Ukraine-/-Related Sanctions Update and Overview: U.S. and EU Reaffirm Sanctions

August 8, 2016

By Jennifer M. Smith, Stewart and Stewart

In July 2016, President Obama and Secretary of State John Kerry reaffirmed that the U.S.’s -/Russia-related economic sanctions will remain in effect unless Russia fulfils its obligations under an agreement reached in February 2015 in Minsk. Also in July 2016, the European Union (“EU”) extended its economic sanctions on Russia by six months until the end of January 2017.

An overview of the various sanctions imposed by the and other countries is provided below. The various sanctions have resulted in a complex web of restrictions, as some countries are employing similar overall approaches, but they are not identical — the particular sanctions imposed differ by country. Anyone engaging in potentially affected transactions must carefully analyze all applicable restrictions and sanctions lists.

Stewart and Stewart maintains — and has recently updated — a comparison table of the persons and entities currently sanctioned by the United States, the EU, Canada, Australia, and Japan here.

I. Background

In 2014, the United States, the EU, and other countries began imposing sanctions against various individuals and entities in response to Russian military intervention in eastern Ukraine, a referendum in Crimea that favored breaking away from Ukraine and joining Russia, and Russia’s subsequent annexation of Crimea.

In September 2014, representatives of Ukraine, the Russian Federation, the Organization for and Co-operation in Europe (“OSCE”), and leaders of the self-proclaimed Donetsk and Luhansk People’s Republics signed a ceasefire agreement called the Minsk Protocol. After hostilities resumed again, the leaders of Ukraine, Russia, France, and and pro-Russian separatists reached a new agreement, called “Minsk II,” in February 2015. The Minsk II agreement provided for, among other things, an immediate ceasefire, withdrawal of heavy weapons within 14 days, exchanges of prisoners, access for humanitarian aid, amnesty for separatists, restoring border control to the Ukrainian government, constitutional reform in Ukraine, and free elections on autonomous status for Donetsk and Luhansk by the end of 2015. Most of those processes have yet to be implemented: fighting continues in some places, heavy weapons have not been withdrawn, the exchange of prisoners has broken down, humanitarian aid is limited, Ukraine has not granted amnesty to separatists, Ukrainian border guards have not been restored along the Russian border, the Ukrainian constitutional reform has been indefinitely postponed, and the elections have not yet occurred.

U.S., European, and Canadian officials have made clear that they will not lift sanctions until Russia fully complies with its Minsk agreement obligations. On July 7, 2016, Secretary Kerry reaffirmed the U.S. commitment to maintaining the economic sanctions at a joint news conference with the Ukrainian president ahead of a NATO summit. The next day, President Obama stated in a Financial Times op-ed that “even as our nations remain open to a more constructive relationship with Russia, we should agree that sanctions on Russia must remain in place until fully implements its obligations under the Minsk agreements.”1

II. The U.S.’s Ukraine-/Russia-Related Sanctions

The United States’ Ukraine-/Russia-related sanctions are currently administered by the Treasury Department’s Office of Foreign Assets Control (“OFAC”), the Commerce Department’s Bureau of Industry and Security (“BIS”), and the State Department’s Directorate of Defense Trade Controls (“DDTC”).

A. OFAC Sanctions

OFAC’s sanctions program currently consists of three different categories of sanctions:

(1) Traditional blocking sanctions against specific Ukraine- and Russia-related individuals and entities, which are listed on the List of Specially Designated Nationals and Blocked Persons (“SDN List”);

(2) Sectoral sanctions prohibiting certain types of transactions with specific entities operating in particular sectors of the Russian economy, which are listed on the Sectoral Sanctions Identification List (“SSI List”); and

(3) Prohibitions on new investment and on the exportation or importation of goods, technology, or services to or from Crimea.

1. U.S. Blocking Sanctions (SDN List)

First, the United States has designated a wide variety of individuals and entities on the SDN list. The sanctioned individuals and entities include:

• Crimean separatists and Russian supporters; • Crimea-based businesses; • Crimean seaports; • Former Ukrainian government officials; • Russian government officials and members of Russian President Putin’s inner circle; • Russian ; • Russian defense and arms companies, such as Kalashnikov Concern and the Almaz-Antey Group; • Businesses and holding companies owned or controlled by sanctioned persons; and • Individuals and entities that have supported serious and sustained evasion of sanctions.

U.S. individuals, companies and other entities (including foreign branches), and persons within the United States are prohibited from engaging in transactions with persons and entities on the SDN List. The assets of the persons and entities on the SDN List are blocked. Individuals designated on the SDN List are also subject to travel bans.

Further, under U.S. law, any entity that is directly or indirectly owned 50% or more in the aggregate by one or more blocked persons is also automatically blocked, even if such entity is not listed on the SDN list or otherwise designated.

1 Barack Obama, America’s alliance with Britain and Europe will endure, Fin. Times, July 8, 2016, available at http://www.ft.com/cms/s/0/ededcb24-4444-11e6-9b66-0712b3873ae1.html#axzz4EPJjU3Dw. 2. U.S. Sectoral Sanctions (SSI List)

Second, the United States has invented a completely new type of sanctions, called “sectoral sanctions,” specifically for its Russia sanctions regime. U.S. sectoral sanctions, which are authorized pursuant to Executive Order 13662, apply to certain companies in the Russian , energy, and defense sectors — some of the most profitable sectors of the Russian economy.

Unlike the companies designated on the SDN list, companies subject to sectoral sanctions are not completely blocked, and transactions with such companies are not completely prohibited. Rather, only certain transactions with companies subject to sectoral sanctions are banned.

The U.S. government considers entities owned 50% or more in the aggregate by one or more persons on the SSI List to be automatically subject to the corresponding sectoral sanctions.

Financial Services Sector

Under Directive 1 Pursuant to Executive Order 13662, U.S. individuals, companies and other entities (including foreign branches), and persons within the United States are currently prohibited from transacting in, providing financing for or otherwise dealing with the new debt of greater than 30 days maturity or new equity for designated entities in the financial sector, their property, or their interests in property. The designated companies include:

• Sberbank of Russia – the largest in Russia;

• VTB Bank OAO – Russia’s second-largest banking group;

• Gazprombank OAO – the third-largest bank in Russia and the financial arm of the world’s largest gas producer, , which provides financial services to more than 45,000 companies and has 40 branches in Russia;

• Vnesheconombank (VEB) – a Russian state-owned financial institution that acts as a development bank and payment agent for the Russian government;

• Russian Agricultural Bank/Rosselkhozbank – a Russian state-owned financial institution that acts as a Russian government agent and has the second-largest regional branch network in the Russia; and

• a number of subsidiaries of such banks.

Energy Sector

Under Directive 2 Pursuant to Executive Order 13662, U.S. individuals, companies and other entities (including foreign branches), and persons within the United States are currently prohibited from dealing with new debt of longer than 90 days maturity for designated energy companies. These companies include:

– Russia’s largest petroleum company and third-largest gas producer;

• Gazprom Neft – the fourth-largest oil producer in Russia;

– a Russian government-owned pipeline company; • OAO – Russia’s largest independent natural gas producer; and

• a number of subsidiaries of Rosneft.

Under Directive 4 Pursuant to Executive Order 13662, U.S. individuals, companies and other entities (including foreign branches), and persons within the United States are also currently prohibited from providing, exporting, or re-exporting goods, services, or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in Russia and involve designated companies. This prohibition applies to five Russian oil companies:

• Gazprom – a large government-owned energy company that engages in gas exploration, production, transportation, storage, processing and sales;

• Gazprom Neft;

– a Russia-based oil and gas company;

– another Russian oil and gas company; and

• Rosneft and related companies.

Defense Sector

Under Directive 3 Pursuant to Executive Order 13662, U.S. individuals, companies and other entities (including foreign branches), and persons within the United States are prohibited from transacting in, providing financing for or otherwise dealing with the new debt of longer than 30 days maturity of designated defense companies. Currently, the only designated companies are Rostec, a state-owned defense conglomerate, and its subsidiaries.

3. U.S. Trade Embargo and New Investment Ban Regarding Crimea

Third, the United States has imposed comprehensive sanctions against the region of Crimea under Executive Order 13685 of December 2014. The following transactions involving Crimea are generally prohibited:

• New investment in Crimea by U.S. individuals and companies and other entities (including foreign branches);

• The importation into the United States, directly or indirectly, of any goods, services, or technology from Crimea; and

• The exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by U.S. individuals, companies, and other entities (including foreign branches), of any goods, services, or technology to Crimea.

The sanctions differ from traditional sanctions because they cover only a particular geographic region within a country and are not imposed on the country as a whole. This increases risk for companies, who must ensure that they are particularly careful about transactions potentially involving Crimea. 4. Facilitation

OFAC’s regulations generally prohibit “facilitation” of transactions with sanctioned individuals and companies that would otherwise be prohibited under OFAC’s sanctions. U.S. companies and other entities, and individuals within such entities, must be careful to ensure that transactions involving foreign affiliates and subsidiaries do not constitute facilitation.

B. BIS and DDTC Sanctions

Unlike the OFAC sanctions, which regulate the conduct of persons, the BIS and DDTC restrictions apply to the export, reexport or foreign transfer of U.S.-origin items (including items in the possession of foreign persons outside of the United States). The BIS and DDTC restrictions are summarized below.

1. Military and Defense-Related Restrictions

In late March 2014, the BIS and DDTC placed a hold on issuing licenses for exports and re- exports of controlled items, defense articles, and defense services to Russia until further notice. In April 2014, the BIS and DDTC announced that they would deny pending applications for licenses and revoke existing licenses to export or reexport controlled “high technology” items to Russia or occupied Crimea that contribute to Russia’s military capabilities.

BIS subsequently imposed an export license requirement under 15 C.F.R. § 744.21 for exports, reexports, or transfers of listed items when the exporter knows or has been informed by BIS that the item is intended, entirely or in part, for a military end use or military end user in Russia. BIS will deny licenses for exports, reexports, or transfers that it determines would make a material contribution to Russia’s military capabilities.

2. Energy Sector Restrictions

Under 15 C.F.R. § 746.5, BIS requires a license for exports, reexports, or transfers of listed items when the exporter knows or has been informed by BIS that the item will be used directly or indirectly in exploration for, or production of, oil or gas in Russian deepwater, Arctic offshore locations, or shale formations in Russia, or is unable to determine whether the item will be used in such projects. A presumption of denial applies for exports, reexports, or transfer for projects that have the potential to produce oil. BIS will review license applications for projects that have the potential to produce gas on a case-by-case basis.

3. Crimea

Under 15 C.F.R. § 746.6, a license is generally required to export or reexport to Crimea or transfer within Crimea any item subject to the EAR, other than food and medicine designated as EAR99 and certain software necessary to enable exchange of personal communications over the Internet. BIS will review license applications with a presumption of denial, except for items authorized under OFAC Ukraine-Related General License (GL) No. 4 such as medical devices, medical supplies, and agricultural commodities, which will be reviewed on a case-by-case basis. There are some limited exceptions to this license requirement. 4. Entity List

The BIS has added several Crimean and Russian entities to its Entity List. These entities include, but are not limited to, Russian defense and energy companies. The BIS’s Entity List designations overlap with, but do not match, OFAC’s designations.

Typically, a license is required for the export, reexport or foreign transfer of any items subject to the EAR to entities designated on the Entity List, with a presumption of denial. These restrictions apply to most of the Crimean and Russian entities on the Entity List. However, BIS has designated five Russian energy companies on the Entity List that are subject to fewer restrictions than those applicable to most entities on the Entity List:

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

For these five companies, a license is required for export, re-export or foreign transfer of items subject to the EAR when the exporter, reexporter or transferor knows those items will be used directly or indirectly in exploration for, or production from, deepwater, Arctic offshore, or shale projects in Russia. License applications for such transactions will be reviewed with a presumption of denial when for use for projects in Russia with the potential to produce oil.

III. Sanctions Imposed by the EU and Other Countries

The United States developed its sanctions in close coordination with the EU and other countries. The U.S. sanctions overlap with, but do not match, the sanctions that have been imposed by the EU and other countries. The EU, Canada, Australia, and Japan have imposed various asset freezes and travel bans, sectoral sanctions, restrictions on trade in arms and dual-use items and technologies, and trade embargoes on Crimea and . These measures are summarized and compared with each other, and with the U.S. sanctions detailed above, in the following table. Sanctions U.S. EU Canada Australia Japan Measures Asset The United States has designated The EU has imposed Canada has Australia has imposed Japan has Freezes and a large number of individuals for asset freezes and imposed asset asset freezes and travel stopped issuing Travel Bans asset freezes and travel bans and travel bans on a large freezes on a large bans on a large number visas to certain a large number of entities for number of individuals number of of individuals and asset individuals and asset freezes under its blocking and asset freezes on a individuals and freezes on a large frozen the assets sanctions. large number of entities, similar to number of entities, of certain entities, similar to the the U.S. blocking similar to the U.S. individuals and U.S. blocking sanctions. blocking sanctions. entities. sanctions. Financial U.S. individuals, companies and EU nationals and Any person in Australia generally Japan has Sectoral other entities (including foreign companies are Canada and prohibits direct or prohibited Sanctions branches), and persons within the prohibited from Canadians abroad indirect purchase or sale investment in United States are currently buying, selling, or are prohibited of, or any other dealing securities prohibited from transacting in, assisting in issuing from dealing in with, bonds, equity, (including shares providing financing for or new bonds, equity, or new securities or transferable securities, and bonds) with a otherwise dealing with the new similar financial new debt of longer money market maturity debt of greater than 30 days instruments with a than 30 days instruments or other exceeding 90 maturity or new equity for maturity exceeding 30 maturity in relation similar financial days issued by designated entities in the Russian days issued by, or to designated instruments having a five Russian financial sector, their property, or providing loans with a Russian banks maturity exceeding 30 banks (Sberbank, their interests in property. maturity exceeding 30 (Sberbank, VTB days issued by five VTB, days to five major Bank, designated Russian Gazprombank, state-owned Russian Gazprombank, banks (Sberbank, VTB VEB, and banks (Sberbank, VTB VEB, Bank, Gazprombank, Rosselkhozbank) Bank, Gazprombank, Rosselkhozbank, VEB, and and their VEB, and and Bank of Rosselkhozbank) subsidiaries. Rosselkhozbank), Moscow). without a sanctions Japan has not subsidiaries outside permit. prohibited lending the EU of such to the banks entities, and those designated for acting on their behalf sectoral or at their direction. sanctions. Energy U.S. individuals, companies and EU nationals and Any person in Australia generally Japan has not Sectoral other entities (including foreign companies are Canada and prohibits direct or imposed any Sanctions & branches), and persons within the prohibited from Canadians abroad indirect purchase or sale sectoral sanctions Restrictions United States are prohibited from buying, selling, or are prohibited of, or any other dealing on the Russian on Energy- dealing with new debt of longer assisting in issuing from dealing in with, bonds, equity, energy sector. Related than 90 days maturity for new bonds, equity, or new debt of longer transferable securities, Exports designated Russian energy similar financial than 90 days money market companies and from providing, instruments with a maturity in relation instruments or other exporting, or re-exporting goods, maturity exceeding 30 to designated similar financial services, or technology in support days issued by, or Russian energy instruments having a of exploration or production for providing loans with a companies maturity exceeding 30 deepwater, Arctic offshore, or maturity exceeding 30 (Gazprom Neft, days issued by three shale projects that have the days to three major Gazprom, designated Russian potential to produce oil in Russia Russian energy Transneft, energy companies and involve designated Russian companies (Gazprom Novatek, Rosneft, (Gazprom Neft, energy companies. Neft, Gazprom, and and Transneft, and Rosneft) Transneft), Surgutneftegas). without a sanctions An export license is required for subsidiaries outside permit. exports to designated companies the EU of such Canada also when the exporter knows those entities, and those prohibits the Australia also prohibits items will be used directly or acting on their behalf export, sale, the direct or indirect indirectly in exploration for, or or at their direction. supply, or shipping supply, sale or transfer production from, deepwater, of certain to Russia, for use in Arctic offshore, or shale projects The EU also requires designated goods Russia, or for the benefit in Russia. License applications prior authorization to Russia or to any of Russia, of specified for such transactions will be (i.e., licenses) for person in Russia items suited to reviewed with a presumption of exports of certain for their use in deepwater, Arctic denial when for use for projects in energy-related deepwater, Arctic offshore, or certain shale Russia with the potential to equipment and offshore, or shale oil exploration and produce oil. technology to Russia. oil exploration and production projects in Export licenses will be production, as well Russia, as well as The U.S. also requires export denied if products are as the provision of related drilling, well- licenses when the exporter knows destined for any financial, testing, and logging and or has been informed by BIS that deepwater, Arctic technical, or other completion services and the item will be used directly or offshore, or shale oil services related to supply of specialized indirectly in exploration for, or exploration and such goods. floating vessels, without production of, oil or gas in production. Drilling, a sanctions permit. Russian deepwater, Arctic well testing, logging, offshore locations, or shale and completion formations in Russia, or is unable services and supply of to determine whether the item will specialized floating be used in such projects. A vessels may not be presumption of denial applies for provided for such exports, reexports, or transfer for projects. projects that have the potential to produce oil. BIS will review license applications for projects that have the potential to produce gas on a case-by-case basis. Defense U.S. individuals, companies and EU nationals and Australia generally Sectoral other entities (including foreign companies are prohibits direct or Sanctions branches), and persons within the prohibited from indirect purchase or sale United States are prohibited from buying, selling, or of, or any other dealing transacting in, providing financing assisting in issuing with, bonds, equity, for or otherwise dealing with the new bonds, equity, or transferable securities, new debt of longer than 30 days similar financial money market maturity of Rostec and its instruments with a instruments or other subsidiaries. maturity exceeding 30 similar financial days issued by, or instruments having a providing loans with a maturity exceeding 30 maturity exceeding 30 days issued by three days to three major designated Russian Russian defense defense companies companies (Oboronprom, United (Oboronprom, United Aircraft Corp., and Aircraft Corp., and Uralvagonzavod) without Uralvagonzavod), a sanctions permit. subsidiaries outside the EU of such entities, and those acting on their behalf or at their direction. Restrictions Licenses for controlled “high The EU has export Australia prohibits Japan has on Trade in technology” items to Russia or and import bans on imports from Russia of tightened export Arms and occupied Crimea that contribute trade in arms with arms or related materiel; restrictions on Dual-Use to Russia’s military capabilities Russia and an export the direct or indirect arms, dual-use Items & will be denied or revoked. An ban for dual-use supply, sale or transfer goods for military Technologies export license is required for goods for military use to Russia, for use in use, and related listed items when the exporter or military end users in Russia, or for the benefit technologies. knows or has been informed by Russia and nine mixed of Russia, of arms or BIS that the item is intended, end-users who provide related materiel; and the entirely or in part, for a military services to the provision to Russia of end use or military end user in Russian military. technical or financial Russia. BIS will deny licenses for assistance or other exports, reexports, or transfers services provided in that it determines would make a relation to a military material contribution to Russia’s activity or the military capabilities. manufacture, maintenance, or use of arms or related materiel without a sanctions permit. Crimea & The U.S. generally prohibits: The EU prohibits: Canada prohibits: Australia prohibits, Japan has Sevastopol (1) Imports from Crimea; (1) Imports from (1) Imports of and without a sanctions banned imports Trade (2) New investment in Crimea; Crimea and dealings in permit: from Crimea and Embargoes and Sevastopol; goods from (1) Imports of goods Sevastopol. (3) The exportation, (2) Investment in Crimea; from Crimea and reexportation, sale, or supply, Crimea (including (2) Investment in financial assistance directly or indirectly, from the buying real estate Crimea that and services related United States, or by U.S. or entities in involves a to such imports; individuals, companies, and Crimea, financing dealing in any (2) Exports of, financial other entities (including Crimean property, assistance, technical foreign branches), of any companies, located in advice, and other goods, services, or supplying related Crimea, held services related to, technology to Crimea. services, and by or on designated goods investing in behalf of relating to the infrastructure Crimea or a creation, acquisition projects in six person in or development of sectors); Crimea, or infrastructure in the (3) Supplying tourism providing sectors of transport, services in Crimea related telecommunications, and Sevastopol; services; energy, and (4) Exports of key (3) Exports and exploitation of oil, goods for certain dealings in gas and mineral sectors, including goods reserves in Crimea equipment for the destined for or Sevastopol; prospection, Crimea; (3) Financial loans or exploration, and (4) Transferring, credit, establishing production of oil, providing, or of joint ventures, gas, and mineral communicatin and the acquisition resources; and g technical or extension by a (5) Technical data or person of an interest assistance, services to, in an enterprise that brokering, from or for the was established in construction or benefit of or Crimea or engineering on the Sevastopol relating services related to direction or to the creation, infrastructure in order of acquisition or the designated Crimea or any development of sectors. person in infrastructure in the Crimea; sectors of transport, (5) Providing or telecommunications, acquiring energy, and financial or exploitation of oil, other services gas and mineral related to reserves in Crimea tourism, to, or Sevastopol; and from or for the (4) Investment services benefit of or related to other on the sanctioned direction or commercial order of activities. Crimea or any person in Crimea; or (6) Docking a cruise ship in Crimea. In addition, many other countries have followed the EU’s sanctions, at least in some respects. These countries include Albania, Georgia, Iceland, Lichtenstein, Moldova, Montenegro, Norway, and Ukraine. has implemented measures to prevent the circumvention of the EU’s sanctions, banned all imports from and exports of certain key goods used in the extraction of oil and gas to Crimea and Sevastopol, and restricted investments for Crimea and Sevastopol. Ukraine has also sanctioned additional individuals and entities in Russia and other countries.

New Zealand has announced travel bans on selected Russian and Ukrainian individuals and suspended negotiations with Russia on a free trade deal.

V. Russia’s Retaliatory Sanctions

In retaliation, Russia has banned imports of certain foods from the United States, Canada, the European Union, Australia, Albania, Iceland, Lichtenstein, Montenegro, Norway, and Ukraine. In late June, Russia extended the import ban until the end of 2017. Ukraine, in turn, has banned Russian food imports.

In addition, Russia has imposed sanctions in the form of asset freezes and travel bans on about 200 individuals from other countries, primarily politicians, civil servants and other public figures, according to a March 2015 Russian news report.2 In July of 2016, Russia denied entry to, detained at the Moscow airport, and ultimately expelled the chairman of the U.S. Broadcasting Board of Governors, Jeff Shell, because he was on an undisclosed list of persons subject to retaliatory sanctions. Russia has also denied entry to certain Canadian and European politicians and officials.

VI. Implications for U.S. Individuals and Companies

Violation of U.S. export control and sanctions laws can result in severe civil and criminal penalties. Accordingly, businesses, other entities, and individuals must carefully examine their transactions that may involve Ukraine, Russia, Crimea, or designated persons; ensure that they understand the types of transactions, dealings, and exports and re-exports that are prohibited before engaging in transactions, exports, or re-exports; and regularly monitor the relevant lists of sanctioned entities to ensure that their dealings do not involve sanctioned persons. Ongoing changes are an important characteristic of the Ukraine- and Russia-related sanctions.

U.S. individuals and companies should consider adding contract language to ensure that sanctioned persons will not be involved in transactions and to address the contingency that a party becomes subject to sanctions in the future. U.S. individuals and companies should also consider adding contractual language requiring foreign business partners to monitor the SDN List and other relevant lists and alert them of possible issues. Even with these contractual guarantees, U.S. individuals and companies need to exercise caution — such contractual guarantees will not insulate U.S. persons from potential penalties under the strict liability standard that applies to sanctions violations.

OFAC’s 50% rules mean that a sanctions program for one country could unexpectedly cover entities in other countries. We have seen a number of situations where sanctions on the Russian sector are extended to third-country hotels and entertainment venues. A thorough knowledge of foreign business partners is essential to avoid this type of exposure to liability under the U.S. sanctions laws.

2 Russia slaps personal sanctions on 200+ foreign citizens – report, RT, Mar. 19, 2015, available at https://www.rt.com/politics/242113-russia-sanctions-russophobes-mccain/. If you have any questions about the Ukraine-/Russia-related sanctions and how these measures may affect your business or specific transactions, please contact Alan M. Dunn or Jennifer M. Smith.

DISCLAIMER: This material, including the table linked above, provides background information only. It does not constitute legal advice or establish an attorney-client relationship with any recipient. This material should not be viewed as comprehensive. Modifications can occur at any time. Stewart and Stewart does not represent, warrant, or guarantee that this material is complete, accurate, or up-to-date. Anyone with a question or need to know about the relevant laws, regulations, rules, requirements, and restrictions should contact a lawyer or relevant government agencies.