In response to the ongoing situation in Ukraine, the United States has issued a new set of sanctions targeting the Russian energy and financial services sectors.1 On July 16, 2014, pursuant to authority under Executive Order 13662, the Administration announced the creation of a new Sectoral Sanctions Identifications List (the “SSI List”) on which it simultaneously placed four prominent Russian companies: Gazprombank OAO2, VEB3, OAO Novatek4 and Rosneft5. We explain the new sanctions and the practical ramifications for U.S. Persons6 in this Alert.
What is the SSI List?
The SSI List is maintained by OFAC and includes individuals or entities determined by OFAC to be operating in the financial services, energy, metals and mining, engineering, defense and related materiel sectors of the Russian economy, as identified in E.O. 13662. The SSI List contains two separate “directives” which set forth the prohibitions for U.S. Persons considering transactions with those named to the SSI List.
Directive 1 prohibits U.S. Persons from transacting in, providing financing for, or otherwise dealing in debt with a maturity of longer than 90 days or equity, if that debt or equity is issued on or after July 16, 2014 (respectively, “New Debt” or “New Equity”), for any named person, their property, or their interests in property. Directive 2 prohibits U.S. Persons from transacting in, providing financing for, or otherwise dealing in New Debt for any named person, their property, or their interests in property. Notably, Directive 2 does not include a prohibition on New Equity.
The prohibitions in Directive 1 apply to Gazprombank OAO and VEB, while the prohibitions in Directive 2 apply to OAO Novatek and Rosneft. The prohibitions likewise apply to any other entity which one of the foregoing sanctioned companies has a 50% or greater ownership interest, and all financing and the provision of services in support of the New Debt and New Equity.
OFAC also issued a new general license relating to transactions with entities named to the SSI List. General License 1 permits U.S. Persons to engage in transactions involving derivative products whose value is linked to an underlying asset that constitutes New Debt or New Equity, and would otherwise be prohibited.
Additions to the SDN List
Also on July 16, 2014, pursuant to Executive Orders 13660 and 13661, the Administration added new entities and individuals to the SDN List, including Feodosiya Enterprises, a key shipping facility in the Crimean Peninsula, due to its involvement in the misappropriation of state assets of Ukraine. A full list of those newly designated as SDNs is available here.
Looking Ahead
The situation in Ukraine continues to evolve. It is important to note that while Gazprombank OAO, VEB, OAO Novatek and Rosneft were named to the SSI List, none are SDNs, and accordingly their property or interests in their property have not been blocked. All other transactions with these entities are permitted, such as shorter-term debt transactions, maintaining correspondent accounts, and conducting dollar clearing transactions, so long as they do not involve prohibited long-term debt or equity transactions. However, this does not mean that every entity named to the SSI List in the future will be absent from the SDN List. As always, proceed with care when considering business dealings with entities in the financial services and energy sectors and conduct thorough due diligence.
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1 We previously reported on earlier iterations of United States sanctions relating to Russia, which may be found here.
2 Gazprombank OAO is a Russian financial institution, which was originally established to provide financial services to companies in Russia’s energy industry but has expanded to provide services to more than 45,000 companies and 3 million private individuals. Gazprombank OAO has more than 40 branches across Russia, and a number of international subsidiaries. Gazprombank OAO specializes in the private banking and corporate financing services.
3 VEB is a Russian state-owned financial institution that acts as a development bank and payment agent for the Russian government. It was formed June 8, 2007, pursuant to Russian federal law and is the legal successor to Vnesheconombank of the USSR, which was a specialized Russian state bank. VEB’s supervisory board is chaired by the Russian prime minister, and the chairman of the bank is appointed by the Russian president. VEN acts as an agent for the Russian Government for the purposes of accounting, servicing, and repaying the sovereign debts of the former USSR and legal entities of Russia and municipal governments; providing and executing state guarantees of Russia and monitoring projects implemented by Russia with involvement of international financial institutions.
4 OAO Novatek is Russia’s largest independent natural gas producer.
5 Rosneft is Russia’s largest petroleum company and third largest gas producer. The Treasury designated Rosneft’s President and Chairman of the Board, Igor Sechin, on April 28, 2014, pursuant to E.O. 13661.
6 A U.S. Person is defined to include any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.
