4/29/2014

Understanding the April 28, 2014 Enhanced U.S. Sanctions On Russian Interests And Their Potential Impact to Your Business

Understanding the April 28, 2014 Enhanced U.S. Sanctions On Russian Interests And Their Potential Impact to Your Business

by Trip Mackintosh, Jesse Horn and Lizbeth Rodriguez-Johnson

Citing Russia's continued illegal intervention in Ukraine and provocative acts that undermine Ukraine's democracy and threaten its peace, security, stability, sovereignty, and territorial integrity, on April 28, 2014, President Obama ordered the implementation of additional sanctions against Russian interests. These new sanctions follow an April 25, 2014 meeting with the U.S. and fellow G7 countries during which it was agreed to sanction Russia for its ongoing failure to deescalate the situation in eastern Ukraine and refrain from further violence or provocative acts. 

The new sanctions target a number of Russian individuals and entities and restrict a potentially broad sector of U.S. exports and re-exports to Russia. The measures amount to a de facto arms embargo and potentially blanket restrictions on dual use exports, depending on how the Departments of Commerce and State interpret the policies. 

U.S. Treasury Sanctions

Pursuant to the authority granted to it under E.O. 13660, the U.S. Department of the Treasury imposed sanctions on seven Russian government officials, including Mr. Igor Sechin, the president of the state-owned oil company Rosneft. Mr. Sechin is a member of President Putin's inner circle. Additionally, Mr. Oleg Belavantsev, Russia's presidential envoy to Crimea; Mr. Dmitry Kozak, a deputy prime minister of the Russian Federation; Mr. Evgeniy Murov director of Russia's Federal Protective Service; Mr. Aleksei Pushkov deputy of the state Duma; Mr. Sergei Chemezov government-appointed board member of Rosneft; and Mr. Vyacheslav Volodin first deputy chief of staff to President Putin, are also individuals hit by the sanctions. Pursuant to E.O. 13661, these individuals are now subject to an asset freeze and a U.S. visa ban.

Additionally, Treasury subjected 17 Russian companies to an asset freeze. The list of these entities, found here, highlights a wide array of industries and Russian sectors. Among the companies sanctioned are several new financial institutions, including Sobinbank, energy companies like the Stroytransgaz Group, and various related entities including mining companies, a corporate aviation service, and a mineral water and soft drink company. The expectation among analysts is that these companies will have lines of commerce and relationships that intertwine significantly with U.S. and EU interests, making this list of sanctioned companies significant.

Commerce and the State Department also announced a tightened policy to deny export license applications for any high-technology items that could contribute to Russia's military capabilities. Those Departments also will revoke any existing export licenses that meet these conditions. The impact of these measures could eclipse the impact of the direct sanctions on listed parties and create difficult compliance and business management issues for U.S. and other aerospace and high-tech companies. 

Export License Rejection/Arms Embargo

The U.S. Department of Commerce and U.S. Department of State, acting under the authority of E.O. 13660 and E.O. 13661, and E.O. 13662, announced a tightened policy to deny export license applications for any high-technology items that could contribute to Russia's military capabilities. The State Department indicated that this will include defense articles and services. Per the broad category of articles or services that could “contribute to Russia's military capabilities,” this could include the entirety of the U.S. Munitions List. In effect, this could be an embargo, depending on how State interprets this mandate. Similarly, Commerce could conclude that all items on the Commerce Control List (CCL) controlled for export for National Security reasons, for example, can no longer be exported or re-exported. This would include a majority of items on the CCL. Both State and Commerce can revoke existing authorizations, potentially involving complex and expensive projects that either were destined for Russia or relied on exports of controlled technologies to Russia.

Commerce also added 13 companies to Commerce's Entity List. Among the entities hit by the new licensing restrictions are Stroytransgaz Holding, located in Cyprus; Volga Group, located in Luxembourg and Russia; and Aquanika, Avia Group LLC, Avia Group Nord LLC, CJSC Zest, Sakhatrans LLC, Stroygazmontazh, Stroytransgaz Group, Stroytransgaz LLC, Stroytransgaz-M LLC, Stroytransgaz OJSC, and Transoil, all located in Russia. Designation on the Entity List imposes [delete a] license requirements for the export, re-export or other foreign transfer of specified items subject to the Export Administration Regulations (EAR) to the designated companies, with a presumption of denial of any export license.  This license requirement is in addition to licensing requirements specified elsewhere on the EAR. 

Potentially more significant, in conjunction with the automatic revocation of any existing export licenses for the entities listed above, all other pending applications and existing licenses, for all applicants, will now receive a case-by-case evaluation to determine their contribution to Russia's military capabilities. If the ultimate determination is a conclusion that a product, technology or service will contribute to Russian military capabilities, there is a presumption of an export license rejection. The business implications of this can be far reaching for U.S. and non-U.S. companies.

International Sanctions

In conjunction with the new U.S. sanctions, the European Union also added 15 new Russian and Ukrainian individuals to its sanctions list, bringing the total number of individuals targeted by the EU to 48.  These sanctions, which go into immediate effect, include asset freezes and travel bans.  The list includes Gen. Valery Gerasimov, chief of the Russian General Staff and first deputy defense minister, and Lt. Gen. Igor Sergun, identified as head of GRU, the Russian military intelligence agency.  Other individuals targeted by the EU may be found here.

Impact

With the listing of 17 Russian companies, across several Russian economic sectors, companies dealing in Russia or with senior Russian officials in any Russian sector are now on notice of possible future sanctions that may already or could soon directly impact their business activities and could, in extreme cases, create risks of possible designation with any association with these entities. Given the fact that any economic sector in Russia can be named as a risk at any time, there is a substantially increasing risk to any involvement in the Russian economy. Combined with the EU's designation of additional individuals to an asset freeze and travel ban, the April 28 U.S. sanctions create a substantially increased compliance risk to U.S. companies that transact in Europe generally and that may conduct business in Russia or Ukraine specifically.

Revocation of licenses by Commerce and State may not be public unless subject to Congressional or other notification requirements. This will contribute to uncertainty among industry participants as to where the line of accepted technology transfers might fall under this new policy. 

In addition to the general importance of a compliance system that enables confirmation of any newly listed sanctioned entities, it is important to review again business relationships, contracts, purchase orders, and upcoming business travel to ensure that a company does not run afoul of the March 6, March 17, or March 20 Executive Orders as well as existing EU sanctions. This mitigates the risk of having assets seized or frozen. Attention should be given to projects that might be implicated by these sanctions. U.S. companies need to determine how these sanctions might impact on-going projects. Non-U.S. companies need to do the same, with attention to U.S. inputs that might now be controlled to the point that a project destined for Russia will have to be materially altered. 

The team at Holland & Hart is prepared to assist with any of these reviews and will continue to provide you updates regarding how to comply with this new, changing sanctions regime.

For More Information Contact:
J. Triplett Mackintosh
Phone: 303-295-8186 or 202-654-6930
Email: tmackintosh@hollandhart.com

Jesse T. Horn
Phone: 303-295-8253
Email: jthorn@hollandhart.com

Lizbeth C. Rodriguez-Johnson
Phone: 303-295-8399
Email: lrodriguez@hollandhart.com

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