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US Imposes Stronger Sanctions on the Russian Energy Sector
Practical Law Legal Update 8-577-1565 (Approx. 5 pages)
US Imposes Stronger Sanctions on the Russian Energy Sector
by Practical Law Finance
| Published on 05 Aug 2014 • USA (National/Federal) |
An update on new sanctions announced by the Office of Foreign Assets Control and the Bureau of Industry and Security.
In the last few weeks there has been a significant escalation in the sanctions against Russia because of its continuing policy of destabilization in Ukraine and its continuing occupation of Crimea and Sevastopol. These recent sanctions are a major departure from the limited sanctions that were imposed previously and may have a significant impact on US energy companies and their interests in the region.
Background
Following popular uprisings that removed President Viktor Yanukovych from power in February 2014, the situation in Ukraine has deteriorated into a serious geopolitical crisis. For more on the background of this crisis, see Article, The Crisis in Ukraine: Lessons for Investors. In response to the crisis, members of the international committee have imposed sanctions against certain Russian and Ukrainian individuals and companies.
US Response
President Obama has issued three executive orders:
For more information on these orders, see Article, The Crisis in Ukraine: Lessons for Investors.
Until recently, the implementation of these orders has been limited to the freezing of the assets of a few Russian and Ukraine government officials. However, on July 16, 2014, the Treasury Department, pursuant to Executive Order 13662, significantly expanded sanctions against Russia by imposing a broad-based package of sanctions on entities in the financial services, energy, and arms or related materiel sectors. In particular, it:
- Created a new list, the Sectoral Sanctions Identifications List (SSIL) to which it added two major Russian financial institutions (Gazprombank OAO and VEB) and two Russian energy firms (OAO Novatek and Rosneft). Under the new sanctions, US persons are prohibited from, in the case of:
- the financial institutions, transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity with respect to these entities; and
- the energy companies, transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity with respect to these entities. There are no restrictions, however, on US companies acquiring equity in these companies.
The Treasury Department does not explain the reason for the different treatment. However, it is worth noting that Western companies already own equity interests in the energy firms Rosneft and Novatek. In addition, US persons can engage in any other transaction with the listed entities that have not been prohibited. - Added eight entities to the Office of Foreign Assets Control (OFAC)'s Specially Designated Nationals and Blocked Persons List (SDNL).
For more information on these sanctions, see Legal Update, Department of Treasury Further Expands Sanctions Against Russia.
Additional Sanctions
On July 29, 2014, OFAC and the Commerce Department's Bureau of Industry and Security (BIS) imposed additional sanctions on Russian commercial interests. These sanctions follow similar actions by the European Union (EU).
OFAC
On July 29, 2014, OFAC announced that:
- Pursuant to Executive Order 13661, it added United Shipbuilding Corporation (USC), the largest shipbuilding company in Russia, to the SDNL. As a result, all of USC's assets within the US will be frozen and US persons are generally prohibited from engaging in transactions with this company. Including USC, there are now nine defense technology firms on the SDNL.
- Pursuant to Executive Order 13662, it is prohibiting US persons and persons within the US from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity for the following entities:
- Bank of Moscow;
- Russian Agricultural Bank; and
- VTB Bank OAO.
US lenders are, therefore, precluded from extending medium to long term financing to these entities. US companies are permitted, however, to engage in other transactions with these entities, but OFAC has the right to expand the scope of these restrictions.
BIS
In conjunction with the OFAC announcement, BIS also announced additional restrictions on US trade with Russia. Namely, BIS:
- Imposed controls on the export, reexport or transfer (in-country) of certain items that the exporter, reexporter or transferor knows or is informed would be used directly or indirectly in Russia's energy sector for exploration or production from deepwater (greater than 500 feet), Arctic offshore, or shale projects that have the potential to produce oil.
- Added USC to its Entity List. As a result, US individuals and companies will not be able to engage in certain activities with this entity unless they have received a license from the BIS, which licenses are usually denied. Companies and individuals are added to this list after representatives of the Departments of Commerce, State, Energy, Defense and, where appropriate, the Treasury, determine that this person is involved in prohibited activity. In the case of USC, the prohibited activities are specified in Executive Order 13661.
For more information, see Russian Oil Industry Sanctions and Addition of Person to the Entity List.
These sanctions make it difficult for Russian companies to use US horizontal drilling, fracking and other technology to develop long-term, technically challenging future projects. But they do not target or interfere with the current supply of energy from Russia or prevent Russian companies from selling oil and gas to any country.
Practical Implications
It is too soon to tell what impact these sanctions will have on Russian oil and gas production or US interests in the region (including oil service companies). However, given the impact that these practices and technology have had on the US (causing to the US to become the largest producer of crude oil in the first quarter of 2014 and the largest natural gas producer), these sanctions are not insignificant. In response, Russia has announced that it is banning food and agricultural imports from the US and EU and certain other countries (see Legal Update, Russia Imposes Retaliatory Sanctions Against US).
In addition, as the situation develops, more sanctions may be forthcoming. US lenders, energy companies and other companies with interests in the region should make sure their dealings with Russian and Ukrainian persons are consistent with the SDNL, the SSIL and any other trade restrictions that may be imposed. Further, the fact that their dealings are not currently prohibited does not mean that new sanctions will not require a reassessment of their investments and business operations.
For more information, see Practice Note, OFAC, USA PATRIOT Act and other Anti-Terrorism Regulations Relevant for Lenders.