Out-Law Analysis | 01 Oct 2014 | 9:39 am | 10 min. read
As with previous rounds of sanctions, if a company has any doubt over whether or not a transaction is caught by any relevant financial or trade sanctions, legal advice should be taken. These latest measures pose significant compliance challenges for companies who transact business in or with Russia, especially non-US companies that may not be familiar with US re-export controls.
These are the sanctions that are in place on 25 September.
The EU Regulations
EU Regulation no 269/2014 and no 208/2014, and their corresponding UK Regulationsmade providing and dealing with funds and economic resources of designated persons a criminal offence . Over the last six months more EU implementing Regulations have been imposed, adding people and entities to the list of designated persons. There are currently 141 individuals and 23 companies designated under EU sanctions relating to Russia and Ukraine.
The sanctions apply to all EU persons and entities and to any non-EU person or entity when doing business within the EU. Accordingly, a British citizen working in Moscow may commit a sanctions related offence, for example, if they broker a deal to supply particular restricted equipment to a Russian entity or for use in Russia.
Scope of the sanctions
The sanctions most relevant to the oil and gas industry are contained in Council Regulation 833/2014 of 31 July 2014, which, as described above, was amended on 12 September 2014 when further sanctions were imposed on business related to Russia .
Prohibition on the provision of certain services and vessels for certain projects
The additional EU sanctions that came into force on 12 September 2014 prohibited the provision of drilling, well testing and logging and completion services for deep water or arctic oil exploration and production and shale oil projects in Russia. The provision of specialised floating vessels for use in deep water or arctic oil exploration and production is also prohibited.
Deep water and arctic oil are not defined in the EU Regulations. The UK's Department of Business, Innovation and Skills (BIS) has said that US regulations define deep water as anything "greater than 500 feet", and that BIS understand "arctic" to mean the area north of the Arctic Circle.
There are two exemptions to the prohibition imposed on 12 September. These are:
Annex II technology
In addition to these oil exploration and production related prohibitions there are trade sanctions relevant to the oil and gas industry for which a licence from an EU export control agency is needed.
These trade sanctions relate to equipment listed in Annex II of Council Regulation 833/2014, including, for example, particular line pipes used for oil and gas pipelines, particular drill pipes, cables and tubing used for drilling for oil and gas, floating or submersible drilling or production platforms and particular vessels. The restricted equipment and technology is identified by way of a description and CN code.
Prior authorisation is needed for the sale, supply, transfer or export, either directly or indirectly, of any equipment listed in Annex II to any person or body in Russia or to any person or body for use in Russia.
Authorisation is required for the provision to any person or body in Russia, or to any person or body for use in Russia, of:
The EU Regulations mean that authorisation will not be granted where there are reasonable grounds to determine that the sale, supply, transfer or export of Annex II equipment, or related technical assistance, financial assistance or brokering services, is for use in deep water or Arctic oil exploration and production and shale oil projects in Russia unless it arises from a contractual obligation concluded before 1 August 2014.
It is prohibited to sell, supply, transfer or export dual-use goods and technology, meaning items listed in Annex I to EC Regulation 428/2009, to any person or company in Russia or for use in Russia, if those items may be intended for military use or the end user is listed in Annex IV to EU Regulation No 959/2014. In addition to considering the application of Russian sanctions, all companies should check if their products, technology or services are subject to generally applicable export controls.
Transferable securities, instruments, loans and credit
EU persons are prohibited from purchasing, selling, providing investment services for, or assistance in the issuance of, or otherwise dealing with certain transferable securities and money-market instruments. The prohibitions apply to transferable securities or money-market instrument with a maturity exceeding 90 days, issued after 1 August 2014 and before 12 September 2014, or with a maturity exceeding 30 days issued after 12 September 2014 by: Sberbank, VTB Bank, Gazprombank, Vnesheconombank or Rosselkhozbank.
They also apply to transferable securities or money-market instruments, loans and credit, except for loans and credit relating to non-prohibited imports or exports, with a maturity exceeding 30 days issued after 12 September 2014 by or, in relation to loans and credit, to: OPK Oboronprom, United Aircraft Corporation, Uralvagonzavod, Rosneft, Transneft, and Gazprom Neft.
These prohibitions apply to other persons or entities established outside of the EU which are more than 50% owned by one of the named corporations; and any other person or entity that acts at the direction of one of these corporations.
Additional trade sanctions in place in connection with Crimea prohibit:
Specifically, the activities which are restricted are:
There are also prohibitions on selling, supplying, or transferring, whether directly or indirectly, equipment as listed in Annex III of Regulation 825/2014 to any Crimean person or company or for use in Crimea.
The equipment listed in Annex III of that regulation includes equipment such as line pipes, drill pipes, casings, tubings, containers, certain pumps, and other types of machinery.
The US has issued a series of Ukraine-related sanctions in response to Russia’s actions in Crimea, including three executive orders, the addition of dozens of names to the Specially Designated Nationals and Blocked Persons list (SDN list), and amendments to the Export Administration Regulations (EAR).
On July 16 and 29 2014, the US Treasury’s Office of Foreign Assets Control (OFAC) imposed sectoral sanctions against Russia targeting major banks, energy companies, and parts of the defence and shipping industries. These sanctions mostly apply to new contracts, meaning those after the date of the applicable sanction. The provision of financing, products and related services required under pre-existing contractual obligations will be allowed, at least for a limited period. On September 12, 2014, OFAC imposed additional sanctions and tightened already existing sanctions against Russia.
Under the current OFAC sanctions affecting Russia, US persons and persons within the US are prohibited from:
From August 6 and September 17 the US Department of Commerce’s Bureau of Industry and Security (DOC) implemented restrictions on the export, re-export and transfer, including in-country transfer, of items subject to the EAR as follows:
DDTC Restrictions on defence items
The US Department of State’s Directorate of Defense Trade Controls (DDTC) announced in April 2014 a policy of denial concerning pending and future export license applications for high technology articles or services that contribute to Russia’s military capabilities. In addition, DDTC continues its review of pre-existing licenses to determine the potential contribution to Russia’s military capabilities.
Application of US Sanctions
These sanctions are complex in application, but generally apply to all US persons and entities operating anywhere in the world, to any overseas company and person when conducting business in the United States, and to certain U.S. origin equipment or technology to be exported or re-exported to Russia or transferred in country.
As an immediate step, companies should check the scope of their pre-existing contracts with Russian businesses or which relate to the provision of financing and relevant products and services.
If there is a pre-existing contractual obligation under which the supply is required to proceed, it may be exempt from the scope of the relevant sanctions, subject to any prior notification provisions, or allowed to proceed if authorised or licensed. However, care is needed as the exemptions may not cover supplies under framework agreements where there is no obligation to supply, or to orders under contracts which were extended after the sanctions came into force.
Financing agreements should also be checked as they may contain extensive prohibitions on proceeding with any contracts relating to Russian business now that sector and country wide restrictions are in place.
Companies that conduct business overseas or with foreign businesses should have in place a compliance program based around a robust policy on sanctions and comprehensive systems to implement the policy effectively. Further, companies should be aware of potential anti-money laundering (AML) risks associated with these regions in light of the ongoing crisis in Ukraine.
Such a program should include: