US Sanctions: Spotlight on Russia

Daniel Pilarski November 2, 2020

This article will focus on U.S. sanctions on Russia/Ukraine. The Russia/Ukraine sanctions program is a complex mix of comprehensive, noncomprehensive and “sectoral” sanctions. It includes both primary sanctions aimed at U.S. persons and secondary sanctions aimed at non-U.S. persons. It encompasses broad sectors of the Russian economy and significant dealings with sanctioned individuals and entities, while generally permitting most transactions with Russia. Accordingly, it stands alone in U.S. sanctions programs and merits its own separate analysis.

Background to Russia sanctions
The Russia/Ukraine sanctions program began in 2014 in response to Russia’s occupation and annexation of Crimea and support for insurgents in eastern Ukraine. However, the original objectives and application of the sanctions program have become more complicated. The program was partially codified and expanded in 2017 by the bipartisan Countering America’s Adversaries Through Sanctions Act (CAATSA). Additional sanctions were implemented following Russia’s support for President Bashar al-Assad in the Syrian Civil War, as well as Russia’s alleged meddling in the U.S. presidential election of 2016, and the poisoning of former agent Sergei Skripal and his daughter in the U.K., among other actions. As a result, although the original sanctions issued in 2014 were prepared in tandem with similar EU sanctions, and achieved similar results (albeit with some key variations), the current U.S. sanctions against Russia have in many ways deviated sharply from the EU sanctions program, leading to difficulties in compliance and cohesion of the respective sanctions programs.

Crimea: comprehensive sanctions
OFAC refers to the sanctions program targeting Russia as “Ukraine-/Russia-related Sanctions.” In a sense this term is a misnomer, as the sanctions do not generally target Ukraine, and indeed, were originally designed to help Ukraine in its conflict with Russia beginning in 2014. The main reason for the reference to Ukraine is that the sanctions target Crimea, which the U.S. and most of the world considers to be a part of Ukraine, but which was occupied and annexed by Russia in 2014.

The sanctions targeting Crimea are comprehensive, in that they generally prohibit all trade between the U.S. or U.S. persons and the region of Crimea. Crimea thus joins Cuba, Iran, North Korea and Syria as the only countries/territories in the world currently subject to a comprehensive U.S. sanctions regime (as mentioned in a previous article, U.S. sanctions on Venezuela can be thought of as “quasi-comprehensive”). The sanctions on Crimea also prohibit U.S. persons from dealing with specially designated national (SDN) individuals and entities involved in Crimea, and target non-U.S. persons determined “to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of” such SDNs.

© Poliorketes / Adobe Stock

Sectoral sanctions
In general
A cornerstone of the original 2014 Russia sanctions in both the U.S. and the EU was the innovation of “sectoral sanctions.” Prior to this, in general terms, individuals and entities targeted by U.S. sanctions were all SDNs, which means they were fully blocked, their U.S. accounts were frozen, and they were unable to participate in any U.S. trade. The goal of U.S. and EU sanctions authorities in 2014 was to target significant sectors of the Russian economy, but not subject participants in those sectors to the devastating consequences of being fully frozen out of the U.S. and EU economies, which may have had significant negative effects on the U.S. and EU as well. Accordingly, U.S. authorities (in parallel to EU authorities) enacted the “Sectoral Sanctions Identification” (SSI) list. The three sectors currently targeted are Russian financial services, energy (oil and gas) and defense. Other potential sectors (including, at times, shipping) have been proposed for additional targeting, but as of now, none have been added. Parties on the SSI list include major players in the targeted Russian sectors. Both U.S. and non-U.S. persons generally can deal with parties on the SSI list. The only prohibition is on the specific activities targeted by the sanctions in question.

Restrictions on financing
Executive Order 13662, issued in 2014, includes four “directives” (essentially, sub-categories) that implement the sectoral sanctions. The first three directives target financing to entities on the SSI list involved in the Russian financial services, oil and gas, and defense sectors, respectively. More specifically, the directives prohibit U.S. persons from engaging in “transactions in, provision of financing for, and other dealings in new debt…or new equity” of parties on the SSI list. Although the prohibitions apply only to U.S. persons, OFAC interprets the prohibition on “dealing in” new debt to apply broadly to the provision of services in support of such debt. As a result, a non-U.S. lender who makes a U.S. dollar loan to a Russian entity subject to these sectoral sanctions (or where there is any other significant U.S. nexus) is at risk of a violation.

The prohibitions apply only to “new debt” with a term to maturity greater than 14 days (for financial institutions), 60 days (for oil and gas companies) or 30 days (for defense companies). The original tenor of permissible financings was greater; it was shortened in 2017 under CAATSA. Clearly the rules apply to a bank loan or a bond issuance, and would also likely apply to a finance lease or other arrangement that is generally treated as a financing. In the case of financial or business arrangements that have some indicia of a financing, it may be much harder to determine whether such arrangements constitute a financing.

Importantly, OFAC has ruled that a trade receivable constitutes a financing for this purpose (in contrast, the comparable EU sanctions generally do not treat trade receivables as financings). Therefore, U.S. persons (or non-U.S. persons with a significant U.S. nexus) who sell goods to or perform services for an entity subject to these restrictions must ensure that payment is made before the applicable deadline (14 days for a bank; 60 days for an oil or gas company). For this purpose, the clock starts running for the sale of goods when title or ownership of the goods passes, and for the performance of services when the final invoice is issued. If payment is not made within the applicable deadline, U.S. persons generally cannot accept the payment, and must apply to OFAC for a specific license.

Arctic offshore, deepwater and shale oil
Directive 4 of Executive Order 13662 generally prohibits a U.S. person from providing goods or services in support of exploration or production for deepwater, Arctic offshore or shale oil projects in which a Russian entity subject to Directive 4 is involved, or owns a 33% or greater economic interest or majority voting interest (prior to CAATSA, the project also needed to have the potential to produce oil in Russia, and minority ownership did not apply). For this purpose, “production” refers to the lifting of oil to the surface and the gathering, treating, field processing, and field storage of such oil. After such oil has been removed from field storage, it is no longer “tainted” by Directive 4, so U.S. persons are generally permitted to transport such oil.

It should be noted that some of Russia’s largest companies (by revenue) are subject to Directive 4 prohibitions but are not subject to Directives 1 through 3, so there is generally no prohibition on providing financing to such companies.

CAATSA and sectoral sanctions
As previously mentioned, in 2017, CAATSA codified and expanded U.S. sanctions on Russia. Section 228 of CAATSA imposes sanctions on a non-U.S. person that “facilitates a significant transaction” for any person subject to any Russian sanctions. On its face, this would apply even to parties on the SSI list, which would mean that U.S. persons could deal with such sectorally sanctioned parties (in a manner that does not violate sanctions), while non-U.S. parties who did so would be at risk. Fortunately, OFAC has interpreted Section 228 to exclude from the scope of prohibitions any transaction in which a U.S. person would not have been in violation. In addition, where the sanctioned party is only on the SSI list, OFAC requires that the prohibition must involve “deceptive practices,” which are defined as “attempts to obscure or conceal the actual parties or true nature of the transaction, or to evade sanctions.”

SDN sanctions; secondary sanctions
In addition to sectoral sanctions, the Russia/Ukraine sanctions program includes traditional “blocking sanctions” which target specified individuals and entities as SDNs. The most noteworthy Russian SDN listing was that of Oleg Deripaska, who was listed in April 2018. Deripaska owned several large Russian companies, including En+ Group (energy and metals company) and RUSAL, one of the world’s largest aluminum companies. Due to the 50% rule, these companies and others owned by Deripaska were treated as SDNs, subject to the same blocking sanctions as any other SDN. OFAC issued general licenses permitting the maintenance or winding down of transactions with these and certain other sanctioned companies, which were renewed periodically. In January 2019, Deripaska completed the restructuring of his holdings, which led to these companies being delisted.

Another company subject to blocking sanctions is United Shipbuilding Corporation (USC), which owned Arctech Helsinki Shipyard, a Finnish shipyard. The shipyard was restructured in May 2019, and is no longer subject to these sanctions.

(Photo: Helsinki Shipyard)

As described above under Sectoral Sanctions, Section 228 of CAATSA imposes sanctions on anyone that “facilitates a significant transaction” for any person subject to any Russian sanctions. Unlike in the case of sectoral sanctions, there is no general carveout or limitation on the application of Section 228 to transactions with Russian SDNs. Similarly, Section 226 of CAATSA imposes secondary sanctions on a non-U.S. financial institution that “facilitates a significant transaction” for a Russian SDN. For purposes of both Sections 226 and 228, the question of what constitutes a “significant” transaction is crucial. Unfortunately, OFAC’s guidance merely points to a facts and circumstances test. As a result, it is very difficult to get substantial comfort that a transaction with a Russian SDN does not rise to the level of a “significant” transaction.

Oligarch list
CAATSA mandated that the U.S. Treasury Department compile a list of Russian “oligarchs.” The oligarch list was released in January 2018, and contained the names of many rich Russians. Critics have noted that the list was essentially the same as the list of the richest Russians compiled by Forbes, without any consideration of their relationship with Vladimir Putin or the Russian government. The oligarch list is not a “sanctions list”; there is no inherent prohibition on doing business with the individuals on the list (although some of the individuals on the list are also SDNs, and therefore are subject to standard blocking sanctions). Nevertheless, being listed on the oligarch list has a chilling effect, and many participants in the international community are reluctant to do business with individuals on the oligarch list.

Related sanctions programs
Several other sanctions programs, while not necessarily targeting Russia by name, have an outsize effect on Russia. They include:

Cyber-related Sanctions;
Foreign Interference in a United States Election Sanctions;
Magnitsky Sanctions (largely subsumed into the broader “Global Magnitsky Sanctions” discussed in an earlier article); and
The Chemical and Biological Weapons Control and Warfare Elimination Act of 1991.

The first three of these are broadly similar to other noncomprehensive sanctions programs, in that they target transactions with the sanctioned individual or entity, but do not target an entire country or territory. These were broadly addressed in an earlier article. The chemical weapons sanctions are more distinctive. They were imposed in response to Russia’s alleged role in the poisoning of former Russian agent Sergei Skripal and his daughter in the U.K. The sanctions were initially drafted to address the widespread use of chemical weapons by Saddam Hussein in Iraq, and have not traditionally been applied to something that looks more like an attempted political assassination. They are explicitly secondary sanctions, and aim to limit the target’s ability to transact with the U.S. So far, the effect of these sanctions has been relatively minimal (e.g., the U.S. is required to oppose the extension of IMF loans to Russia). More recently, additional sanctions have been discussed in response to Russia’s alleged poisoning of opposition politician Alexei Navalny, although any such sanctions have yet to be imposed.

Nord Stream 2
A bipartisan consensus in the U.S. government has long opposed Nord Stream 2, the planned project to deliver Russian gas to central and western Europe, based on the fear that it will make Europe overly energy-dependent on Russia, which will limit Europe’s ability to oppose Russia. For their part, most EU member states support Nord Stream 2 and downplay the risk.

Section 232 of CAATSA provides that the president, acting “in coordination” with U.S. allies, “may impose” secondary sanctions on parties providing valuable goods or services in support of a Russian pipeline. Shortly after CAATSA’s enactment, the U.S. State Department interpreted Section 232 to preclude pre-existing projects, and thus did not apply it to Nord Stream 2 at all. In December 2019, The National Defense Authorization Act (an omnibus spending bill with bipartisan support) expanded the sanctions to cover explicitly the laying of pipe by vessels in support of Nord Stream 2. Finally, in July 2020, the State Department reversed its earlier determination, and now will apply Section 232 of CAATSA to Nord Stream 2. Additional sanctions have been threatened. The effect of all of these is that although Nord Stream 2 is almost complete, it is unclear whether or when the last sections of pipeline can be laid.

The future of Russia sanctions
Sanctions on Russia have been extremely politicized in the U.S., especially after the 2016 U.S. presidential election, in which many Democrats blamed Russia for interfering in the election in favor of Donald Trump. Meanwhile, Republicans have historically favored sanctions and other actions against Russia. As a result, a bipartisan consensus emerged, which resulted in the passage of CAATSA in 2017. CAATSA responded to Democratic fears that President Trump will unilaterally revoke or waive the Russian sanctions by essentially codifying the Russian sanctions program, and requiring Congressional oversight over attempts by the president to eliminate the sanctions. Meanwhile, and in contrast to other sanctions programs, President Trump has at times been reluctant to impose new sanctions on Russia called for by Congress, although he has in fact imposed multiple sanctions that were required.

The forthcoming U.S. presidential election is scheduled for November 3. That said, whoever wins will likely find it difficult to ease the sanctions on Russia, due to the restrictions imposed by CAATSA, as well as significant political opposition to any measures that are seen as easing sanctions on Russia.

Frequently asked questions
A U.S. company has invoiced a Russian oil and gas company on the SSI list (Directive 2) for services. The invoice is not paid for 60 days. Can the U.S. company cancel and reissue the invoice?
No, that would be sanctions evasion. OFAC imposed penalties on a company that was confronted with precisely this scenario.

Can a non-U.S. person provide financing to a Russian entity on the SSI list (Directives 1-3)?
Yes, if the loan is not in U.S. dollars, there are no other U.S. ties or U.S. persons involved, and no deceptive practices are used. This should not trigger a secondary sanctions violation under CAATSA.

Can a U.S. company (or non-U.S. company with a significant U.S. nexus) time charter a vessel to a Russian entity on the SSI list (Directives 1-3) on a long-term basis?
The answer is unclear, and would likely depend on the specific provisions of the time charter and related business arrangements.

This article is part of a series focused on the application of U.S. sanctions to the shipping community.