Russia Sanctions 2017
Despite numerous diplomatic ceasefires aimed at resolving the ongoing Russo-Ukrainian conflict, violent hostilities between Kiev’s government forces and Russian-backed separatists in eastern Ukraine’s Donetsk and Luhansk regions continue today, having claimed more than 10,000 lives since April 2014. This article will provide a brief background and update on the sanctions programs implemented in response to the Kremlin’s aggressive foreign policy regime in Ukraine.
In 2014, the US and EU began imposing sanctions against Russian and Ukrainian individuals and entities in response to Russia’s annexation of Crimea and its backing of a separatist movement in eastern Ukraine. The Ukraine/Russia-related sanctions program implemented by the US Department of Treasury’s Office of Foreign Assets Control (OFAC) began on March 6, 2014, when President Obama, in Executive Order (EO) 13660, declared a national emergency to deal with the threat posed by those who undermined the democratic processes in Ukraine and threatened the nation’s security, sovereignty and territorial integrity.
The president subsequently issued EOs that expanded the scope of the initial order, authorizing the imposition of sanctions against Russian government officials, certain individuals and institutions in Crimea, and persons operating in Russia’s arms sector. The US also imposed an entirely new type of sanctions regime known as Sectoral Sanctions, comprised of four directives outlining prohibitions against transacting with certain Russian financial service, defense and energy companies. OFAC issued a corresponding Sectoral Sanctions Identification List (SSI), prohibiting US persons from doing business with specified individuals or entities in identified business sectors.
On August 2, 2017, President Donald Trump signed into law H.R. 3364, a wide-ranging sanctions measure titled the Countering America’s Adversaries Through Sanctions Act (CAATSA). The bill passed with near unanimous Congressional approval, and served to expand the scope of current sanctions in place against Iran, Russia and North Korea. Pursuant to CAATSA’s Title II, the Countering Russian Influence in Europe and Eurasia Act (CRIEEA), OFAC amended its Ukraine/Russia-related Sectoral Sanctions first issued in 2014.
First, on September 29, OFAC issued updated versions of Directives 1 and 2, which prohibit dealing in new debts in the financial and energy sectors. Subsequently, on October 27 the US Department of State released a list of 39 prominent Russian state-owned and private defense companies that will be subject to a variety of menu-based sanctions starting early next year, warning companies to avoid conducting “significant transactions” with the listed Russian entities. The State Department noted it will take into account the “totality of the circumstances” on a case-by-case basis when considering each individual transaction.
OFAC then expanded Directive 4 on October 31, substantively expanding the scope of the sanctions program for businesses involved in the Russian oil industry. Since Directive 4 was issued in September 2014, US individuals and entities have been prohibited from providing goods, services or technology in support of deepwater, Arctic offshore, or shale projects that produce oil in the Russian Federation or in Russian waters. This prohibition applies to major Russian oil companies on the Sectoral Sanctions List (SSI), including the state-owned energy giant Gazprom, as well as Lukoil, Surgutneftegas and Rosneft. The Modified Directive 4 expands the geographical scope of this restriction and broadens the criteria for sanctionable activity. Support of such oil projects will now be prohibited if they meet all three of the following criteria:
The project was initiated on or after January 29, 2018; the project has the potential to produce oil in any location; and, any person determined to be subject to Directive 4 or any earlier version has a 33 percent or greater ownership interest in the project or owns a majority of the voting interests in the project. (Formerly it was those on the SSI List and their 50 percent or more owned entities).
The amended Directive 4 gives the Trump administration the option of imposing sanctions on companies helping develop Russian export pipelines, the most important of which for the EU is the Nord Stream Project. In fact, Section 257 of CAATSA specifically articulates the US’s continued opposition to the Nord Stream 2 pipeline, which is managed by Gazprom. However, as of November OFAC had not released guidance on its plans for Gazprom’s Nord Stream financial partners throughout the western EU, which includes major gas companies such as Royal Dutch Shell, Austria’s OMV, and Germany’s Uniper and Wintershall. When asked for comment on the directive’s effect on the Nord Stream 2, a senior US administration official stated that they were not going to go “project by project or company by company and talk about whether or not we think that the guidance affects them or not.”
It is thus too soon to predict how the US will enforce the updated Russian sanctions with regards to western Europe’s energy sector. Gazprom’s partners in the western EU could be drastically affected; and the extent to which US regulators will go after them remains to be seen. The sanctions program will likely drive Russian energy companies to China for financing assistance on upcoming large-scale transnational pipeline projects. Ultimately, compliance practitioners will need to stay up to date on any upcoming OFAC guidance and comprehensive due diligence will remain a necessity, particularly for those who engage with Russian and European entities in the international energy and defense sectors.
Doreen M. Edelman is a shareholder and co-leader of the Global Business Team at Baker Donelson (Washington, D.C.). With more than 25 years of experience in import and export compliance, foreign investment and global expansion, she advises both U.S. and foreign-based companies on international business matters. Julius Bodie also contributed to this article. A law clerk with Baker Donelson, he recently graduated from Loyola Law School.