US Imposes Sectoral Sanctions Against Russia, EU Targets Individuals, May Expand Sanctions
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CLIENT ALERTS US Imposes Sectoral SaNctioNs AgaiNst Russia, EU Targets INdividuals, May ExpaNd SaNctioNs July 21, 2014 Authors Edward J. KraulaNd, Meredith RathboNe, Richard J. Battaglia, Guy SoussaN, Maury SheNk, AlexaNdra Baj, Jack R. Hayes Overview ON July 16, 2014, the US Treasury DepartmeNt, Office of ForeigN Assets CoNtrols (OFAC) issued the Sectoral SaNctioNs IdeNtificatioNs List (SSI List), imposiNg saNctioNs oN several eNtities iN the RussiaN finaNcial aNd eNergy sectors. OFAC also desigNated as Specially DesigNated NatioNals (SDNs) several other iNdividuals aNd eNtities, iNcludiNg KalashNikov CoNcerN, maNufacturer of the AK-47 assault rifle. The EuropeaN UNioN also has beeN active iN imposiNg UkraiNe-related saNctioNs. First, oN July 11, 2014, the EU adopted CouNcil DecisioN 2014/455/CFSP aNd CouNcil ImplemeNtiNg RegulatioN No. 753/2014, imposiNg saNctioNs oN 11 iNdividuals iNvolved iN destabiliziNg easterN UkraiNe. SecoNd, oN July 16, 2014, the EuropeaN CouNcil adopted coNclusioNs (the CommuNique) expressiNg williNgNess to expaNd targetiNg of eNtities coNtributiNg to the crisis iN UkraiNe; block New project fuNdiNg for Russia from the EuropeaN INvestmeNt BaNk, aNd coordiNate Member State positioNs to similarly block fuNdiNg from the EuropeaN BaNk of RecoNstructioN aNd DevelopmeNt; aNd restrict iNvestmeNts iN Crimea aNd Sevastopol. New US SaNctioNs IssuaNce of Sectoral SaNctioNs IdeNtificatioN List IN NamiNg eNtities to the SSI List, OFAC has imposed the first “sectoral” saNctioNs oN Russia uNder Executive Order 13662, targetiNg certaiN eNtities iN the RussiaN finaNcial aNd eNergy sectors. OFAC has stopped short of “blockiNg” the listed eNtities as Specially DesigNated NatioNals (SDNs). Rather, OFAC has restricted US persoNs aNd persoNs withiN the UNited States from traNsactiNg iN, providiNg finaNciNg for, or otherwise dealiNg iN New “debt” of loNger thaN 90 days’ maturity issued for saNctioNed persoNs, aNy eNtity such saNctioNed persoN owNs, directly or iNdirectly, 50 perceNt or more, their property, or their iNterests iN property. IN the case of the saNctioNed eNtities solely iN the finaNcial sector, the same restrictioNs also apply to Newly issued “equity.” All other traNsactioNs with these persoNs or iNvolviNg their property or property iNterests are permitted, provided that they do Not iNvolve blocked property uNder UkraiNe-related Executive Order 13660, 13661, or 13662, or aNy other saNctioNs program admiNistered aNd eNforced by OFAC. The SSI List ideNtifies eNtities iN the RussiaN finaNcial aNd eNergy sectors that OFAC has targeted for the New debt aNd New equity saNctioNs. The list iNcludes two directives—Directive 1 pertaiNiNg to certaiN RussiaN eNtities the finaNcial sector, aNd Directive 2 pertaiNiNg to specific RussiaN eNtities iN the eNergy sector (together, the OFAC Directives). Several aspects of the OFAC Directives are Notable, with specific iNformatioN provided iN FrequeNtly Asked QuestioNs GuidaNce (FAQ GuidaNce) published oN the OFAC website aNd summarized as follows: DefinitioN of debt. “Debt” iNcludes boNds, loaNs, exteNsioNs of credit, loaN guaraNtees, letters of credit, drafts, baNkers acceptaNces, discouNt Notes or bills, or commercial paper. DefinitioN of equity. “Equity” iNcludes stocks, share issuaNces, depositary receipts, or aNy other evideNce of title or owNership. Broader restrictioNs for RussiaN finaNcial sector. Directive 1 restricts traNsactioNs related to New debt aNd New equity issued by listed eNtities iN the finaNcial sector. Directive 2, which pertaiNs to the eNergy sector, restricts traNsactioNs related oNly to New debt oNly. Effective dates. The restrictioNs set forth iN Directives 1 aNd 2 apply to New debt aNd New equity issued oN or after July 16, 2014 aNd with a maturity of 90 days or loNger. RestrictioNs oN New debt for the RussiaN finaNcial aNd eNergy sectors. The Directives prohibit traNsactioNs iNvolviNg New debt; finaNciNg iN support of such debt; aNd aNy dealiNg iN such debt, iNcludiNg services iN support thereof, for saNctioNed persoNs. [N.B. A prior versioN of the Directives previously stated that the restrictioNs applied to New debt or New equity issued “of” these persoNs, but have beeN chaNged to apply to debt for these persoNs. AdditioNally, the FAQ guidaNce of July 16, 2014 appears to overstate the Directives’ restrictioNs to be applied to New debt issued “by, oN behalf of, or for the beNefit of” the persoNs operatiNg iN Russia’s finaNcial aNd eNergy sectors.] The OFAC Directives also apply to rollover of existiNg debt where the rollover results iN the creatioN of New debt with a maturity of loNger thaN 90 days. RestrictioNs oN New equity for the RussiaN finaNcial sector. Directive 1 prohibits traNsactioNs iNvolviNg New equity; finaNciNg iN support of such equity; aNd aNy dealiNg iN such equity, iNcludiNg services iN support thereof, for saNctioNed persoNs iN the finaNcial sector. Applicability to subsidiaries, property, aNd iNterests iN property of saNctioNed eNtities. The Directives apply to New debt aNd equity issued for persoNs Not oNly ideNtified oN SSI List , but also eNtities owNed 50 perceNt or more by listed eNtities, as well as their “property” aNd “iNterests iN property.” These terms are broadly defined iN 31 C.F.R. § 589.308. Permissible traNsactioNs. The followiNg types of traNsactioNs curreNtly are permitted: TraNsactiNg iN, finaNciNg, or dealiNg iN debt aNd equity issued before July 16, 2014 TraNsactiNg iN, finaNciNg, or dealiNg iN debt with a maturity of 90 days or less, eveN if issued after July 16, 2014 TraNsactiNg iN, finaNciNg, or dealiNg iN New equity for eNtities operatiNg iN the RussiaN eNergy sector For US finaNcial iNstitutioNs, maiNtaiNiNg correspoNdeNt accouNts aNd processiNg US dollar-cleariNg traNsactioNs for listed eNtities, provided that such services are Not used for traNsactioNs prohibited by the Directives Derivative products. GeNeral LiceNse No. 1 authorizes US persoNs aNd persoNs iN the UNited States to eNgage iN traNsactioNs iNvolviNg derivative products whose value is liNked to uNderlyiNg debt or equity that is restricted uNder the Directives. No blockiNg. Notably, the eNtities ideNtified oN the SSI List are Not also desigNated oN OFAC’s SDN List. Therefore, US persoNs aNd persoNs located iN the UNited States are Not required to block the property aNd iNterests iN property of saNctioNed persoNs that come iNto their possessioN or coNtrol. Rather, US persoNs should reject restricted traNsactioNs, aNd aNy “finaNcial iNstitutioN” must report rejected traNsactioNs to OFAC withiN 10 days iN accordaNce with SectioN 501.604 of the ReportiNg, Procedures aNd PeNalties RegulatioNs (31 C.F.R. Part 501). OFAC Notes that it is possible SSI List eNtities may be desigNated as SDNs uNder Executive Order 13662 or other authority iN the future. LiceNsiNg. IN the iNtroductioN to the SSI List, OFAC states that “[e]Ntities aNd iNdividuals oN the list are occasioNally liceNsed by OFAC to traNsact busiNess with US persoNs iN aNticipatioN of removal from the list or because of foreigN policy coNsideratioNs iN uNique circumstaNces.” SaNctioNed eNtities iN the RussiaN finaNcial sector iNclude: BaNk for DevelopmeNt aNd ForeigN EcoNomic Affairs (VNeshecoNombaNk) State CorporatioN (a.k.a. VNeshecoNombaNk, a.k.a. VEB) GazprombaNk OJSC SaNctioNed eNtities iN the RussiaN eNergy sector iNclude: Novatek Rosneft There are multiple eNtries oN the SSI List for each of the eNtities listed above, reflectiNg differeNt Names uNder which the eNtities are doiNg busiNess. New SDN DesigNatioNs OFAC desigNated five iNdividuals aNd eleveN eNtities uNder Executive Orders 13660 aNd 13661. These persoNs are listed as SDNs aNd are thus “blocked.” This meaNs that the property or property iNterests of the SDN located iN the UNited States or iN the possessioN or coNtrol of a US persoN, such as a US baNk or other finaNcial iNstitutioN, are frozeN. This effectively cuts off the saNctioNed persoNs from the US finaNcial aNd commercial system, aNd prohibits US persoNs from y p y , p p coNductiNg busiNess with the saNctioNed persoNs aNywhere iN the world. SaNctioNed iNdividuals iNclude: Sergey Beseda, a seNior officer iN the RussiaN Federal Security Service AleksaNdr Yurevich Borodai, who has declared himself “Prime MiNister of the People’s Republic of DoNetsk” Sergei IvaNovich Neverov, Deputy ChairmaN of the RussiaN State Duma Oleg GeNrikhovich Savelyev, MiNister for CrimeaN Affairs Igor Shchegolev, aide to RussiaN PresideNt Vladimir PutiN SaNctioNed eNtities iNclude: DoNetsk People’s Republic (a separatist eNtity that has illegitimately declared iNdepeNdeNce iN easterN UkraiNe) Federal State UNitary ENterprise State Research aNd ProductioN ENterprise Bazalt; Feodosiya ENterprise JSC CoNcerN Radio-ElectroNic TechNologies JSC CoNcerN Sozvezdie JSC Military-INdustrial CorporatioN NPO MashiNostroyeNia JSC CoNcerN Almaz-ANtey KalashNikov CoNcerN KoNstruktorskoe Byuro PriborostroeNiya Otkrtoe AktsioNerNoe Obshchestvo (a.k.a. INstrumeNt DesigN Bureau) LuhaNsk People’s Republic (a separatist eNtity that has illegitimately declared iNdepeNdeNce iN easterN UkraiNe) UralvagoNzavod With the exceptioN of the DoNetsk People’s Republic aNd LuhaNsk People’s Republic, which are separatist eNtities, the SDN eNtities listed above operate iN the RussiaN arms aNd related materiel sectors. If aNy of the above eNtities owNs aNother eNtity 50 perceNt or more, the property aNd property iNterests of the secoNd, NoN- desigNated eNtity are also deemed blocked uNder § 589.406, aNd caNNot be dealt iN. The desigNatioN of KalashNikov CoNcerN (KalashNikov)