U.S. Added 17 Companies and 7 Individuals, Including Rosneft CEO Sechin, to Russia Sanctions List and Further Restricted Exports to Certain Russian Entities; EU, Canada, and Japan Also Stepped Up Sanctions

May 1, 2014
Alan M. Dunn and Jennifer M. Smith

On April 25, 2014, the G-7 (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) announced that they would “move swiftly to impose additional sanctions on Russia” due to Russia’s failure to deescalate the ongoing situation in eastern Ukraine and contrary to Russia’s commitments in an April 17 agreement reached in Geneva.  Following that announcement, the United States, Canada, and EU have imposed additional sanctions in the form of asset freezes and travel bans on certain persons; Japan imposed travel bans on certain persons; and the United States has announced that it will revoke and deny export licenses for certain controlled exports to Russia.  The U.S. Export-Import Bank (Ex-Im) also recently postponed consideration of a $21 million transaction to finance mining equipment exports to a Russian company due to the ongoing situation.

A comparison table of the persons currently sanctioned by the United States, Canada, and the EU appears here.  We will update this table as appropriate.

U.S. – Additional Sanctions

On Monday, the United States named an additional seven Russian government officials and 17 entities to its sanctions list.  Each of the entities named is owned or controlled by individuals or entities that had previously been named for sanctions.  Particularly notable among the entities named on Monday were:

  • SGM Group, a gas pipeline construction company;
  • Stroytransgaz Group, a Russian construction group, and related companies;
  • Transoil, a Russian rail freight operator that specializes in the transportation of oil and oil products;
  • Sakhatrans LLC, a transportation company engaged in the construction of a bulk terminal for coal and iron ore exports;
  • InvestCapital Bank;
  • SMP Bank; and
  • JSB Sobinbank.[1] 

As a result, Visa and MasterCard withdrew their network support for credit and debit cards issued by SMP Bank and InvestCapitalBank.[2]

U.S. individuals, companies, and other entities (including foreign branches) are prohibited from engaging in transactions with sanctioned persons.  Under U.S. law, any entity in which a U.S.-designated person has a 50% or more ownership interest is also automatically subject to the sanctions.

Among the individuals named Monday, April 25, 2014, were Igor Sechin, the President and Chairman of the Management Board for Rosneft, and Sergei Chemezov, Deputy Chairman of the Board of Directors for Rosneft and Director General of the State Corporation for Promoting Development, Manufacturing and Export of Russian Technologies High-Tech Industrial Products (Rostec).[3]  Sechin and Chemezov have not yet been sanctioned by the EU or Canada.

Rosneft is Russia’s leading oil company and one of the world’s largest publicly-traded oil companies.[4]  Although Rosneft has not itself been sanctioned, the listing of its President and Chairman by the U.S. will, as a minimum, complicate some transactions with the company.  Rosneft reportedly controls about 40% of crude-oil production in Russia.[5]  Exxon Mobil has multiple joint ventures with Rosneft.  BP has a 19.75% stake in Rosneft, and BP Chief Executive Bob Dudley (an American citizen) is a member of Rosneft’s Board of Directors.  Other oil majors, including Royal Dutch Shell and Statoil, and major commodities trading companies also have ties to Rosneft.

Rostec, which like Rosneft, has not been sanctioned as of this writing, is in the same position of having a senior executive listed as a sanctioned person by the U.S.  Among Rostec’s existing relationships, it has a joint venture with Boeing that manufactures about half of the titanium parts used in Boeing’s aircraft.[6]

While Rosneft and Rostec themselves were not named for sanctions, U.S. businesses considering transactions with these companies need to tread carefully.  The U.S. regulators also consider “indirect transactions” with sanctioned persons, including transactions through third-party intermediaries, and facilitation of otherwise prohibited transactions to be violations of the sanctions laws. 

U.S. individuals and companies (including foreign branches) should ensure that any contemplated transactions with Rosneft, Rostec, or other potentially affected companies do not involve the sanctioned persons in any way.  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 be very careful — such contractual guarantees will not insulate anyone from potential penalties under the strict liability standard that applies to sanctions violations.

In addition, Monday’s sanctions show that the United States will in some cases name individual Russian businessmen for sanctions first, and then subsequently name companies that those businessmen own or control.  If this trend continues, Rosneft and Rostec might become subject to sanctions in the future.

U.S. – Additional Export Control Restrictions

The United States also announced on Monday that the U.S. agencies will deny pending applications for licenses and revoke existing licenses to export or re-export controlled high technology items to Russia or occupied Crimea that contribute to Russia’s military capabilities.[7]  This expands upon the agencies’ earlier announcements that that they have placed a hold on issuing new licenses for exports and re-exports of controlled items, defense articles, and defense services to Russia until further notice.[8]  The U.S. Department of Commerce also added 13 of the 17 entities designated for sanctions on Monday to its Entity List, which imposes a license requirement for the export, reexport, or transfer of items subject to the Export Administration Regulations (EAR), with the presumption of denial.[9]

U.S. Ex-Im Bank Decision

  The U.S. Export-Import Bank has withdrawn, and delayed indefinitely, consideration of an application by Suek LLC, Russia’s top producer of thermal coal and exporter of coal, for $21 million to finance U.S. mining equipment exports to Russia.  Earlier this month, Ex-Im suspended an application for financing by Novatek, a Russian company partly owned by a sanctioned Russian businessman.[10]

Canada – Additional Sanctions

On Monday, Canada designated for sanctions an additional nine individuals, seven of whom were named by the United States either that day or previously, and two entities not previously named by the United States or the EU.  The two entities were small banks, ExpoBank and RosEnergoBank.[11]  Canada has largely followed both the United States and the EU sanctions designations, and its list includes some top Russian businessmen that have also been designated by the United States.

EU – Additional Sanctions

On Tuesday, the EU announced sanctions against 15 individuals, consisting of Russian political officials and military and intelligence leaders and Crimean leaders.[12]  This list differs significantly from the current U.S. and Canadian lists.  The EU appears to be more hesitant to impose sanctions on Russian businessmen, and the EU has not yet designated any entities for sanctions. 

EU – Current Export Control Restrictions

The EU and the UK have also adopted certain export licensing restriction policies in response to the ongoing situation, but these measures have not been as extensive as the policies that the United States has adopted.  In February, the EU suspended all export licensing to Ukraine for any equipment that might be used for internal repression.[13]  In March, the UK suspended all licenses and license applications for export to the Russian military that could be used against Ukraine.[14]

Japan – New Sanctions

  On Tuesday, Japan imposed visa bans on 23 people but did not disclose their names.[15]  Before this week, Japan’s sanctions had been limited to diplomatic measures.  Specifically, Japan had stopped talks with Russia on visa facilitation, investment agreements, and an agreement on the use of outer space.[16]

Recent Russian Response

On Tuesday, Putin mentioned that the Russian government has proposed certain retaliatory measures, but he declined to impose any such measures then.[17]

Impact of Sanctions on Russia’s Economy

The sanctions appear to have had some effect on the Russian economy so far.  By Monday, April 25, there had been more than $60 billion of capital flight out of Russia this year and some declines in Russia’s stock market.[18]  Former Russian finance minister Alexei Kudrin said on Monday that Western sanctions might reduce Russia’s already tepid economic growth or even cause a recession.  Russian Finance Ministry officials have already stated that their 0.5% growth forecast for 2014 may be overly optimistic.[19]

Possible Future Sanctions

The United States and the EU are trying to harmonize their sanctions programs as much as possible, but policy differences and competing interests have resulted in some differences.  Spokespersons for the United States, the EU, and Canada have indicated that all governments may impose further sanctions if Russia does not deescalate the situation. 

U.S. officials also have indicated that Alexei Miller, the chief executive of Russian natural gas export monopoly Gazprom, a Gazprom-affiliated bank, and Russian arms exporter JSC Rosoboronexport have been considered for sanctions.[20]  Some U.S. legislators also have called for expanded sanctions.  For example, U.S. Senator Bob Corker of Tennessee, the top Republican on the Foreign Relations Committee, has called for sanctions on Gazprom and four of Russia’s largest banks.[21]

U.S. Executive Order 13662 of March 20, 2014 authorizes sanctions against entire sectors of the Russian Federation economy such as financial services, energy, metals and mining, engineering, and defense and related materiel.[22]  The United States has not yet exercised this sanctions authority but has indicated it might do so if Russia does not deescalate the situation.

The EU, which imports a third of its natural gas from Russia, is split on the prospect of intensified sanctions, although reportedly the EU has circulated a document for feedback from affected member states that outlines possible sanctions on sectors of the Russian economy, including energy and finance.[23]

Ongoing changes are an important characteristic of the Russia and Ukraine-related sanctions, as the U.S. and other countries are rapidly adjusting their policies to influence decisions in Russia.

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, 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.

If you have any questions about exporting to Russia or the Russia and Ukraine sanctions and how these measures may affect your business or specific transactions, please contact Alan M. Dunn or Jennifer M. Smith.

[1] U.S. Department of the Treasury, Press Release, Announcement Of Additional Treasury Sanctions On Russian Government Officials And Entities: Sanctions Target Seven Russian Government Officials, Including Members of the Russian Leadership’s Inner Circle, and 17 Entities (Apr. 28, 2014), available at http://www.treasury.gov/press-center/press-releases/Pages/jl2369.aspx.

[2] Alex Lawson, Visa, MasterCard Cut Ties With Sanctioned Russian Banks, Law360, Apr. 29, 2014.

[3] U.S. Department of the Treasury, supra note 3; Rosneft, Board of Directors, http://www.rosneft.com/about/board/.

[4] U.S. Department of the Treasury, supra note 3.

[5] Henry Meyer and Irina Reznik, Putin Confidant Sechin Targeted as U.S. Sanctions Russian Elite, Bloomberg, Apr. 28, 2014, available at http://www.bloomberg.com/news/2014-04-28/putin-confidant-sechin-targeted-as-u-s-sanctions-russian-elite.html.

[6] Peter Baker and Mark Landler, U.S. Announces More Sanctions Against Russia, N.Y. Times, Apr. 28, 2014.

[7] White House, Statement by the Press Secretary on Ukraine (Apr. 28, 2014).

[8] The announcements were posted on BIS’s website, http://www.bis.doc.gov/, and DDTC’s website, http://pmddtc.state.gov/index.html

[9] Bureau of Industry and Security, U.S. Department of Commerce, “Commerce Department Announces Expansion of Export Restrictions on Russia” (Apr. 28, 2014), available at http://www.bis.doc.gov/index.php/component/content/article/9-bis/carousel/666-commerce-department-anounces-expansion-of-export-restrictions-on-russia.

[10] Ex-Im Postpones Consideration Of Financing For Russian Energy Firm, Inside U.S. Trade, Apr. 29, 2014, available at http://insidetrade.com/index.php?option=com_user&view=login&return=aHR0cDovL2luc2lkZXRyYWRlLmNvbS8yMDE0MDQyOTI0NjkwMjYvSW5zaWRlLVRyYWRlLUdlbmVyYWwvU2hvcnQtVGFrZXMvZXgtaW0tcG9zdHBvbmVzLWNvbnNpZGVyYXRpb24tb2YtZmluYW5jaW5nLWZvci1ydXNzaWFuLWVuZXJneS1maXJtL21lbnUtaWQtMTc2Lmh0bWw=.

[11] Regulations Amending the Special Economic Measures (Russia) Regulations (SOR/2014-98), entered into force Apr. 28, 2014 (unofficial version), available at http://www.international.gc.ca/sanctions/russia_developments-developpements_russie5.aspx?lang=eng.

[12] Council Implementing Regulation (EU) No. 433/2014 (Apr. 28, 2014), published in Official Journal of the European Union L126, Vol. 57 (Apr. 29, 2014).

[13] UK Government, Department for Business Innovation & Skills, “Notice to Exporters 2014/04: EU suspends all export licensing to Ukraine for any equipment which might be used for internal repression” (Feb. 24, 2014), available at http://blogs.bis.gov.uk/exportcontrol/general-awareness/notice-to-exporters-2014-eu-suspends-all-export-licensing-to-ukraine-for-any-equipment-which-might-be-used-for-internal-repression/.

[14] UK Government, Department for Business Innovation & Skills, “Notice to Exporters 2014/06: UK suspends all licences and licence applications for export to the Russian military that could be used against Ukraine” (Mar. 18, 2014), available at http://blogs.bis.gov.uk/exportcontrol/uncategorized/notice-to-exporters-201406-uk-suspends-all-licences-and-licence-applications-for-export-to-russian-military-that-could-be-used-against-ukraine/.

[15] Japan imposes visa bans on 23 people in new sanctions on Russia, Reuters Apr. 29, 2014, available at http://www.trust.org/item/20140429053813-maj2b.

[16] G7 sanctions will strike hard on Russia’s economy, finance and armory, Charter ’97, Mar. 25, 2014, available at http://charter97.org/en/news/2014/3/25/91793/

[17] Indira A.R. Lakshmanan and Joe Carroll, Putin’s Threat to Retaliate for Sanctions Carries Risks, Bloomberg, Apr. 30, 2014, available at http://www.bloomberg.com/news/2014-04-30/putin-threat-to-retaliate-for-sanctions-carries-risks.html.  On April 17, Russia circulated a document to WTO Members of the Council for Trade in Services and the Council for Trade in Goods, asserting that the U.S. sanctions are not consistent with the U.S.’s WTO obligations and urging the United States to bring the Executive Orders authorizing the sanctions in line with its WTO commitments. Communication from the Russian Federation, Certain Trade Restrictive Measures Adopted By The United States, S/C/W/353, G/C/W/697 (Apr. 17, 2014).

[18] David Lerman, Andrew Atkinson and Daria Marchak, U.S. Plans to Hit Putin Inner Circle With New Sanctions, Bloomberg Businessweek, Apr. 28, 2014, available at http://www.businessweek.com/news/2014-04-26/russia-asked-to-help-free-ukraine-monitors-as-sanctions-sought.

[19] Jay Solomon, William Mauldin and Colleen Mccain Nelson, U.S., Europe Impose New Sanctions on Russia: President of Oil Giant Rosneft Is Among the Targets; EU to Add 15 More Individuals to Its List, The Wall Street Journal, Apr. 28, 2014.

[20] Id.

[21] David Lerman, Andrew Atkinson, and Daria Marchak, U.S. Plans to Hit Putin Inner Circle With New Sanctions, Bloomberg Businessweek, Apr. 28, 2014, available at http://www.businessweek.com/news/2014-04-26/russia-asked-to-help-free-ukraine-monitors-as-sanctions-sought.

[22] Exec. Order No. 13,662, 79 Fed. Reg. 16,169 (Mar. 24, 2014), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/ukraine_eo3.pdf.

[23] Lakshmanan and Carroll, supra note 17.

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