Overview of Sanctions Against Sectors of the Russian Economy
Sanctions against Russia have put a damper on the enthusiasm of working with Russian businesses. The costs of doing business with Russia may exceed the financial benefits because of a web of challenges, including navigating the sanctions regime. In our last article, we discussed sanctions against specific individuals and companies. In this article, we discuss sanctions against “sectors” of the Russian economy.
Sectoral Sections Identification (SSI)
This type of sanctions applies to companies and individuals in Russia’s financial, energy, and defense sectors. Unlike blanket sanctions against individuals and companies on the Specially Designated Nationals and Blocked Persons List (SDN List), sectoral sanctions are directed at certain sectors. Those companies on the SSI List may also appear on the SDN List.
Those companies that have been placed on the Sectoral Sanctions Identifications List (SSI) are limited but not prohibited from engaging in certain transactions with U.S. persons.
These sectoral sanctions are based on four OFAC’s directives and prohibit U.S. individuals and entities from engaging in specific kinds of transactions related to lending, investment or trade with entities on the SSI List. The Department of Treasury Office of Foreign Assets Control (OFAC) administers these directives. The U.S. Department of Treasury maintains the SSI List. As with the SDN List, sectoral sanctions apply not only to companies on the SSI List, but also to companies 50% or more owned by companies or individuals on the SSI List.
In the directives, there is reference to debt and equity. Each of these terms is broadly defined.
• The term “debt” includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper.
• The term “equity” includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership.
Directive 1: Financial Sector
Directive 1 targets certain Russian financial Institutions under Executive Order 13662. U.S. persons are prohibited from involvement in any transaction relating to new debt of more than 14 days maturity or new equity of SSIL-designated entities or entities 50% or more owed by them.
“New debt” or “new equity” means debt or equity that was or is issued by the financial institution on the SSI List on or after relevant sanctions effective date.
This directive applies to all transactions involving new debt or new equity, including financing, and other dealings in new debt, if the new debt has a maturity longer that the period specified below.
Debt issuance Maturity prohibition
July 16, 2014 – September 11, 2014 Longer than 90 days maturity
September 12, 2014 – November 27, 2017 Longer than 30 days maturity
November 28, 2017 – present Longer than 14 days maturity
Directive 2: Energy Sector
This directive targets entities in the Russian energy sector. U.S. persons are prohibited from involvement in any transaction relating to new debt (which is broadly defined and includes trade financing and even payment terms) of more than 60 days maturity for SSIL designated entities or entities 50% or more owed by them.
The prohibition includes rolling over existing debt, if the rollover results in the creation of new debt with a maturity of longer than the applicable period specified in the relevant directive. This directive does not prohibit involvement in any transaction relating to new equity.
• For example, for debt that is issued on or after November 28, 2017, on behalf of or for the benefit of a company or person subject to Directive 2, the maturity of this instrument must be 60 days or less in order for a U.S. person to transact in, to provide financing for, or to otherwise deal in this debt.
• For debt that is issued on or after July 16, 2014 but before November 28, 2017, on behalf of or for the benefit of a person subject to Directive 2, the maturity of this instrument must be 90 days or less in order for a U.S. person to transact in, to provide financing for, or to otherwise deal in this debt.
If the terms of the agreement do not subsequently change due to rollover etc., then a U.S. person may deal in such debt even after the 60-day debt limit comes into effect on November 28, 2017 because such debt would not constitute “new debt” for purposes of the sanctions applicable on or after November 28, 2017.
Directive 2 applies to all transactions involving new debt; all financing in support of such debt; and any dealing in, including provision of services in support of, such new debt. The dates for debt issued and time limitations on its maturity are the following:
Debt issuance Maturity prohibition
July 16, 2014 – November 27, 2017 Longer than 90 days maturity
On or after November 28, 2017 Longer than 60 days maturity
Directives 1 and 2 do not require U.S. persons to block the property or interests in property of the entities identified in the directives. Persons identified in the directives will not be automatically added to the SDN List. U.S. persons should reject transactions or dealings that are prohibited under Directives 1 and 2 and report to OFAC any rejected transactions within 10 business days.
Directive 3: Defense
This directive is aimed at entities in the Russian defense sector. U.S. persons are prohibited from involvement in any transaction relating to new debt of more than 30 days maturity with a SSIL-designated entities or entities 50% or more owed by them.
Prohibition includes rollover of existing debt, if such rollover results in the creation of new debt with a maturity of longer than the applicable specified in the relevant directive and does not prohibit involvement in any transaction relating to new equity.
Transacting in, providing financing for, or otherwise dealing in new equity instruments of persons subject to Directives 2 and 3 is permissible. U.S. financial institutions may continue to maintain correspondent accounts and process U.S. dollar-clearing transactions for the persons subject to the directives, so long as those activities do not involve transacting in, providing financing for, or otherwise dealing in transaction types prohibited by these directives.
Transacting in, providing financing for, or otherwise dealing in any debt issued by, on behalf of, or for the benefit of persons subject to Directives 1, 2, or 3, or equity issued by, on behalf of, or for the benefit of persons subject to Directive 1, is permissible, if the debt or equity was issued prior to the date on which the person became subject to the relevant directive.
In addition, transacting in, providing financing for, or otherwise dealing in debt instruments with terms shorter than the specified terms, even if they are issued after the sanctions effective date, is permissible.
Directive 4: Oil and Gas
Directive 4 targets major Russian oil and gas companies. U.S. persons are prohibited from directly or indirectly providing goods, services (except financial services) or technology in support of exploration or production for deep-water (underwater activities at depth of more than 500 feet), arctic offshore (drilling originated offshore and located above the Arctic Circle), or shale projects (shale formations), performed anywhere in the world, with potential to produce oil if the SSIL has 33% interest or greater in the project.
Even though these directives are limited in terms of the sectors of the Russian economy to which they apply, they create major hurdles in business transactions to those individuals and companies on the SSI List. U.S. companies contemplating transactions with Russian companies should consult with a sanctions lawyer. If you need more information about sanctions or assistance in finding a sanctions lawyer, you should contact info@rostenlaw.