On December 19th, President Obama signed Executive Order (EO) 13685 specifically targeting Crimea and those responsible for the usurpation of the peninsula back in March. This latest EO was the forth in a series aimed at discouraging Russia from continuing its destabilization campaign in eastern Ukraine and the first dealing with the Ukraine crisis in 9 months. A full year after violent protests initially broke out in Kiev there appears to be no end in sight to the fighting between Ukrainian forces and pro-Russian rebels and the recent signing of EO 13685 suggests Ukraine, along with the U.S., EU, and Russia will continue to be embroiled in this conflict for months to come. Thus, in 2015 it remains as important as ever to stay abreast of new developments, incorporate new government directives into your existing procedures, and continue performing well-documented due diligence on all transactions that may touch an effected party or region.
The following is an overview of U.S. sanctions on Russia as of January 15. As you know, these prohibitions can be changed or added to at any time. Currently, U.S. sanctions are focused mainly on the financial services, energy, and defense sectors so U.S. parties should be careful to vet all interactions with parties that may be involved in these industries. U.S parties are expected to know who they are doing business with, what related parties might be benefiting from the transaction (such as a parent company or third party), and the end-user and end-use of any exports. The expanding sanctions program does not require you to forgo all business opportunities in the region, but it does necessitate a heightened level of awareness and careful documentation of who you are doing business with in order to ensure compliance and avoid costly inadvertent violations.
Executive Orders: The Administration has issued the following executive orders giving the Department of Treasury the ability to block Russian parties from transacting with the United States.
13660 – Blocking Property of Certain Persons Contributing to the Situation in Ukraine (March 6, 2014)
13661 – Blocking Property of Additional Persons Contributing to the Situation in Ukraine (March 17, 2014)
13662 – Blocking Property of Additional Persons Contributing to the Situation in Ukraine (March 20, 2014)
13685 – Blocking Property of Certain Persons and Prohibiting Certain Transactions with Respect to the Crimea Region of Ukraine (December 19, 2014)
Ukraine-Related Sanctions Regulations: The Treasury Department’s Office of Foreign Assets Control (OFAC) issued regulations to implement the executive orders listed above (31 CFR Part 589). The regulations currently prohibit U.S. parties from transacting with listed entities and block listed entities’ assets.
Specially Designated Nationals List (SDN): On December 19, pursuant to President Obama’s most recent Ukraine-related executive order of the same date, OFAC added 17 individuals and 7 organizations to its SDN List, which imposes a blanket prohibition on transacting with the listed entities that applies to all U.S. parties.
Sectoral Sanctions Identifications List (SSI): In additional to listing certain prohibited parties on the SDN List, on July 16 OFAC created a list of entities with specific restrictions pursuant to Executive Order 13662 – the SSI List. U.S. parties were initially prohibited from transacting in, providing financing for, or dealing in new debt of longer than 90 days maturity or new equity for entities on this list. On September 12, OFAC further reduced the new debt dealing prohibition to 30 days for certain Russian entities in the financial services and defense sectors. Concurrently, OFAC prohibited U.S. parties from providing any goods, services (except for financial services), or technology supporting oil production. The restrictions also apply to entities that are owned 50 percent or more by the listed parties. This means that U.S. parties need to ask questions and know who they are doing business with – especially when it comes to Russian banks and parties involved in Russian financing or the energy and defense sectors.
Entity List: Most recently on September 12, the Bureau of Industry and Security (BIS) at the Department of Commerce added five Russian entities in Russia’s defense sector as well as five of the Russia’s largest energy companies to its Entity List. The list bars the export and reexport of items under the Department of Commerce’s jurisdiction to listed parties.
Denial of export licenses: BIS has instituted a policy of denying licenses for exports, reexports, and foreign transfers of “items for use in Russia’s energy sector that may be used for exploration or production from deepwater, Arctic offshore, or shale projects that have the potential to produce oil.” The timing and the exact goods affected were left unclear, however the policy appears to only effect items that would currently require a license to export. The Department of State’s Directorate of Defense Trade Controls has implemented a similar policy, indicating that it “will deny pending applications for export or re-export of any high technology defense articles or services regulated under the U.S. Munitions List to Russia or occupied Crimea that contribute to Russia’s military capabilities.”
General Licenses: Starting on September 12 OFAC has issued 5 Ukraine-related general licenses designed to either facilitate the winding down of activities otherwise prohibited by the sanctions program or provide for certain excepted transactions. Most notably, Ukraine General License Number 4 of December 19 authorizes the exportation of certain agricultural commodities, medicine, medical supplies, and replacement parts to Crimea (otherwise prohibited by EO 13685).
BOTTOM LINE: With each expansion of sanctions the bottom line remains the same. With continued fighting despite a truce announcement in September, crumbling peace talks, and the Russian-backed rebel’s continued insistence on independence from the government in Kiev, it doesn’t seem like U.S. sanctions on Russia will be lifted any time soon. So U.S. companies involved in business with Russian entities must continue implementing internal programs that will ensure they have valid export licenses for each transaction and periodically check their business partners (as well as their business partners’ associates and ultimate end-users of their products) against the lists discussed above. In the event that a transaction may be prohibited by any of the sanctions currently in force U.S. companies should make sure to follow up with thorough, documented due diligence and either clear the party beyond doubt or refrain from going forward.