United States and Europe Expand Sanctions against Russia
The U.S. Sanctions
On July 29, 2014, the U.S. Office of Foreign Assets Control (“OFAC”) added additional Russian banks to its recently created Sectoral Sanctions Identification List (“SSI List”). The newly-listed banks include Bank of Moscow and Russian Agricultural Bank, among others. They join OFAC’s previous Directive 1 designees on the SSI List, Gazprombank (GPB) and Vnesheconombank (VEB), which OFAC identified on July 16.
As previously reported, the SSI List prohibits U.S. persons from dealing in new debt (with a maturity of more than 90 days) or new equity of these banks, or such new debt or equity of companies in which they hold a 50 percent or greater interest. Entities identified on the SSI List are not Specially Designated Nationals and their property is not blocked. U.S. persons are required to reject any transactions that would violate the SSI List’s directives, and are barred from providing any services in support of such new debt or equity.
In addition to expanding the SSI List, OFAC also added a Russian civilian and military shipbuilding company, United Shipbuilding Corporation, to its Specially Designated Nationals List (“SDN List”). The U.S. Department of Commerce also added United Shipbuilding Corporation to its Entity List. As a result, exports, reexports or other foreign transfers of items subject to the EAR to the United Shipbuilding Corporation now require a license. Commerce will review applications for such licenses with a presumption of denial.
The new U.S. sanctions come one day after European Union officials agreed to increase sanctions against Russia in response to separatists’ alleged interference with the investigation of the Malaysia Airlines Flight 17 crash site.
The European Sanctions
In its most decisive action since the beginning of the Ukraine crisis, the EU has imposed sanctions targeting specific sectors of the Russian economy (so called “phase three sanctions”). This is in addition to an update to existing measures, including the listing of additional individuals and entities whose assets must be frozen.
The new sanctions go much further than the EU’s earlier sanctions – visa bans and asset freezes – on designated parties, or other sanctions having a limited scope. The latter took the form of an import ban on products “originating in” Crimea and Sevastopol and the European Investment Bank’s suspension of new financing of public sector projects in Russia.
The new measures not only ban all trade in military products between the EU and Russia, as well as exports of dual-use goods intended for military use, but they also restrict Russia’s access to EU capital markets and target parts of the Russian energy sector.
The new regime is prospective in that it applies only to new contracts. However, the immediate effects of the measures should not be discounted.
The defence sector, as well as suppliers of dual-use equipment for military use, will be hit first.
Any new contracts involving weapons and related equipment (including ancillary services) are prohibited. Any transfer of any dual-use item to the Russian Military or that involves a military end-use or end-user is also prohibited, although the preamble to the relevant legal instrument suggests that space and aeronautics industries should not be affected.
Big players in energy markets will also have to adapt to the new legislative environment. If the end-use of specific products is expected to be in Russia, economic operators subject to the new rules, including sellers and exporters, will have to comply with a comprehensive prior authorization regime. Authorizations will be denied if the transaction pertains to deep water oil exploration and production, arctic oil exploration or production and shale oil projects in Russia.
Banks and other financial institutions working with major state-owned Russian banks and development banks, including certain subsidiaries and other related entities, may find it very difficult to carry out certain transactions, if at all.
Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB) and Rosselkhozbank are blacklisted to the extent transactions involve transferable securities and money-market instruments with a maturity exceeding 90 days, issued after August 1, 2014.
The new measures, as combined with an update to the existing asset freezing measures, are expected to have a general chilling effect on trade and financial flows between Russia and the EU, which will be compounded by the way asset freezes may be enforced by EU Member States.
In addition to making it virtually impossible to do business with listed individuals or entities, even dealings with non-listed entities that are owned or controlled by listed individuals may create legal risks. This is particularly burdensome in this case as the EU targets particularly wealthy individuals and major corporations including, most recently, the Russian National Commercial Bank.
If you have any questions regarding this update, please contact the Sidley lawyer with whom you usually work or
Lisa A. Crosby
Andrew W. Shoyer
Sven De Knop
Sidley Economic Sanctions Practice
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