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

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1 Ukraine-/Russia-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 Ukraine-/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 An overview of the various sanctions imposed by the United States 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 Security 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 Germany and pro-russian separatists reached a new agreement, called Minsk II, in February 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 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

2 that sanctions on Russia must remain in place until Moscow 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 banks; 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

3 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 financial services, 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 bank 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, Gazprom, 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: Rosneft Russia s largest petroleum company and third-largest gas producer; Gazprom Neft the fourth-largest oil producer in Russia; Transneft a Russian government-owned pipeline company;

4 OAO Novatek 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; Lukoil a Russia-based oil and gas company; Surgutneftegas 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 of December 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.

5 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 reexports 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 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 , 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 , 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.

6 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 Sevastopol. These measures are summarized and compared with each other, and with the U.S. sanctions detailed above, in the following table.

7 Sanctions Measures Asset Freezes and Travel Bans Financial Sectoral Sanctions Energy Sectoral Sanctions & Restrictions on Energy- Related U.S. EU Canada Australia Japan The United States has designated a large number of individuals for asset freezes and travel bans and a large number of entities for asset freezes under its blocking sanctions. 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 Russian financial sector, their property, or their interests in property. U.S. individuals, companies and other entities (including foreign branches), and persons within the United States are prohibited from dealing with new debt of longer than 90 days maturity for The EU has imposed asset freezes and travel bans on a large number of individuals and asset freezes on a large number of entities, similar to the U.S. blocking sanctions. EU nationals and companies are prohibited from buying, selling, or assisting in issuing new bonds, equity, or similar financial instruments with a days issued by, or providing loans with a days to five major state-owned Russian banks (Sberbank, VTB Bank, Gazprombank, VEB, and Rosselkhozbank), subsidiaries outside the EU of such entities, and those acting on their behalf or at their direction. EU nationals and companies are prohibited from buying, selling, or assisting in issuing new bonds, equity, or Canada has imposed asset freezes on a large number of individuals and entities, similar to the U.S. blocking sanctions. Any person in Canada and Canadians abroad are prohibited from dealing in new securities or new debt of longer than 30 days maturity in relation to designated Russian banks (Sberbank, VTB Bank, Gazprombank, VEB, Rosselkhozbank, and Bank of Moscow). Any person in Canada and Canadians abroad are prohibited from dealing in new debt of longer Australia has imposed asset freezes and travel bans on a large number of individuals and asset freezes on a large number of entities, similar to the U.S. blocking sanctions. Australia generally prohibits direct or indirect purchase or sale of, or any other dealing with, bonds, equity, transferable securities, money market instruments or other similar financial instruments having a days issued by five designated Russian banks (Sberbank, VTB Bank, Gazprombank, VEB, and Rosselkhozbank) without a sanctions permit. Australia generally prohibits direct or indirect purchase or sale of, or any other dealing with, bonds, equity, transferable securities, Japan has stopped issuing visas to certain individuals and frozen the assets of certain individuals and entities. Japan has prohibited investment in securities (including shares and bonds) with a maturity exceeding 90 days issued by five Russian banks (Sberbank, VTB, Gazprombank, VEB, and Rosselkhozbank) and their subsidiaries. Japan has not prohibited lending to the banks designated for sectoral sanctions. Japan has not imposed any sectoral sanctions on the Russian energy sector.

8 Exports designated Russian energy companies and 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 Russian energy companies. An export license is required for exports to designated companies when the exporter 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. The U.S. also requires export licenses 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 similar financial instruments with a days issued by, or providing loans with a days to three major Russian energy companies (Gazprom Neft, Gazprom, and Transneft), subsidiaries outside the EU of such entities, and those acting on their behalf or at their direction. The EU also requires prior authorization (i.e., licenses) for exports of certain energy-related equipment and technology to Russia. Export licenses will be denied if products are destined for deepwater, Arctic offshore, or shale oil exploration and production. Drilling, well testing, logging, and completion services and supply of specialized floating vessels may not be provided for such projects. than 90 days maturity in relation to designated Russian energy companies (Gazprom Neft, Gazprom, Transneft, Novatek, Rosneft, and Surgutneftegas). Canada also prohibits the export, sale, supply, or shipping of certain designated goods to Russia or to any person in Russia for their use in deepwater, Arctic offshore, or shale oil exploration and production, as well as the provision of any financial, technical, or other services related to such goods. money market instruments or other similar financial instruments having a days issued by three designated Russian energy companies (Gazprom Neft, Transneft, and Rosneft) without a sanctions permit. Australia also prohibits the direct or indirect supply, sale or transfer to Russia, for use in Russia, or for the benefit of Russia, of specified items suited to deepwater, Arctic offshore, or certain shale oil exploration and production projects in Russia, as well as related drilling, welltesting, and logging and completion services and supply of specialized floating vessels, without a sanctions permit.

9 Defense Sectoral Sanctions Restrictions on Trade in Arms and Dual-Use Items & Technologies license applications for projects that have the potential to produce gas on a case-by-case basis. 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 Rostec and its subsidiaries. Licenses for controlled high technology items to Russia or occupied Crimea that contribute to Russia s military capabilities will be denied or revoked. An export license is required for 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 EU nationals and companies are prohibited from buying, selling, or assisting in issuing new bonds, equity, or similar financial instruments with a days issued by, or providing loans with a days to three major Russian defense companies (Oboronprom, United Aircraft Corp., and Uralvagonzavod), subsidiaries outside the EU of such entities, and those acting on their behalf or at their direction. The EU has export and import bans on trade in arms with Russia and an export ban for dual-use goods for military use or military end users in Russia and nine mixed end-users who provide services to the Russian military. Australia generally prohibits direct or indirect purchase or sale of, or any other dealing with, bonds, equity, transferable securities, money market instruments or other similar financial instruments having a days issued by three designated Russian defense companies (Oboronprom, United Aircraft Corp., and Uralvagonzavod) without a sanctions permit. Australia prohibits imports from Russia of arms or related materiel; the direct or indirect supply, sale or transfer to Russia, for use in Russia, or for the benefit of Russia, of arms or related materiel; and the provision to Russia of technical or financial assistance or other services provided in relation to a military Japan has tightened export restrictions on arms, dual-use goods for military use, and related technologies.

10 Crimea & Sevastopol Trade Embargoes material contribution to Russia s military capabilities. The U.S. generally prohibits: (1) Imports from Crimea; (2) New investment in Crimea; and (3) 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 EU prohibits: (1) Imports from Crimea and Sevastopol; (2) Investment in Crimea (including buying real estate or entities in Crimea, financing Crimean companies, supplying related services, and investing in infrastructure projects in six sectors); (3) Supplying tourism services in Crimea and Sevastopol; (4) Exports of key goods for certain sectors, including equipment for the prospection, exploration, and production of oil, gas, and mineral resources; and (5) Technical assistance, brokering, construction or engineering Canada prohibits: (1) Imports of and dealings in goods from Crimea; (2) Investment in Crimea that involves a dealing in any property, located in Crimea, held by or on behalf of Crimea or a person in Crimea, or providing related services; (3) Exports and dealings in goods destined for Crimea; (4) Transferring, providing, or communicatin g technical data or services to, from or for the benefit of or on the activity or the manufacture, maintenance, or use of arms or related materiel without a sanctions permit. Australia prohibits, without a sanctions permit: (1) Imports of goods from Crimea and financial assistance and services related to such imports; (2) Exports of, financial assistance, technical advice, and other services related to, designated goods relating to the creation, acquisition or development of infrastructure in the sectors of transport, telecommunications, energy, and exploitation of oil, gas and mineral reserves in Crimea or Sevastopol; (3) Financial loans or credit, establishing of joint ventures, and the acquisition or extension by a person of an interest in an enterprise that was established in Crimea or Sevastopol relating Japan has banned imports from Crimea and Sevastopol.

11 services related to infrastructure in the designated sectors. direction or order of Crimea or any person in Crimea; (5) Providing or acquiring financial or other services related to tourism, to, from or for the benefit of or on the direction or order of Crimea or any person in Crimea; or (6) Docking a cruise ship in Crimea. to the creation, acquisition or development of infrastructure in the sectors of transport, telecommunications, energy, and exploitation of oil, gas and mineral reserves in Crimea or Sevastopol; and (4) Investment services related to other sanctioned commercial activities.

12 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. Switzerland 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 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 private equity 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

13 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.