NEWS Alert

The United States Increases Sanctions Targeting Sectors of Russian Economy

On September 11, 2014, the White House announced that new sanctions against Russia “in light of Russia’s actions to further destabilize Ukraine over the last month, including through the presence of heavily armed Russian forces in eastern Ukraine.”  Specifically, the United States has: (1)added new Russian defense firms subject to strict U.S. foreign asset controls;(2) expanded sanctions targeting sectors of the Russian economy and blocking access to U.S. capital markets, and (3) increased U.S. export controls involving Russian energy and defense firms. These actions are in conjunction with similar measures taken by members of the G-7, theEuropean Union and other states.

I.        New Russian Defense Firms Added to SDN List


Effective 12, 2014, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) announced the addition of the following five (5) Russian defense companies to the US Specially Designated Nationals and Blocked Persons List (“SDN List”) pursuant to Executive Order 13661:
  • Almaz-Antey Air Defense Concern Main System Design Bureau (specializing in anti-air, anti-missile, and space defense systems); 
  • Tikhomirov Scientific Research Institute of Instrument Design (specializing in weapons control systems for fighter planes and mobile medium range anti-aircraft surface to air missile (SAM) defense vehicles); 
  • Mytishchinski Mashinostroitelny Zavod OAO (manufacturer of ordinances and accessories, including naval, aircraft,anti-aircraft and field artillery products);
  • Kalinin Machine Plant, JSC (designer and manufacturer of machines for military and civil application); and
  • Dolgoprudny Research Production Enterprise (manufacturer and developer of high-technology defense products).
Persons or firms on the SDN list are subject to economic sanctions including the blocking of any assets or property subject to U.S. jurisdiction or held by U.S. persons, and U.S. persons are generally prohibited from dealing with them.

II.        Expanded Sectoral Sanctions Targeting Finance, Energy, and Defense Industries

Pursuant to Executive Order 13662, the Secretary of Treury has also identified specified persons operating in sectors of the Russian economy subject to sanction and implemented through Directives issued by the Office of Foreign Assets Control (OFAC) pursuant to its delegated authorities.  The following information provides a summary of the purpose and scope of the Directives, new and amended, which target among other sectors, the financial, energy, and defense sectors of the Russian economy.

OFAC maintains and updates a published list of persons operating in sectors of the Russian economy identified by the Secretary of the Treasury pursuant to Executive Order 13662 –the Sectoral Sanctions Identifications (SSI) List.  The SSI List is not part of the Specially Designated Nationals (SDN) List.  However, individuals and companies on the SSI List may also appear on the SDN List. 


a.      
Directive 1 and Directive 2 (Amended)

Directive 1, issued on July 16, 2014, prohibits 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 the sanctions effective date ("new debt" or "new equity") by, on behalf of, or for the benefit of the persons operating in Russia’s financial sector named under Directive 1, their property, or their interests in property.  On September 12, 2014, OFACamended Directive 1, reducing the tenor of prohibited debt from longer than 90 days to longer than 30 days.

The firms on the SSL List under Directive 1 include banks and financial concerns such as Aktsionerny Kommercheski Bank Bank Moskvy (a.k.a. Bank of Moscow), Bank Vneshney Torgovli Rossiyskoy Federatsi (a.k.a. Bank VTB OAO), and recently added Sberbank Rossii (a.k.a Sberbank of Russia).

Directive 2, as amended, separately prohibits transacting in, providing financing for, or otherwise dealing in new debt of greater than 90 days maturity if that debt is issued on or after the sanctions effective date by, on behalf of, or for the benefit of the persons operating in Russia’s energy sector named under the Directive 2, their property, or their interests in property.


The firms on the SSL List under Directive 2 include energy companies such as Oil Company Rosneft (a.k.a. Rosneft) and newly added AK Transneft OAK(a.k.a, Transneft, JSC) and OJSC Gazprom Neft (a.k.a. Gazprom Neft OAO).

The new sanctions pursuant to Directives 1 and 2 prohibit transactions by U.S. persons as defined in E.O. 13662, wherever they are located, and transactions within the United States. This action does not require U.S.persons to block the property or interests in property of the entities identified in the Directives, nor will persons identified in Directives 1 and 2be added to the Specially Designated Nationals (SDN) List.  U.S. persons should reject transactions or dealings that are prohibited by Directives 1 or 2, and to the extent required by Section 501.604 of the Reporting, Procedures and Penalties Regulations (31C.F.R. part 501), U.S. persons must report to OFAC any rejected transactions within 10 business days.

b.      Directive 3 (New)

On September 12, 2014, OFAC issued Directive 3, introducing new prohibitions on all transactions in, provision of financing for, and other dealings in new debt of longer than 30 days maturity of persons determined to be subject to the Directive, their property, or their interests in property.   Transactions by U.S. persons or within the United States involving derivative products whose value is linked to an underlying asset that constitutes new debt with maturity of longer than 30 days issued by a person subject to Directive 3 are authorized by General License 1Apursuant to Executive Order 13662, as further described below.


The only firm on the SSL List under Directive 3 is defense firm Rostec (a.k.a. Rostec State Corporation).

c.      
Directive 4 (New)

OFAC also issued Directive 4 on September 12, 2014, introducing new prohibitions on the provision of goods, services (except for financial services), and technology for certain activities involving certain persons operating in the Russian energy sector.  Directive 4prohibits the direct or indirect provision, exportation, or reexportation of goods, services (except for financial services), or technology in support of exploration or production for deep water (depths of more than 500 feet), Arctic offshore, or shale projects that have the potential to produce oil in Russia, or in maritime area claimed by the Russia and extending from its territory, and involve any person determined to be subject to Directive 4 or that person’s property or interests in property.  The prohibition on the exportation of services includes, for example, drilling services, geophysical services, geological services, logistical services, management services, modeling capabilities, and mapping technologies.  The prohibition does not apply to the provision of financial services, e.g., clearing transactions or providing insurance related to such activities.


The firms on the SSL List under Directive 4 include energy companies such as Gazprom Neft OAO (a.k.a. JSC Gazprom Neft), Lukoil OAO (a.k.a. Lukoil),Oil Company Rosenft (a.k.a. OAO Rosneft Oil Company), and Stkrytoe Aktsionernoe Obshchestvo Surgutneftegaz (a.k.a. Surgutneftegas).   Some of the designees under Directive 4 are cross-listed under Directive 2.

d.      General Licenses (New)


OFAC, in concurrence with amending and issuing Directives, issued new general licenses in order to authorize activities that would otherwise be prohibited with regard to Ukraine. General licenses allow all US persons to engage in the activity described in the general license without needing to apply for a specific license.

Specifically, OFAC issued General License 1A, which authorizes certain transactions involving derivative products that would otherwise be prohibited pursuant to Directives 1, 2, or 3.  This General License 1A replaced and superseded General License No. 1, dated July 16, 2014, which authorized certain transactions involving derivative products that would have been prohibited pursuant to Directives 1 or 2.


With respect Directive 4, OFAC issued General License 2, authorizing for 14 days all prohibited services and activities that are ordinarily incident and necessary to the wind down of operations, contracts,or other agreements involving persons determined to be subject to Directive4.  In order to qualify under this General License, a transaction must (1) occur prior to 12:01 am E.D.T.September 26, 2014, and (2) relate to operations, contracts, or agreements that were in effect prior to September 12, 2014. General License 2 does not authorize any new provision, exportation, or re-exportation of goods, services, or technology except as needed to cease operations, contracts, or other agreements involving affected projects.

It is important to note that each Directive operates independently of the others.  If a transaction involves a person subject to two Directives, for example, a U.S. person engaging in that transaction must comply with the requirements of both Directives.  Exemptions in one Directive apply only to the prohibitions contained in that Directive and do not carry over to another Directive.

III.               Expanded U.S. Export Controls Affecting Russian Energy and Defense Firms

In conjunction with the announcement from the U.S. Department of Treasury of new targeted sanctions and designations of five (5) Russian defense firms to the SDN List, on September 12, 2014, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) announced the addition of the same five (5) entities to the BIS Entity List: (1) Almaz-Antey Air Defense Concern Main System Design Bureau; (2) Tikhomirov Scientific Research Institute of Instrument Design; (3) Mytishchinski Mashinostroitelny Zavod OAO; (4) Kalinin Machine Plant, JSC; and (5) Dolgoprudny Research Production Enterprise.

Designation on the BIS Entity List imposes a license requirement for the export, reexport or foreign transfer of items subject to the Export Administration Regulations (EAR) to the designated entities, with a presumption of denial.  BIS will also require licenses for an additional group of items destined to military end uses or end-users in Russia.


In addition, BIS also added the following (5) five Russian energy companies to the BIS Entity List to impose a license requirement for the export, reexport or foreign transfer of items subject to the EAR to those companies when the exporter, reexporter or transferor knows those items will be used directly or indirectly in exploration for, or production from, deep water, Arctic offshore, or shale projects in Russia. 

The energy firms on the BIS Entity List overlap with the firms targeted by OFAC on the SSI List under Directive 4: (1) Gazprom Neft OAO (a.k.a. JSC Gazprom Neft), (2) Gazprom OAO (a.k.a. OAO Gazprom), (3) Lukoil OAO (a.k.a. Lukoil), (4) Oil Company Rosenft (a.k.a. OAO Rosneft Oil Company), and (5) Stkrytoe Aktsionernoe Obshchestvo Surgutneftegaz (a.k.a. Surgutneftegas).


As with the defense sector firms, license applications for transactions with these energy firms will be reviewed by BIS with a presumption of denial when for use directly or indirectly for exploration or production from deep water, Arctic offshore, or shale projects in Russia that have the potential to produce oil.

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Firms engaged in business in Russia must closely monitor these developments and address any compliance risks and requirements under U.S. law.  TWG has been continuously representing and working with companies doing business in Russia, Ukraine and the CIS for two decades.   For further information, please contact Mr. Glenn Wicks or Mr. Ronce Almond via email or via telephone at (202) 457-7790.
The Wicks Group - 601 Pennsylvania Avenue, NW, South Building, Suite 900, Washington, DC 20004 - T: +1.202.457.7790 /