprise State Research and Production Enterprise Bazalt; (iii) JSC Concern Sozvezdie; (iv) JSC MIC NPO Mashinostroyenia; (v) Kalashnikov Concern; (vi) KBP Instrument Design Bureau; (vii) Radio-Electronic Technologies; (viii) Uralvagonzavod; (ix) Sergey Besesda; (x) Oleg Savelyev; (xi) Sergei Neverov; and (xii) Igor Shchegolev.
Additional BIS export restrictions
On July 16, 2014, BIS also announced that the eleven entities that were newly designated by OFAC as SDNs were also being added to BIS' Entity List. Thus, the following entities will be added to the Entity List: (i) Donetsk People's Republic; (ii) Feodosia Enterprise; (iii) JSC Concern Radio-Electronic Technologies; (iv) JSC Concern Sozvezdie; (v) JSCC Almaz-Antey; (vi) Kalashnikov Concern; (vii) KBP Instrument Design Bureau; (viii) Luhansk People's Republic; (ix) MIC NOP Mashinostroyenia; (x) Research and Production Corporation "UralVagonZavod"; and (xi) State Research and Production Enterprise "Bazalt." Designation on the Entity List imposes a license requirement for the export, re-export or foreign transfer of items subject to the Export Administration Regulations to the designated Entities, with a presumption of denial.
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We will continue to monitor developments in Russia and Ukraine closely and issue additional briefings as events warrant.
2 Defined to include: (1) entities organized under US laws and their non-US branches; (2) individuals or entities in the United States; or (3) US citizens or permanent resident aliens wherever located.
3 OFAC has advised that the term "debt" includes: (1) bonds; (2) loans; (3) extensions of credit; (4) loan guarantees; (5) letters of credit; (6) drafts; (7) bankers acceptances; (8) discount notes; or (9) commercial paper.
4 OFAC has advised that the term "equity" includes: (1) stocks; (2) share issuances; (3) depositary receipts; (4) or any other evidence of title or ownership.