EU and US Russia-related sanctions and their impact on business

Out-Law Analysis | 01 Oct 2014 | 9:39 am | 10 min. read

FOCUS: The European Union and the US continue to expand sanctions on individuals and companies connected to Russian business. The latest expansion has a significant impact on the oil and gas sectors in particular, although other sectors too should take note. 

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.

EU Regulation no 833/2014 imposed trade sanctions on particular types of business with Russian persons or in Russia. EU Regulation no 960/2014 expanded those restrictions on 12 September.

EU Regulation no 692/2014 as amended by Regulation no 825/2014 imposed further trade sanctions in relation to business in Crimea.

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:

  • where the obligation to provide the services and/or the vessel arises from a contractual obligation that was concluded before 12 September 2014; or
  • where the services and/or the vessel are necessary for the "urgent prevention or mitigation of an event likely to have a serious and significant impact on human health and safety or the environment".

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:

  • technical assistance or brokering services related to Annex II equipment or the provision, maintenance and use of such equipment; and / or
  • financing or financial assistance related to the sale, supply, transfer or export of Annex II equipment or the provision of related technical assistance.

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.

Dual Use

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.

Crimea

Additional trade sanctions in place in connection with Crimea prohibit:

  • activities which relate to the creation, acquisition or development of infrastructure in the areas of transport, telecommunications or energy in Crimea, and
  • activities which relate to the exploitation of oil, gas or mineral resources in Crimea.

Specifically, the activities which are restricted are:

  • the granting of any financial loan or credit specifically relating to such activities;
  • the acquisition of shares and securities in Crimean companies engaged in such activities;
  • the creation of a joint venture related to such activities; and
  • related technical assistance or brokering services related to such investment activities.

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.

US sanctions

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).

OFAC Sanctions

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: 

  • transacting in, providing financing for, or otherwise dealing in new debt of longer than 30 days maturity or new equity issued by major state-owned Russian banks, including Bank of Moscow, Gazprombank OAO, Vnesheconombank (VEB), Russian Agricultural Bank (Rosselkhozbank), VTB Bank OAO and Sberbank Russia.
  • transacting in, providing financing for, or otherwise dealing in new debt for Russian energy firms OAO Novatek and Rosneft;
  • Dealing with any party named on the SDN List; and
  • Providing, exporting, or re-exporting, whether directly or indirectly, goods, services or technology in support of exploration or production for Russian deepwater, Arctic offshore, or shale projects that have the potential to produce oil and involve Gazprom, Gazprom Neft, Lukoil, Surgutneftegas and Rosneft, as outlined in Directive 4). Under OFAC guidance prohibited services include drilling services, geophysical services, geological services, logistical services, management services, modelling capabilities and mapping technologies, but not financial services. General License 2 authorised a two week wind down period for prohibited activities, which expired on September 26 2014.

DOC Restrictions

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: 

  • items classified under certain Export Control Classification Numbers (ECCNs) designated under Section 746.5 of the EAR, known as the new EAR Russian industry sector sanctions, or covered by a Schedule B number listed on the Russian Industry Sector Sanctions List, Supplement 2 to Part 746 of the EAR, require a license for export if the exporter or re-exporter is aware that the item will be used, directly or indirectly in exploration or production of oil or gas in Russian deepwater, meaning greater than 500 feet, Arctic offshore locations or shale formations in Russia. DOC has implemented a “presumption of denial” licensing policy for all items subject to the EAR which require a license for export to Russia in connection with Russian oil projects. Gas projects are not included in the policy of presumptive denial, leading to the initial assumption that license applications for gas projects will be reviewed by DOC on a case by case basis.
  • Five Russian energy companies have been added to DOC’s Entity List in Supplement 4 to EAR Part 744, including Gazprom OAO, Gazpromneft, Lukoil OAO, Rosneft and Surgutneftegas. A specific license from DOC is required for the export, reexport or transfer (including in-country transfer) of any item subject to the EAR to any of these companies if it is known that the items will be used directly or indirectly in exploration or production of oil or gas in Russian deepwater, meaning greater than 500 feet, Arctic offshore locations or shale formations in Russia. There is a presumption of denial for all license applications.
  • DOC also added five Russian defence companies to the Entity List, including Almaz-Antey Air Defense Concern Main System Design Bureau, Tikhomirov Scientific Research Institute of Instrument Design, Mytishchinski Mashinostroitelny Zavod OAO, Kalinin Machine Plant, JSC and Dolgoprudny Research Production Enterprise. A specific licence is now required for the export, re-export or transfer, including in-country transfer, of any item subject to the EAR by any person to these companies, regardless of the end use. There is a presumption of denial for all license applications.
  • Section 744.21 of the EAR has been amended to extend the licensing requirement for certain items on the Commerce Control List (CCL) when it is known the item is destined for a military end use or end user in Russia.

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.

Compliance Steps

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:

  • customer and transaction due diligence and screening against applicable financial sanctions target lists, including EU, US and UK sanctions lists;
  • assessing if equipment and products are on export control lists and ensuring that all necessary licenses to export are obtained;
  • checking if imported goods are in any way restricted;
  • contractual controls, including sanctions exclusions and warranties;
  • training in policies and procedures; and
  • regular monitoring of transactions and periodic audits of sanctions compliance.

This has been produced by Tom Stocker and Yuri Botiuk of Pinsent Masons, the law firm behind Out-Law.com, and Linda Tiller and Cortney Morgan of US firm Husch Blackwell