Understanding sanctions on Russia

In September, the U.S. Treasury Department, acting under the authority granted by President Obama’s Executive Order 13662, materially escalated sanctions against Russia, imposing a broad-based package of restrictions on Russian entities operating within Russia’s defense and related materiel sector.

According to its press release, the U.S. Department of the Treasury extended targeted financial sanctions to Russia’s largest bank, deepened existing sanctions on Russian financial institutions, expanded sanctions in Russia’s energy sector, and increased the number of sanctioned Russian entities in the energy and defense sectors.

RUSSIAN FINANCIAL INSTITUTION AND DEFENSE CONTRACTOR SANCTIONS

This newest round of sanctions prohibits offering financing to Rostec, a Russian institution dealing in industrial technology products. The sanctions also add Sberbank, Russia’s largest bank, to the list of sanctioned financial institutions. Under these sanctions, transactions by U.S. persons or within the U.S. involving new debt greater than 30 days maturity are restricted. Likewise, the debt financing restrictions have been tightened from 90 days to 30 days for the other sanctioned Russian banks: Bank of Moscow, Gazprombank OAO, Russian Agricultural Bank, VEB, and VTB Bank. See General License 1A

As for Russian state-owned defense technology firms, the assets of the following companies are now blocked: OAO ‘Dolgoprudny Research Production Enterprise,’ Mytishchinski Mashinostroitelny Zavod OAO, Kalinin Machine Plant JSC, Almaz-Antey GSKB, and JSC NIIP.

OIL DRILLING ENTITY SANCTIONS

Perhaps the most notable new sanctions come in regards to the exportation of goods, services and technology for oil drilling. Treasury imposed sanctions that prohibit the exportation of goods, services (not including financial services), or technology in support of exploration or production for Russian deepwater, Arctic offshore, or shale projects that have the potential to produce oil. These sanctions are immediately applicable to five Russian energy companies – Gazprom, Gazprom Neft, Lukoil, Surgutneftegas, and Rosneft – involved in these types of projects.

These sanction measures by the Treasury Department complement restrictions administered by the Commerce Department and are similar to new EU measures published in September. Under the new sanctions, U.S. persons had until Sept. 26 to wind down applicable transactions with these entities pursuant to a general license that Treasury’s Office of Foreign Assets Control (OFAC) issued earlier. See General License 2. After expiration of the general license, no activity may continue with listed entities without prior, express authorization from OFAC.

Further, American entities are now also prohibited from offering financing for more than three months to two Russian oil companies: Gazprom Neft and Transneft.

EUROPEAN UNION SANCTIONS

Also in September, the EU issued similar sanctions targeting Rosneft, Transneft, and Gazprom Neft which prevent these entities from raising long-term debt on European capital markets. According to news reports, the new round of sanctions, similar to those imposed by the U.S., increases restrictions on the Russian financial sector and prohibits European entities from buying debt with a maturity of more than 30 days, from issuing loans or from providing financial services to the three banks listed above and three defense firms (Opk Oboronprom, United Aircraft Corporation, andUralvagonzavod’).

The EU also implemented a prohibition on dual-use goods and technology where the sale, supply, transfer, or export is to one of the listed Russian businesses. That list of entities currently includes: 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 EU also added 24 individuals to its list of sanctioned parties and imposed travel bans and asset freezes against leading members of Russian President Vladimir Putin’s inner circle, including the businessman Sergei Chemezov, chairman of defense and industrial group Rostec. Others targeted include Igor Lebedev, deputy speaker of the Russian lower house of parliament, and Vladimir Zhirinovsky, an outspoken nationalist politician. The addition of the 24 individuals to the EU list of those subject to travel bans and asset freezes brings the total to 119 since the EU began introducing the measures in March 2014.

IMPACT

While the latest moves do not cut off entire sectors of the Russian economy, they come close. This is especially true in light of the prohibition in the “dealing in” new debt issued by, on behalf of, or for the benefit of Sberbank. In practice, U.S. financial institutions will likely treat any transaction with a listed bank as a rejection.

The new measures materially restrict access to American and European debt markets for the targeted financial institutions and defense firms. The U.S. actions now bar affected Russian institutions from the American debt markets for loans over 30 days, meaning that while they will still be able to conduct day-in, day-out business with overnight loans, it will be significantly harder to finance medium- and long-term activity. By designating firms in the arms or related materiel sector, the Treasury Department cut these firms off from the U.S. financial system and the U.S. economy.

Given the general importance of a compliance system that enables confirmation of any newly listed sanctioned entity, it is important to again review business relationships, contracts, purchase orders, and upcoming business travel to ensure that a company does not inadvertently violate any existing U.S. and EU sanctions.

A review should be conducted of projects that might be implicated by these sanctions. U.S. companies need to determine how these sanctions might impact on-going and prospective projects. Non-U.S. companies need to do the same, with attention to U.S. and EU inputs that might now be controlled to the point that a project destined for Russia will have to be materially altered.