Ukraine & Russia:
Recent Developments in Export
Controls & Sanctions
September 11, 2014
Kim Strosnider, Covington & Burling LLP
Carol Fuchs, General Electric
Agenda
1. Overview of new measures
2. U.S. sanctions developments
3. New U.S. export restrictions targeting Russia’s
energy sector
4. EU update
5. Navigating the new measures
2
Overview of Developments
• Ukraine-related sanctions began in March 2014 as
series of fairly routine measures:
– Asset blocking,
– Entity List designations and
– Revised export licensing policies.
• Tide turned in July 2014: range of new measures have
transformed landscape for companies trading with
Russia:
– “Sectoral sanctions” and
– New energy-related export control restrictions.
3
U.S. Sanctions and List-Based Controls
4
Lists Relevant to Ukraine Sanctions
• Russia not subject to broad embargo; sanctions
remain targeted and list-based.
• 3 key US lists for purposes of Ukraine/Russia
sanctions:
– List of Specially Designated Nationals and Blocked
Persons (“SDN List”)
– Entity List
– Sectoral Sanctions Identifications List (“SSI List”)
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OFAC SDN List
• Maintained by U.S. Treasury
Department, Office of Foreign Assets
Control (“OFAC”).
• New SDNs include individuals and
entities in Russia’s financial, energy,
and defense sectors, such as:
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–
–
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Kalashnikov Concern
United Shipbuilding
Russian politicians
Former Ukrainian politicians and
separatist leaders
– Russian businessmen (e.g. Igor Sechin of
Rosneft)
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OFAC SDN List
• Trade by U.S. Persons with SDNs is broadly prohibited.
• SDN assets must be blocked when they come into the
United States or possession or control of a U.S. Person.
• These trade restrictions and asset-blocking measures
also apply to entities owned 50% or more by one or
more SDNs; updated guidance issued by OFAC in August
2014.
7
BIS Entity List
• “Entity List” names persons that have engaged in
activities the U.S. believes are contrary to its national
security or foreign policy interests.
• List maintained by Commerce Department, Bureau of
Industry and Security (“BIS”).
• License required for any person -- including a nonU.S. person -- to export, reexport, or transfer any
item subject to the EAR to a party on the Entity List.
• Approximately 25 parties added to Entity List in
connection with the crisis in Ukraine. Presumption of
denial for a license to export/reexport to these
parties.
8
OFAC SSI List
• On July 16, 2014, OFAC established a new Sectoral
Sanctions Identifications List (“SSI List”), which identifies
for targeted sanctions:
– Financial Institutions: Bank of Moscow, Gazprombank
OAO, Rosselkhozbank, Vnesheconombank, and VTB
Bank, and
– Energy Companies: OAO Novatek, Rosneft Oil
Company.
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OFAC SSI List
• U.S. persons are prohibited from transacting in,
providing financing for, or otherwise dealing in:
– New debt of longer than 90 days maturity for any SSIList parties or their property/property interests.
– New equity for SSI-List financial institutions or their
property/property interests.
• Prohibitions extend to dealings with entities
owned 50% or more by SSI List parties.
• OFAC FAQs provide some guidance on new
directives, but many questions remain.
10
New U.S. Export Restrictions
Targeting Russia
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Russia-Related Export Controls
• Supplementing list-based sanctions, Commerce
Department has enacted set of new export
controls targeting certain trade with Russia:
– Broad new licensing requirements for certain energysector items.
– Tighter controls on licensing for certain other items
(high tech, or subject to national security controls).
12
Increasing U.S. Export Restrictions
• Commerce Department, through BIS, controls items
subject to the Export Administration Regulations
(“EAR”):
– Items on Commerce Control List (“CCL”)
– Non-sensitive EAR99 items not listed on CCL
• Authorization requirements depend on destination, end
use, end user.
– Destination restrictions found through review of CCL,
consideration of Commerce Country Chart
– End use/end user restrictions found in EAR Part 744
13
Increasing U.S. Export Restrictions
• Recently, controls on exports to Russia tightened:
– BIS will deny licenses for exports/reexports to Russia or
occupied Crimea of high-tech items that could contribute to
Russian military capabilities.
• Similar policy at State Department for items controlled by the
International Traffic in Arms Regulations (“ITAR”).
– End of favorable license review for exports/reexports to
Russia of CCL items subject to national security (“NS”)
controls.
• Other major development: addition last month of
“Russian Industry Sector Sanctions” to the EAR.
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Russia Industry Sector Sanctions
• New rule published and effective August 6, 2014.
• A BIS license is required to export from the United States to
Russia, reexport from a third-country to Russia, or transfer
within Russia any item that is subject to EAR if:
– Listed in a new EAR supplement or specified in any of eight Export
Control Classification Numbers (“ECCNs”) on the CCL and
– The exporter, reexporter, or transferor knows -- or is unable to
determine whether -- the item will be used directly or indirectly in
exploration for, or production of, oil or gas in Russian deepwater,
Arctic offshore locations, or shale formations in Russia.
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Items in Scope: Must be Subject to EAR
• The items specified in the new rule must be “subject to
the EAR”:
–
–
–
–
In the United States
In transit through the United States
U.S.-origin items, wherever located
Items manufactured outside the United States containing more
than 25% controlled U.S.-origin content (by value)
– Certain foreign-made direct products of U.S. technology or
software
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Items in Scope: Supp. No. 2 to Part 746
• Items listed in Supp. No. 2 to EAR Part 746 include certain:
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–
–
–
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Pipes
Well tubings and casings
Drill bits and tools
Oilfield pumps
Gas separation equipment
Oil drilling and production platforms/machinery
Drilling derricks
• Items are identified by Census Bureau “Schedule B”
numbers (not ECCNs because they are EAR99)
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Items in Scope: Existing ECCNs
• Items classified under the following existing ECCNs are
in scope:
– 1C992: Commercial charges and devices
– 3A229: Firing sets and equivalent high-current pulse
generators
– 3A231: Neutron generator systems
– 3A232: Detonators and multipoint initiation systems
– 6A991: Marine or terrestrial acoustic equipment
– 8A992: Vessels, marine systems, or equipment and various
parts, components, and related items
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Items in Scope: New ECCNs
• Items classified under the following new ECCNs
are in scope:
– 8D999: Software specially designed for the operation
of unmanned vessels used in Russia’s oil and gas
industry
– 0A998: Oil and gas exploration data and software
• Includes seismic analysis data, hydraulic fracturing design and
analysis software and data, and hydraulic fracturing materials.
• Broader than “technology” elsewhere controlled on CCL
(specific information necessary for the development,
production, or use of items on the CCL)
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Restricted End-Uses:
Deepwater, Arctic, Shale
• Knowledge requirement
– Affirmative knowledge
– Unable to determine whether . . .
• Direct or indirect use in oil or gas production or exploration
• Russian deepwater
– More than 500 feet
• Arctic offshore locations in Russia
– “Arctic” is undefined but BIS guidance expected
• Shale formations in Russia
– “Shale” is undefined but BIS guidance expected
20
BIS Licensing Policy
• Presumption of denial: Applications for
licenses to export, reexport, or transfer
the specified items for use in Russian
deepwater, Arctic offshore, or shale
projects that have the potential to
produce oil.
• Case-by-case review: Applications for
licenses to export, reexport, or transfer
the specified items for use in Russian
deepwater, Arctic offshore, or shale
projects that have the potential to
produce gas.
21
BIS Rule: No Grandfather Provision
• The new controls do not contain a “grandfather’
provision exempting exports, reexports, or in-country
transfers in furtherance of contracts entered into
prior to August 6, 2014.
• On the other hand . . .
– Rule does not require items exported or reexported to
Russia prior to August 6, 2014 to be withdrawn from Russia.
– Rule does not restrict exports, reexports, or in-country
transfers pursuant to a license granted by BIS prior to
August 6, 2014.
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EU Sectoral Sanctions
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EU Sectoral Sanctions
• Imposed by EU Council Regulation 833/2014 (effective
August 1, 2014)
– Adopted at the EU level but implemented by Member States’
authorities, which can lead to differences in interpretation.
• Regulation 833/2014 applies:
– To conduct by EU-incorporated entities and EU Member State
nationals anywhere in the world.
– To conduct by any person, irrespective of nationality, in
connection with activities occurring in the territory of the EU or
(with regard to legal persons) in respect of business “done in
whole or in part within the Union.”
– To conduct on-board any aircraft or vessel under the jurisdiction
of a Member State.
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EU Financial Sanctions
• Financial-sector sanctions also imposed.
• Article 5 of the EU regulation prohibits:
– Directly or indirectly purchasing, selling, providing brokering or
assistance in the issuance of, or otherwise dealing with
transferable securities and money market instruments with a
maturity exceeding 90 days, issued after August 1 by certain
financial institutions.
• Five banks listed: Sberbank, VTB Bank, Gazprombank,
Vnesheconombank, and Rosselkhozbank.
• Also reaches these banks’ affiliates established outside
the EU and those acting on their behalf/at their direction.
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Restrictions on Exports
• Similar to the U.S. Russian Industry Sector Sanctions.
• Imposes a licensing requirement for the sale, supply, transfer, or
export, after 1 August 2014, of certain “technologies” contained
in Annex II of the Regulation.
– Annex II includes “certain technologies suited to the oil industry for use in
deep water oil exploration and production, Arctic oil exploration and
production, or shale oil projects in Russia.”
• Presumption of denial if Annex II items are for “deep water” or
“Arctic” oil exploration or production or for shale oil projects in
Russia.
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Summary of EU and US Russia Energy Sector Sanctions
PROGRAM
EU ENERGY SECTOR SANCTIONS
US ENERGY SECTOR SANCTIONS
AUTHORITY
EU 833/2014 (O&G)
15 CFR 732-774
JURISDICTION
EU persons and legal entities, wherever
located, and activities within EU
Items subject to the EAR (US-origin or foreign
manufacture with more than de minimis US
content)
NON-ORIGINATING ITEMS
Whether or not originating in EU
Items subject to the EAR
RESTRICTED ITEMS
EU Annex II (HS Codes)
8 listed ECCNs and Supp 2 (Schedule B
Numbers)
AUTHORISATION/LICENSE
REQUIREMENT
All items on Annex II for any end use in
Russia
Listed ECCNs and Supp 2 items if knowledge
of deepwater (> 500 ft), Arctic offshore or
shale end use in Russia for oil or gas
exploration or production, or unable to
determine whether such end use, or
informed by BIS of such end use
STANDARD OF REVIEW
No authorisation if EU has reasonable
grounds to determine that items are for
deepwater, Arctic or shale oil exploration
or production in Russia.
Presumption of denial for deepwater, Arctic
offshore, or shale oil exploration or
production in Russia; case-by-case review for
other projects.
PRE-EXISTING
COMMITMENTS
Grandfather provision for contracts
entered into prior to 8/1/14, but
authorisation required and discretionary.
No grandfathering of pre-existing
commitments; even shipments in-transit
cannot proceed without license.
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Other EU Restrictions
•
•
Export of certain infrastructure items/technologies
(including energy) to be used in Crimea or Sevastapol
Import of Crimea-origin goods into the EU
•
•
Traditional “country of origin” analysis doesn’t translate well;
Crimea isn’t a country.
Source with Crimea address ≠ origin Crimea.
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How to Implement Russia- &
Ukraine-Related Sanctions
September 11, 2014
Imagination at work.
In-House Challenges
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What are the facts?
Is legal analysis current? (e.g., rules change over the
weekend)
Have all applicable jurisdictions been evaluated?
If legal, what about reputational concerns?
Who reviews transactions?
How to review only once?
How to communicate internally?
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Implement the “LISTS”
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Incorporate Russia/Ukraine lists into company’s watchlist
screening program. Make sure that all screening tools are
updated promptly.
Identify parties that are majority-owned by sanctioned
individuals/entities.
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Either research customers/suppliers or research listed names.
Use external third party researchers with Russian expertise (and
Russian language).
Explain to internal clients why these names are not automatically
captured by third party screening tools.
Track names on spreadsheet; clearly distinguish between
“blocked” and “financial” sanctions. Identify majority owner(s).
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Screenshot: Russia/Ukraine Spreadsheet
EXAMPLE
Prepare FAQ’s
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Be specific to your company.
Don’t just cite the law. Explain how it matters to your
business.
Explain what to do and where to get help.
Attach or link to source documents.
Mark for internal use only, if appropriate.
Before posting, obtain outside counsel review.
Develop Flowcharts and Graphics
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Draw decision trees for each sanctions area, e.g.,
screening, energy, military.
Draw separate charts for US and EU, if appropriate, or
make summary chart highlighting areas of difference.
Use VISIO for better clarity than PowerPoint.
PERMITTED
PROHIBITED
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Communications
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Track news daily; report to senior management.
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Directly relevant to sanctions.
Political news.
Economic/stock market info; e.g., value of ruble.
Messages to distribution list promptly as changes
happen.
Designate focal points and escalation process.
Periodic team calls.
Training.
Internal website to post materials.
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Use Outside Counsel
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Obtain news immediately, even before law firm alerts.
Clarify areas of confusion.
Check for accuracy and clarity.
Use non-US lawyers for non-US sanctions.
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Questions?
Kim Strosnider
kstrosnider@cov.com
+1.202.662.5816
Carol Fuchs
Carol.fuchs@ge.com
+1.202.637.4222
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