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Energy Law Exchange

September 10, 2014

U.S., EU Impose Sector-Specific Sanctions Against Russia

Recently the United States and the EU imposed additional targeted sanctions against Russia in response to the ongoing conflict in Ukraine. Although previous sanctions issued by the U.S. and EU since March 2014 affect various sectors of the Russian economy, including Russias military industrial complex, the most recent sanctions target Russias financial and energy sectors.

U.S. Sanctions

Since March 2014, the United States has imposed visa bans on certain government officials and blocked property and interests in property of certain persons and entities that are stated to contribute to the situation in Ukraine. The most recent sanctions imposed restrictions on exports and re-exports of oil- and gas-related items for deepwater, Arctic offshore, or shale projects in Russia. These sanctions have been imposed primarily by the U.S. Treasury Departments Office of Foreign Assets Control (OFAC) and the U.S. Commerce Departments Bureau of Industry and Security (BIS).

OFAC Sanctions

Parties whose property and interests in property are blocked are identified on OFACs Specially Designated Nationals (SDN) List and U.S. persons are generally prohibited from engaging in transactions with parties listed on the SDN List and with entities owned directly or indirectly (50 percent or more including in the aggregate) by parties listed on the SDN List. Sanctioned persons connected to the energy industry include Igor Sechin (President of Rosneft) and Gennady Timchenko (owner of the Volga Group). Sanctioned entities involved in Russias energy industry include the Volga Group (a financier for Russias energy sector), Stroytransgaz (a company controlled by the Volga Group that engineers and constructs pipelines and energy facilities), Transoil (involved in oil transport by rail), and United Shipbuilding Corporation (involved in shipbuilding for the energy industry).

On July 16, 2014, OFAC issued sectoral sanctions against Russias financial and energy sectors. These sectoral sanctions prohibit U.S. persons (and persons in the United States) from entering into transactions with entities determined by OFAC to be operating in Russias financial sector that involve debt with maturity of longer than 90 days or equity if that debt or equity is issued on or after July 16, 2014. For entities determined by OFAC to be operating in Russias energy sector, the same prohibition applies to transactions involving debt (but not equity) with maturity of longer than 90 days if issued on or after July 16, 2014.

Parties subject to sectoral sanctions are identified on OFACs Sectoral Sanctions Identifications List (the SSI List). Persons 50 percent or more owned by parties on the SSI List are also subject to OFACs sectoral sanctions. Importantly, parties on the SSI List are not subject to a blocking order and are not listed on OFACs SDN List. Thus far, OFAC has determined that Rosneft and Novatek operate in Russias energy sector and has placed them on the SSI List. Additionally, Gazprombank, one of the five financial services entities on the SSI List, has significant ties to Russias energy industry through its largest shareholder, Gazprom.

BIS Sanctions

Effective on August 6, 2014, BIS imposed a licensing requirement on exports, re-exports, and in-country transfers involving specific items when used directly or indirectly in exploration for, or production of, oil or gas in Russian deepwater (greater than 500 feet) or Arctic offshore locations or shale formations in Russia. Items subject to this licensing requirement include drilling rigs, parts for horizontal drilling, drilling and completion equipment, subsea processing equipment, Arctic-capable marine equipment, wireline and down hole motors and equipment, drill pipe and casing, software for hydraulic fracturing, high pressure pumps, seismic acquisition equipment, remotely operated vehicles, compressors, expanders, valves, and risers. BIS will review license applications involving covered items with a presumption of denial. No license exceptions are available except certain provisions of license exception GOV.

Importantly, BIS implemented these new sanctions in addition to restrictions already in place for transactions involving high technology items. BIS current policy is to reject license applications that involve high technology exports to Russia or Crimea that may contribute to Russias military capabilities.

EU Sanctions

The EUs most recent sanctions became effective on August 1, 2014, and include the following:*an arms embargo against Russia (excluding contracts concluded before August 1, 2014);

*financial sanctions on dealing in bonds, equity, or similar financial instruments with a maturity exceeding 90 days, issued after August 1, 2014, when transactions involve certain Russian financial sector entities; and

*sanctions on transactions involving certain dual-use goods and technology for military use or military end-users in Russia, excluding contracts concluded before August 1, 2014. Directly related to Russias energy sector, and similar to BIS export controls, the EU also imposed sanctions on transactions involving specific energy-related items ( e.g., line pipe, drill pipe, tubing, rock-drilling tools, and other types of oil and gas-related equipment) if they are for use in Russia, including those suited for use in deepwater oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia. The EU sanctions include transfer of technology and technical support provided to Russia. As EU nationals are caught by these sanctions, officers of companies other than those based in the EU can be affected by the EU sanctions. Licenses, however, may be granted to execute an obligation arising from a contract concluded before August 1, 2014.

Russias Response

To date, Russias response to the U.S. and EU sanctions has been unrelated to energy. On August 6, 2014, Russia announced a one-year import ban on a vast range of food products originating in the United States, EU member countries, and other countries that recently imposed sanctions on Russia. According to news reports, Russia is also considering imposing import restrictions on these countries shipbuilding, automotive, and aircraft industries, as well as adopting measures to prevent European airlines from flying over Siberia when traveling to and from Asia. It has been reported that the EU is already considering filing a request for consultation with the WTO.