Articles Posted in Russia Sanctions

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The 17th EU-Ukraine summit took place in Kyiv, Ukraine on 27 April 2015, being the first summit taking place under the framework of the Association Agreement, the treaty between the EU and Ukraine that establishes a political and economic association between the parties.

The summit was an opportunity for the EU and Ukraine to discuss: (i) the implementation of the Association Agreement and the political and economic reforms in Ukraine including EU financial and other assistance; (ii) the crisis in Eastern Ukraine and the application of the Minsk agreements; and (iii) regional issues and the preparations for the upcoming Eastern Partnership summit in Riga.

During the summit, EU and Ukrainian leaders are reported to have agreed that the full implementation of the Minsk agreements, the ceasefire deal struck between Ukraine and pro-Russian rebels, remains the best chance to move towards a political solution, taking note of the European Council Conclusions of 19 March 2015 which called both for the swift and full implementation of the Minsk agreements, and for the duration of the restrictive measures against Russia to be linked to such implementation.

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It has been reported that Russia has proposed the sale of S-300 surface-to-air missile defense systems to Iran. According to the Russian News Agency TASS, Russian Foreign Minister Sergey Lavrov said that Russia’s previous voluntary embargo of sales of military equipment to Iran is no longer needed due to the progress in the negotiations regarding Iran’s nuclear program.

On May 1, 2015, Ed Royce (R-Calif.), the Chairman of the House Foreign Affairs Committee, and ranking member Eliot Engel (D-N.Y.) sent a letter to President Obama stating that the White House should consider using sanctions to deter the delivery of the missile defense system to Iran. The letter calls on the President to determine whether the proposed sale would advance Iran’s efforts to acquire or develop destabilizing numbers and types of advanced conventional weapons.

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On January 29, 2015, the Bureau of Industry and Security (BIS) issued a rule amending the Export Administration Regulations (EAR), consistent with the prohibitions contained in Executive Order 13685 that broadly prohibited new investments in, imports from and exports to the Crimea region. Specifically, the Executive Order prohibited “the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any goods, services, or technology to the Crimea region of Ukraine.”

A license is now required for exports and reexports to, and transfers within, the Crimea region of Ukraine for all items subject to the EAR, other than food and medicine designated as EAR99. There will be a presumption of denial for all such license applications, with the exception of certain agricultural commodities, medicine, medical supplies, and replacement parts authorized under the Department of the Treasury’s Office of Foreign Assets Control General License No. 4. For those items, BIS will review the license applications on a case-by-case basis.

Shipments of items that did not previously require a license that were on the dock for loading, or loaded on January 29, 2015, were allowed to proceed without a license, provided that they were exported/reexported by February 1, 2015.

Certain license exceptions are available for exports and reexports to, and transfers within, the Crimea region of Ukraine. These include the following, subject to the specific requirements in each exception:

  • TMP for items for use by the news media
  • GOV for items for personal or official use by personnel and agencies of the U.S. Government, the International Atomic Energy Agency (IAEA), or the European Atomic Energy Community (Euratom)
  • GFT for gift parcels and humanitarian donations
  • TSU for certain operation technology and software for lawfully exported commodities, and certain sales technology
  • BAG for exports of items by individuals leaving the United States as personal baggage
  • AVS for civil aircraft and vessels

For guidance on legal issues involving Ukraine-Russia sanctions, contact any of the above authors, or any of the professionals in Pillsbury’s International Trade Group.

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By Christopher R. Wall, Stephan E. Becker, Nancy Fischer, Aaron R. Hutman and Stephanie J. Rohrer

The Office of Foreign Assets Control issued three general licenses today authorizing certain activities that would otherwise be prohibited by Executive Order 13685. This Executive Order became effective on December 19, 2014, and broadly prohibited new investments in, imports to, and exports from the Crimea region of Ukraine. Companies were permitted a wind-down period under certain circumstances through the start of February 1, 2015, pursuant to earlier General License 5. Today’s general licenses authorize specific transactions in the following three areas:

  • Non-Commercial Personal RemittancesGeneral License 6 authorizes transactions including the sending/receipt by U.S. persons to/from the Crimea or on behalf of a person ordinarily resident in the Crimea region. It also authorizes certain financial institutions to process those transfers of funds. This does not include charitable donations to an entity or funds transfers used to support the operation of a business, even if family-owned. Additionally, U.S. persons are authorized to hand carry funds to individuals in the Crimean region, or who are ordinarily resident there, provided that it is not done on behalf of a third party. This does not authorize transactions with persons whose property and interests in property are blocked pursuant to Ukraine-related Executive Orders 13660, 13661, 13662 or 13685.
  • Operations of Bank AccountsGeneral License 7 authorizes U.S. financial institutions to operate a personal bank accounts for persons ordinarily resident in the Crimea region provided that the transactions are solely for personal use and do not involve transfers to/from the Crimea region, or benefit persons ordinarily resident in the Crimea region, unless qualifying as personal remittances authorized by General License 6. This does not authorize transactions with persons whose property and interests in property are blocked pursuant to the Ukraine-related Executive Orders.
  • Telecommunications and Mail General License 8 authorizes all transactions with respect to the receipt and transmission of telecommunications involving the Crimea region, so long as no payments involve a person whose property and interests in property are blocked pursuant to the Ukraine-related Executive Orders. However, it does not authorize the provision, sale or lease of telecommunications equipment or technology, or capacity on telecommunications transmission facilities (such as satellite or terrestrial network activity). The transactions of common carriers incident to mail and package service between the United States and the Crimea region are authorized, provided that the importation/exportation is not prohibited by Executive Order 13685, or it is otherwise authorized.

For guidance on legal issues involving Ukraine-Russia sanctions, contact any of the above authors, or any of the professionals in Pillsbury’s International Trade Group.

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Ukraine Freedom Support Act

The enactment of the Ukraine Freedom Support Act of 2014 starts the timeline for the following new extraterritorial sanctions:

  • Sanctions on Rosoboronexport (effective January 17, 2015) – The President is required to impose three or more sanctions from the list of options below. Rosoboronexport is the sole state broker and exporter/importer of Russian defense products. Despite the President’s stated intent not to use the sanctions authorized under the act, it is not clear how he will be able to avoid the requirement of this mandatory provision.
  • Arms-Related Activities in Syria, Ukraine, Georgia and Moldova (effective February 1, 2015) – The President is required to impose three or more sanctions from the list of options below against Russian and Russian-owned or controlled parties who are determined to produce, transfer or broker sales of defense articles to these countries without the support of their internationally recognized governments or who provide support for these activities. Although nominally mandatory, the determination with regard to parties is discretionary, giving the President flexibility to apply this provision.
  • Investment in Crude Oil Projects (effective February 1, 2015) – The President is authorized to impose three or more sanctions from the list of options below on foreign persons that are determined to have knowingly made a significant investment in a “special Russian crude oil project,” which includes Russian deepwater, arctic offshore, and shale formation projects “intended to extract crude oil.” The U.S. Treasury and Commerce Departments have interpreted similar language to include gas projects that may produce oil.
  • Foreign Financial Institutions (effective June 16, 2015) – Sanctions may be imposed on foreign financial institutions that knowingly (a) engage in significant transactions with parties sanctioned under this statute, or (b) facilitate significant financial transactions on behalf of Russian Specially Designated Nationals (SDNs) designated under Ukraine-related sanctions. The sanctions authorized for such activities are prohibitions or restrictions on opening or maintaining correspondent and payable-through accounts in the United States.

Read more: U.S. Sanctions Legislation Targets Russia While EU and U.S. Expand Crimea Sanctions

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Stephan E. Becker, Pillsbury partner, will co-present on the topic of “U.S. Sanctions Relating to the Unrest in Ukraine: Compliance Challenges,” on Thursday, October 9 at 1:00pm.

The United States began by imposing sanctions on persons and entities associated with the unrest in the Ukraine, but the sanctions have been expanded to target broader segments of the Russian economy with the adoption of new sectoral sanctions.

During this PLI webinar, the following topics will be discussed:

  • The scope of the U.S. sanctions administered by the Treasury and Commerce Departments
  • The implementation of sectoral sanctions on the Russian financial, defense and oil& gas sectors
  • Recent expansions of the sanctions and potential future changes

For more information and to register, please visit the event page.

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The United States recently expanded sanctions and export controls against the Russian defense sector. These designations and export control steps have implications for defense contractors, parts suppliers and brokers.

The Office of Foreign Assets Control (OFAC) recently expanded the list of Specially Designated Nationals (SDNs) to include entities in the Russian defense sector and also expanded its sectoral sanctions, which previously applied to the financial and energy sectors, to include the Russian defense sector. The U.S. Department of Commerce, Bureau of Industry and Security (BIS) also expanded export controls applicable to Russia’s defense industry.

Sanctions Designations
On September 12, 2014, OFAC added five new entities as SDNs in the Russian defense sector including:

  • Almaz-Antey Air Defense Concern Main System Design Bureau
  • JSC, Tikhomirov Scientific Research Institute of Instrument Design
  • JSC, Kalinin Machine Plant
  • JSC, Mytishchinski Mashinostroitelny Zavod, OAO
  • Dolgoprundy Research Production Enterprise, OAO

The Russian defense entities that were previously designated as SDNs in July 2014 include:

  • Almaz-Antey Corp.
  • Federal State Unitary Enterprise State Research and Production Enterprise Bazalt
  • JSC Concern Sozvezdie
  • JSC MIC NPO Mashinostroyenia
  • Kalashnikov Concern
  • KBP Instrument Design Bureau
  • Radio-Electronic Technologies
  • Uralvagonzavod
  • United Shipbuilding Corp.

All transactions involving the property or interests in property of these SDNs held by U.S. persons or in the United States are prohibited. This prohibition includes transactions in U.S. dollars that clear through the United States whether or not U.S. persons are involved. The sanctions apply to any company owned 50 percent or more by one of these companies. If equipment was ordered or purchased but money is still owed, shipment of the items may be blocked. OFAC guidance should be sought before proceeding.

Sectoral Sanctions
OFAC also issued Directive 3 pursuant to Executive Order 13662 restricting transactions with specified defense entities involving new debt with a maturity of more than 30 days. New debt is defined as bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers’ acceptances, discount notes or bills, or commercial paper, issued after the date that the person was listed under the Directive. Financing and providing services in support of the debt are also prohibited. Currently, Rostec is the only entity that has been listed under Directive 3. However, the prohibitions in Directive 3 also apply to any company owned 50 percent or more by Rostec, which is a large conglomerate with numerous subsidiaries and ownership stakes in Russian defense industry companies. OFAC has indicated that providing Rostec and its subsidiaries with deferred purchase agreements extending payment terms of longer than 30 days would constitute a prohibited extension of credit. This prohibition will be of particular importance to suppliers and other parties that provide goods or services to the Rostec family of companies.

Export Controls
BIS expanded the Entity List to impose export control restrictions on the SDNs added by OFAC as described above. The BIS Entity List already covered the nine SDNs previously designated by OFAC in the defense sector. Transactions with these entities involving any item subject to the Export Administration Regulations (EAR) require a license that is subject to a policy of denial. This restriction applies to reexports of items that are subject to the EAR even if a U.S. person is not involved in the transaction.

BIS also prohibited the export of certain items to Russia without a license when the exporter knows that the item is intended for a “military end use” or “military end user” in Russia. This prohibition extends to Russia the “military end use/end user” rule that previously applied only to China. The ECCN list covered by this rule is contained in EAR Part 744, Supplement No. 2. License applications for these items will be reviewed on a case-by-case basis, but will be subject to denial if the items would make a material contribution to Russia’s military capabilities. Items not listed in Supplement No. 2 are not subject to these restrictions even if destined for use by a military end user, though would be subject to the above SDN and Entities List prohibitions if destined for one of those companies.

 

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In response to the continuing situation in eastern Ukraine and Crimea, the European Union (EU) has adopted further significant sanctions against Russia. On 6 August 2014, Russia responded.

The EU is continuing to intensify sanctions against Russia in response to the rising tensions in eastern Ukraine and Crimea. A number of key restrictive measures came into force on 1 August 2014, contained in Council Regulation (EU) No 833/2014 of 31 July 2014 (“Council Regulation”).

Financial Sanctions

New sectoral sanctions prohibit EU nationals and companies entering into contracts after 1 August 2014 to buy or sell a range of specified financial instruments (with a maturity exceeding 90 days) issued by the following major state owned Russian banks – Bank for Development and Foreign Economic Affairs (“VEB”), Gazprombank, Russian Agricultural Bank (Rosselkhozbank), Sberbank and VTB Bank OAO. This prohibition extends to their non-EU subsidiaries owned over 50 percent and those acting on their behalf. Services related to the issuing of such financial instruments, e.g. brokering, also are prohibited.

Other Restrictions

Further sanctions measures adopted by the EU include:

(i) an arms embargo (which includes a ban on the purchase, import or transport of military goods from Russia);

(ii) an export ban on dual-use goods for military end users; and

(iii) measures to curtail access to certain equipment and technologies, particularly in the oil exploration and production sector.

These measures have followed other recent sanctions aimed at Russia. In particular, EU Regulation 825/2014 on 30 July 2014 already had placed a ban on providing loans or other credit in a wide range of sectors in Crimea and Sevastopol.

To date, the EU also has frozen the assets of, and banned travel for, many individuals, including certain Russian and Ukrainian officials, who are deemed responsible for destabilizing the situation in eastern Ukraine. The EU also has frozen the assets of a number of entities in Russia and the Ukraine, making it an offence to deal in assets belonging to listed entities.

Russia Retaliates

In response, on 6 August 2014, Russia imposed a one-year import ban on certain agricultural and food products originating from countries that have introduced sanctions against Russia (or acceded to such sanctions). Furthermore, the Russian government is considering banning transit flights across its territory for EU and US airlines.

This past week’s activities represent the first significant expansion of EU sanctions beyond a limited asset freeze list. Companies should actively assess whether they face exposure in Europe or otherwise in their business interests in Russia and/or the Ukraine.

 

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The United States, European Union and Canada each took steps recently to expand sanctions against Russia, including the targeting of major defense companies and the addition of export controls. These designations and export control steps have implications for defense contractors and brokers.

The Office of Foreign Assets Control (“OFAC”) listed the following Russian defense-sector companies as Specially Designated Nationals (“SDNs”) effective July 16, 2014:

  • Almaz-Antey Corp.
  • Federal State Unitary Enterprise State Research and Production Enterprise Bazalt
  • JSC Concern Sozvezdie
  • JSC MIC NPO Mashinostroyenia
  • Kalashnikov Concern
  • KBP Instrument Design Bureau
  • Radio-Electronic Technologies
  • Uralvagonzavod.

In addition, on July 29, 2014, OFAC designated the United Shipbuilding Corporation, which designs and repairs both military and commercial ships in Russia.

New transactions with these Russian companies by U.S. companies, citizens or permanent residents or persons in the United States are prohibited. As a consequence, transactions in dollars in which funds transfers clear through the U.S. banking system are subject to blocking as well. In addition, the sanctions apply to any company owned 50 percent or more by one of these manufacturers.

These designations, however, do not apply to equipment previously manufactured by these companies and already purchased and fully paid for. Such equipment is not blocked and may be possessed and used by persons subject to U.S. jurisdiction. Further, the sanctions do not prohibit new sales or lease transactions for such equipment in the secondary market. For example, according to OFAC guidance, if a U.S. person owns 100 AK-47 rifles originally manufactured by Kalashnikov Concern and purchased outright before July 16, 2014, these rifles may be re-sold in the secondary market so long as the sanctioned Russian companies or other SDNs are not part of the transaction.

If equipment has been ordered or acquired from one of these Russian companies, but money is still owed, the items may be blocked. Depending on the transaction, the sanctioned companies may continue to have an interest in the equipment. OFAC has recommended that any purchaser in such a situation seek guidance on whether the U.S. government would consider the items to be blocked.

In addition to the OFAC SDN designations, these nine companies have been added to the U.S. Bureau of Industry and Security (“BIS”) Entity List. Any export or re-export to these companies of goods, software or technology subject to the Export Administration Regulations (“EAR”) is now prohibited without a license, with a presumption that any such license request will be denied. Jurisdiction is based on U.S. content. Non-U.S. persons acting outside of the United States are subject to the prohibition if exporting or re-exporting to these companies items that are subject to the EAR.

The U.S. State Department’s Directorate of Defense Trade Controls (“DDTC”) has not yet issued a new policy statement concerning these companies. Exports of defense articles and defense services to Russia, however, are subject to a policy of denial. Brokering requests related to the resale of previously purchased defense articles from defense sector companies may be approved, although companies are advised to contact DDTC for guidance.

Actions in Other Jurisdictions
To date, the European Union (“EU”) has designated only one entity within the arms and materiel industry, Almaz-Antey Corp. The EU, however, has placed restrictions on exports of dual-use goods and technology that could be intended for a military end use/end user in Russia. The sale, supply, transfer or export directly or indirectly to a person in Russia or for use in Russia is prohibited. Further, the EU has prohibited technical assistance and financing/financial assistance relating to items on the Common Military List or dual-use goods that could be used for a military end use or end user, as well as the provision to, manufacture or maintenance for, or use of such items by a Russian person or in Russia. Pre-existing contract obligations, however, may be authorized.

Canada has designated eight of the same entities that the U.S. designated for operating in the arms and materiel industry. Property of the designated entities that is within Canada or the possession of a Canadian person is now blocked.

Sanctions and export controls continue to evolve in response to events in Ukraine and Russia. The defense manufacturing and materiel sector in Russia likely will continue to be a target of sanctions by the U.S. and other western governments.

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The United States, Canada and the European Union have designated a number of additional officials and companies as the unrest continues in eastern Ukraine. The United States also imposed sanctions on the head of Russian energy giant Rosneft and announced new export controls on shipments to Russia. Although sector-wide sanctions or broader measures against the Russian banking or energy industries have not yet been imposed, such measures remain under active consideration and further destabilization or Russian military action could trigger additional steps in the near future.

The United States (April 28, 2014), Canada (April 28, May 4, and May 12, 2014) and European Union (“EU”) (April 29 and May 12, 2014) have imposed additional sanctions designations, continuing to target selected individuals and entities. As yet, no country has implemented broader embargoes against Russia or its industry sectors. Normal business, banking and travel continue to be permitted, except for transactions involving the designated individuals and entities.

The U.S., Canada and EU have made the following new designations:

U.S. Sanctions

  • Six additional Russian government officials.
  • Igor Sechin – President and Chairman of the Management Board for Rosneft, Russia’s leading petroleum company.  Rosneft, however, is not subject to sanctions since Sechin does not own more than 50 percent of Rosneft.
  • Seventeen other entities owned or controlled by Bank Rossiya, Gennady Timchenko or the Rotenberg brothers who have been previously targeted by U.S. sanctions.  The entities are in the financial/banking, construction, transportation/logistics and consumer products sectors.
  • OFAC added a new Russian bank, Tempbank, to its Specially Designated Nationals List on May 8.  This action was taken under the Syrian Sanctions Regulations.

Canada Sanctions

  • Twenty-one individuals – All but two of the individuals were previously named by other jurisdictions; the two new individuals are both Russian political figures.
  • Eighteen entities – Two Russian banks (RosEnergoBank and ExpoBank) that have not been named by any other jurisdiction and sixteen additional entities that had already been designated by the United States.

EU Sanctions

  • Fifteen individuals, consisting of nine Russian political figures, including the Chief of the General Staff of the Armed Forces of the Russian Federation and six persons involved in the Crimean separatist movement or new Crimean government.
  • Thirteen additional individuals, including of Russian government and military officials and Ukrainian separatist leaders, and two companies (PSJC Chernomorneftegaz and Feodosia) whose assets were appropriated by the Crimean authorities.

Additional U.S. Actions
The U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) had announced in March that it was suspending processing of new licenses for exports to Russia. On April 28, 2014, BIS updated the policy, stating that it will deny pending license applications for exports or re-exports of high technology items that could be used to support Russia’s military capabilities and will revoke any existing licenses meeting those criteria. BIS, however, announced that it would consider license applications not meeting those criteria on a case-by-case basis, allowing the processing of some applications to resume. The State Department has posted a similar notice regarding licenses under the International Traffic in Arms Regulations (“ITAR”) for export or retransfer of military equipment, software, technology and services.

BIS also added 13 Russian companies to its Entity List. Any export or re-export to these companies of goods, software or technology subject to U.S. jurisdiction under the Export Administration Regulations are now prohibited without a license, with a presumption that any such license request will be denied.

On May 8, 2014 the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) published the Ukraine-Related Sanctions Regulations at 31 C.F.R. Part 589 implementing Executive Orders 13660, 13661 and 13662. These regulations codify the prohibitions outlined in the Executive Orders, as well as certain interpretations such as guidance on the prohibitions applicable to entities owned 50 percent or more by a designated individual or entity

Next Steps
Although the most recent steps are incremental, the U.S. Administration has indicated that additional sanctions against the Russian energy, banking and other sectors remain on the table and the United States is negotiating with the EU on the scope of these broader sanctions. At a Senate Foreign Relations Committee hearing on May 8, 2014, a number of senators voiced frustration with the Administration’s approach, and 21 Republican senators have introduced legislation requiring the imposition of broad sanctions oneconomic sectors, while Administration representatives advocated a surgical approach using a “scalpel” to cut across parts of sectors. Events surrounding the planned separatist vote in eastern Ukraine that took place on May 11, 2014 and the planned Ukraine-wide elections on May 25 could trigger the imposition of broader sanctions, which would likely have a more significant impact than the sanctions designations that have been made to date.