Articles Posted in Russia Sanctions

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.

The Obama Administration has threatened to impose additional sanctions on Russia in response to the Ukraine crisis but so far has only blocked the assets of 32 individuals and one bank. Additionally, with little fanfare, the two primary U.S. agencies responsible for issuing export licenses announced that they have stopped processing applications for licenses to export or re-export products and technology to Russia. The United Kingdom is suspending existing licenses and will not process license applications to export to Russia products and services that are destined for military use in the Ukraine.

United States Export License Policy
The Commerce Department’s Bureau of Industry and Security (BIS) administers the Export Administration Regulations (EAR), which apply to exports of commercial and dual-use products, software and technology. BIS posted a notice on its website on March 26 stating that it has not been issuing licenses for the export or re-export of items to Russia since March 1, just days after the initial armed invasion of Crimea. During fiscal year 2013, BIS approved 1,832 license applications for export/re-export to Russia of U.S. origin items.

The State Department’s Directorate of Defense Trade Controls (DDTC) administers the International Traffic in Arms Regulations, which govern exports of military equipment, software, technology and services. DDTC posted a notice on its website on March 27 similarly announcing that it has placed a hold on issuing licenses for exports to Russia.

The actions have been taken independently of the sanctions imposed by the United States on individuals and entities considered to be associated with President Putin following Russia’s annexation of Crimea. Neither agency has amended its regulations. Rather, they are exercising their existing broad discretion over licensing decisions. Consequently, their announcements have no effect on the export of items not requiring a license, or those qualifying for license exceptions or exemptions. There is also no effect on exporting items under licenses that have previously been approved by either agency. At this point, companies may continue to ship these items to Russia.

United Kingdom Export License Policy
On March 18, the United Kingdom announced that it was suspending existing licenses and processing license applications “for direct export to Russia for military and dual use items destined for units of the Russian armed forces or other state agencies which could be or are being deployed against Ukraine.” This suspension also applies to licenses for exports to third countries of items to be incorporated into equipment destined for use by Russia against the Ukraine.

Modest Impact and Mixed Signals
The suspension of license processing for Russia will, of course, have an immediate impact on companies with pending applications and those that regularly require export licenses for operations in Russia. For example, applications for technical assistance agreements for space launch services will be on indefinite hold and the volatility of the situation in Ukraine makes it impossible to predict when that policy may be revised.

Within the larger policy context, however, these actions are not likely to have an important impact on diplomacy. Most U.S. trade with Russia does not require export licenses, and while the United Kingdom and Russia earlier this year had discussed expanding their defense trade cooperation, they had not yet signed an agreement before the Ukraine crisis exploded.

Meanwhile, other countries are sending mixed signals regarding defense and high technology trade. Although the German government cancelled a Rheinmetall contract to deliver a combat simulator to Russia, Siemens’ CEO promised continued cooperation in a meeting with President Putin last week. France is still scheduled to deliver two aircraft carriers to Russia, and even the United States has not taken steps to suspend or cancel the delivery to the Afghan defense forces of Russian Mi-17 helicopters purchased from Rosoboronexport.

As the Ukraine crisis continues, it is possible that the U.S. and allied country governments will strengthen their technology and defense trade sanctions, perhaps expanding them to include other products or technology that do not now require licenses but might be seen as sensitive. Companies trading in agricultural or low technology commercial items, however, are unlikely to be affected by export restrictions unless a total trade embargo is imposed on Russia, which currently is not a policy option on the horizon.

Sanctions escalated at a rapid pace last week as western powers responded to the crisis in Ukraine and Russian’s annexation of Crimea. The United States, European Union (EU), Canada and Australia have implemented sanctions. The approaches and specific sanctions lists of these four jurisdictions overlap but have certain key differences. Following are the current contours of these sanctions (through March 23, 2014).

Sanctions Implemented to Date

United States – Has named 32 specially designated nationals (“SDNs”) under three new Executive Orders, including 31 individuals and one bank. Transactions with these SDNs are prohibited and their property is blocked, with no exception made for agreements or joint ventures established prior to the sanctions. The United States also has instituted travel and visa bans for certain Russian and Ukrainian officials. Executive Orders 13660 (March 6, 2014), 13661 (March 16, 2014), and 13662 (March 20, 2014) have set up a framework to sanction persons disrupting democracy in the Ukraine, Russian government officials, entities operating in the arms and related materiel sector in Russia, and persons operating in particular economic sectors within Russia to be identified based on Executive Order 13662 (which may include the financial services, energy, metals and mining, engineering and defense industries).

EU – Has frozen the assets of and banned travel for several Russian and Ukrainian officials under Council Regulations 208/2014 (March 5, 2014) and 269/2014 (March 17, 2014) and Implementing Regulation 284/2014 (March 21, 2014). Unlike the United States, the EU makes exceptions under certain conditions for payments due under contracts/obligations and certain arbitral decisions arising prior to the designation of the individual, for certain judicial/legal awards, and for funds determined to be for basic needs, legal fees or service charges for frozen accounts.

Canada – Has frozen the assets and banned travel to certain Russian and Ukrainian officials under two sets of regulations for Ukraine — Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations (SOR/2014-44) (March 5, 2014) and Special Economic Measures (Ukraine) Regulations (SOR/2014-60) (March 17, 2014) and its amending regulations, as well as one set of regulations for Russia — Special Economic Measures (Russia) Regulations (SOR/2014-58) (March 17, 2014). Canada allows some transfers with designated individuals, such as: those due under contracts entered into prior to the individual being designated, pension payments; transactions related to a diplomatic mission or an organization with diplomatic status; transactions necessary for a Canadian to obtain accounts, funds or investments held by a designated person; those for legal services; and for loan repayments where the loan was entered into prior to the individual being designated.

Australia – Has announced that sanctions and travel bans will be imposed on a list of individuals in response to Russian actions in Crimea. The specific parties are still under consideration and no updates have been made to the Australia sanctions webpage to date.

All four jurisdictions are expected to consider additional sanctions, including designations of Russian companies and/or financial institutions, targeting the assets of Russian oligarchs and restricting sensitive export sectors.

Adapting to Further Escalation of Sanctions
It still is permissible to do business with and in Ukraine and Russia. The sanctions issued to date focus on specific individuals and one entity (Bank Rossiya) that has been sanctioned by both the United States and Canada. Entities that are majority-owned by these individuals and entities are covered by the sanctions as well. However, broader embargoes including prohibitions on financial transactions and investment bans are being actively considered and could be imposed without advance notice.

The extreme uncertainty of the current environment should prompt companies in the U.S., EU, Canada and Australia not only to screen and block transactions with the individuals and entities that have been named to date, but also to assess their exposure to transactions or investments involving Russia and Ukraine and to take steps to minimize such exposure wherever possible. U.S. and EU regulators are assessing their financial institutions’ exposure to former Ukrainian officials, Russia oligarchs and their investment holdings, and other Russian entities. It is likely that additional sanctions will be imposed. Transactions involving Russian counterparties should be monitored carefully to evaluate whether the individual or entity is in the sphere that is most likely to be targeted (particularly those closely associated with President Putin) and transactions should be limited to the shortest term possible.

Russia has responded to the U.S. and western sanctions in kind, banning travel into Russia for nine high profile U.S. government officials. While these sanctions have little economic impact, statements by the Russian government indicate that additional counter-sanctions targeting U.S. and EU business interests are possible, and perhaps even likely.

In response to political developments in the Ukraine and Russian military action in Crimea, the United States and European Union (EU) announced new sanctions on March 6, 2014. Canada issued its sanctions on March 5, 2014. The U.S. Executive Order authorized the Treasury Department to block the assets of persons determined to have engaged in certain destabilizing conduct or misappropriation of state assets in the Ukraine. The Executive Order also provided for the potential denial of visas. The United States has not yet made any designations under its sanctions and is not expected to do so immediately, but has issued anti-money laundering guidance concerning the accounts of eighteen members of the former Ukraine regime, including ex-President Viktor Yanukovych. The EU and Canada imposed an asset freeze against these former Ukraine regime officials.

The U.S., EU and Canada are deploying sanctions in an attempt to influence Russian behavior in the Ukraine and to support the new Ukraine government by helping it pursue assets misappropriated by former regime officials and cronies. At present, the U.S. sanctions are only a framework, since there have not been any sanctions designations. Trade, investment, banking and commercial activity with the Ukraine and Russia remain lawful.

The EU designations imposed under Council Regulation No. 208/2014 and the Canadian designations under the “Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations” (SOR/2014-44) go further in actually freezing the assets of eighteen former Ukrainian government officials and their close associates who are subject to criminal prosecution in Ukraine. The EU regulation does, however, provide for limited exceptions such as payments due under contracts concluded before the date of designation.

In related action, the Financial Crimes Enforcement Network (FinCEN) issued guidance on March 6, 2014 (FIN-2014-A002) to monitor accounts that may relate to these eighteen former Ukrainian regime officials sanctioned by the EU and Canada, updating its earlier Ukraine anti-money laundering guidance of February 25 (see FIN-2014-A001). FinCen issued its advisory because of the increased risk that these individuals may attempt to move assets in a deceptive fashion. The advisory does not impose new obligations on U.S. financial institutions, but it reminds them of the enhanced scrutiny required for private bank accounts of senior foreign political figures and emphasizes the obligation to file suspicious activity reports if they know, suspect or have reason to suspect that transactions relating to such accounts involve funds derived from illicit activity.

By issuing this advisory, rather than blocking the assets of these individuals outright, the Obama Administration is evidently attempting to calibrate carefully the escalation of sanctions, using only the threat of designation at present as a diplomatic tool. Careful calibration also is warranted because of the substantial assets of U.S. companies in Russia and the risk of retaliatory Russian action against those assets. The U.S. Executive Order, however, opens the door to the possible imposition of sanctions by the Office of Foreign Assets Control (OFAC) on a wide range of Ukrainian and Russian parties and those who do business with them.

Specifically, the Executive Order authorizes sanctions against persons determined to:

Consistent with past OFAC guidance, parties that are owned 50 percent or more by a person subject to sanctions would be subject to the sanctions as well. The Executive Order further provides for immigration and visa bans in addition to blocking.

In addition to the sanctions authorized under the Executive Order, other sanctions under consideration include designations of Russian companies and/or financial institutions under other U.S. sanctions programs, targeting the assets of Russian oligarchs, and restricting exports of certain products or technology. The situation is evolving rapidly, and companies should monitor developments closely.