Introduction

The US government and the European Union have expanded sanctions and export controls against Russia's energy, defence and financial services sectors. On September 12 2014, the Treasury Department's Office of Foreign Assets Control (OFAC) broadened sectoral sanctions issued pursuant to Executive Order 13662 to target Russia's defence sector and additional entities and activities in the energy sector, and added five Russian defence companies to OFAC's Specially Designated Nationals (SDN) List. On September 17 2014 the Commerce Department's Bureau of Industry and Security (BIS)announced new restrictions on exports to Russia destined to military end uses or end users and added 10 Russian energy and financial firms to its Entity List. For its part, the European Union imposed new restrictions on certain Russian companies' access to EU financing and financial markets, introduced trade controls on the export of dual-use and energy goods to Russia and designated 24 individuals for EU asset-freezing measures.

Sectoral sanctions

On July 16 2014 OFAC first imposed sectoral sanctions and listed entities under these sanctions using its Sectoral Sanctions Identifications List (SSI List) (for further details please see "Ukraine-related sanctions expanded to target financial, energy and defence sectors"). On September 12 2014 OFAC amended Directives 1 and 2 under its sectoral sanctions and added Directives 3 and 4.

Directive 1

Directive 1 targets Russia's financial services sector. As amended, it prohibits all transactions in, provision of financing for and other dealings in new debt of longer than 30 days maturity or new equity of entities listed under Directive 1. OFAC's amendment has two effects. First, it reduces the tenor of prohibited debt from longer than 90 days to longer than 30 days. However, transactions relating to debt with a maturity of 90 days or less issued by a Directive 1-listed entity are not prohibited if they were issued before September 12 2014 (the date of the amendment) and the terms of the instrument do not subsequently change.

OFAC's amendment of Directive 1 also added Sberbank to the list of Russian banks that are subject to this directive. Accordingly, the parties subject to Directive 1 are the Bank of Moscow, Gazprombank, Russian Agricultural Bank, Sberbank, Vnesheconombank and VTB Bank, as well as any entities in which these banks have a 50% or greater ownership interest.

Directive 2

Directive 2 targets Russia's energy sector. It prohibits US persons from all transactions in, provision of financing for and other dealings in new debt of longer than 90 days maturity for entities listed under Directive 2. OFAC did not amend the directive's substantive prohibitions – that is, the allowable maturity of the debt remains over 90 days. However, it did list two additional Russian energy firms, AK Transneft and Gazprom Neft. These firms join Novatek and Rosneft on the SSI List for Directive 2. Of these firms, Gazprom Neft and Rosneft are also listed under Directive 4. US persons must take care to comply with the restrictions of both directives in dealing with these parties.

Directive 3

In addition to expanding the scope of existing directives, OFAC added Directive 3, targeting Russia's defence sector. Directive 3 prohibits US persons from all transactions in, provision of financing for and other dealings in new debt of longer than 30 days maturity for entities listed under the directive. OFAC listed one entity under Directive 3 – Rostec, a Russian state-owned holding company in the weapons sector. As with other Ukraine-related listings, these sanctions apply to any entity in which a listed entity has a 50% or greater ownership interest.

Relevant to the first three directives, OFAC issued General Licence 1A, which authorises all transactions by US persons or within the United States involving derivative products whose value is linked to an underlying asset that constitutes new debt with a maturity of longer than 30 days (if issued by a party subject to Directives 1 or 3) or 90 days (if issued by a party subject to Directive 2). The amendment supersedes General Licence 1 of July 16 2014 and reflects the addition of Directive 3 and the reduction of the tenor of prohibited debt under Directive 1.

Directive 4

OFAC also issued new Directive 4, which prohibits US persons from directly or indirectly providing, exporting or re-exporting goods, services (except for financial services) or technology in support of exploration or production for deepwater (greater than 500 feet), Arctic offshore or shale projects that have the potential to produce oil in Russia or a maritime area claimed by Russia, and that involve any person listed under Directive 4. Examples of the exportation of services prohibited under this directive include drilling services, geophysical services, geological services, logistical services, management services, modelling capabilities and mapping technologies. However, this directive does not prohibit the provision of financial services, such as clearing transactions or insurance.

The parties currently listed under this directive are Gazprom, Gazprom Neft, Lukoil, Rosneft and Surgutneftegas. Gazprom Neft and Rosneft are listed under Directive 2 as well. In particular, if a person is subject to both Directives 2 and 4, the fact that Directive 4 exempts the provision of financial services does not supersede or in any way diminish the prohibition in Directive 2 regarding dealings in debt.

OFAC issued General Licence 2 on September 12 2014, authorising for 14 days all services and activities prohibited by Directive 4 that are ordinarily incident and necessary to wind down operations, contracts or other agreements involving listed parties. General Licence 2's window closes at 12:01am Eastern Time on September 26 2014 and relates only to the wind-down of operations, agreements or contracts in effect before the new sanctions were imposed on September 12 2014. Any person invoking General Licence 2 must, within 20 business days of conclusion of the wind-down activities, file a detailed report with OFAC, setting out the parties involved, the type and scope of activities conducted and the dates of the activities, among other things.

The following table summarises the differences between the four directives:

Click here to view table.

Specially Designated Nationals List

In addition to expanding sectoral sanctions, OFAC added the following five Russian defence companies to the SDN List:

  • Almaz-Antey;
  • Kalinin Machine Plant;
  • Mytishchinski Mashinostroitelny Zavod;
  • Tikhomirov Scientific Research Institute of Instrument Design; and
  • Dolgoprudny Research Production Enterprise.

Export restrictions

In conjunction with OFAC's expansion of sanctions, the BIS expanded restrictions affecting exports to Russia.

Defence sector

On September 17 2014 the BIS added to its Entity List the same five Russian defence companies that OFAC added to the SDN List:

  • Almaz-Antey;
  • Kalinin Machine Plant;
  • Mytishchinski Mashinostroitelny Zavod;
  • Tikhomirov Scientific Research Institute of Instrument Design; and
  • Dolgoprudny Research Production Enterprise.

By adding these parties to the Entity List, the BIS has imposed a licence requirement for the export, re-export or in-country transfer of items subject to US jurisdiction to the listed parties, with a presumption of denial.

The BIS also expanded the 'China Rule' to Russia. Specifically, it expanded the scope of Section 744.21 of the Export Administration Regulations which formerly applied only to China, to prohibit the unlicensed export, re-export or in-country transfer of certain items destined to military end use or military end users in Russia.

Energy sector

The BIS also added to its Entity List the same five Russian energy companies that the OFAC listed on the SSI List under Directive 4:

  • Gazprom;
  • Gazprom Neft;
  • Lukoil;
  • Rosneft; and
  • Surgutneftegas.

The BIS imposed a licence requirement for the export, re-export or in-country transfer of items subject to US jurisdiction to the listed energy companies when the exporter knows, has reason to know or cannot determine whether the item will be used directly or indirectly in the exploration or production of oil or gas in Russian deepwater, Arctic offshore locations or shale formations in Russia. This licensing policy dovetails with that annunciated in Section 746.5 of the regulations. Whereas the Entity List additions prevent unlicensed transfer of any items subject to the regulations to the listed entities where such items will be used directly or indirectly for the covered oil or gas exploration or production, Section 746.5 applies only to certain items, but restricts those items' transfer, regardless of the party involved, if the item is to be used in covered oil or gas exploration or production.

The BIS export controls target activities related to the exploration or production of oil or gas, whereas the prohibitions in Directive 4 of OFAC's sectoral sanctions do not apply where the project has the potential to produce only gas.

Lisa Crosby, Andrew W Shoyer, Robert Torresen or Lindsay A Bourne

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