On March 20, 2014, President Obama issued a new Executive Order expanding sanctions against Russian officials and other entities involved in Moscow’s recent annexation of Crimea. Building on previous orders, the measure authorizes asset freezes, travel bans, and other punitive measures targeting parties that threaten Ukraine’s sovereignty and territory. These measures raise new regulatory and commercial risks. With European Union (EU) leaders convening in Brussels to coordinate their own response, and with other countries, such as Canada and Australia, also imposing sanctions, U.S., European, and multinational companies that do business in or with Russia, or with Russian persons, should take appropriate steps to minimize their sanctions risk.
Like the March 6, 2014 and March 17, 2014 Executive Orders, this new measure authorizes the Treasury Department’s Office of Foreign Assets Control (OFAC) to block property held by certain Specially Designated Nationals (“SDNs”) with close ties to the Russian Government. It also prohibits U.S. persons from engaging in any commercial or financial transactions with Russian SDNs, including by providing any funds, goods, services, or technology (including charitable donations) to such persons. Combined with State Department travel bans, the goal is to bar Russian SDNs from doing business with the United States and limit their access to the international financial system.
Although the new Executive Order does not sanction Russia or the Russian Government on a comprehensive basis, it does authorize targeted sanctions within certain key sectors. Notable examples include the energy, engineering, metals and mining, and defense industries—industries that are dominated by the Russian Government and its political allies. The list is not exhaustive, however. While U.S. officials may target these and other profitable sectors, the new Executive Order preserves OFAC’s ability to designate and sanction entities across the Russian economy.
The result is the economic equivalent of a warning shot—one that threatens some fairly significant targets. While the new Russia sanctions cannot be compared to the comprehensive embargos against Cuba or Iran, or even the regime-based sanctions imposed on Syria, they nonetheless give the U.S. Government a basis for rapidly expanding the sanctions’ scope and impact in response to new developments on the ground. This includes the ability to coordinate U.S. sanctions with those imposed by the EU and other governments.
Finally, the new Executive Order prohibits transactions with entities that are directly or indirectly owned or controlled by Russian SDNs, including various non-Russian entities that may be acting on their behalf. This requirement presents heightened risks for multinational corporations. With a growing number of Russian officials and business leaders operating through proxy companies and third-party representatives based in the West, U.S. and European companies may have limited insight into their Russian counterparts’ actual ownership structure.
In the near term, these sanctions are most likely to impact companies that operate in the financial and energy fields. The new SDNs include Bank Rossiya, which serves many senior members of the Russian Government, and Gennady Timchenko, who is a founder of Gunvor, one of the world’s largest independent commodity trading companies. Bank Rossiya reportedly has numerous correspondent relationships with banks in the United States and EU. Gunvor, in turn, plays an influential role in global petroleum markets and is a counterparty to billions of dollars in energy sector transactions.
Against this backdrop, companies that do business in Russia or with Russian entities should stay abreast of all sanctions developments and ensure that they can terminate business that implicates sanctioned parties or conduct. Even companies that are not directly impacted by these sanctions need to be aware that future business with Russia or other Russian persons could be prohibited without any prior notice. Steps to take include:
- Assess Risk Exposure. Companies with Russian exposure should immediately catalogue their business with Russia to determine the full extent of dealings with Russia, or Russian companies or persons, including through indirect means (distributors, agents, downstream sales, etc.).
- Contractual Provisions. Companies with any kind of dealings with Russia or Russian persons should include strong force majeure or similar clauses in future contracts that reference U.S., EU, and United Nations sanctions as a basis for termination.
- Screening. Companies should screen current and future Russian counterparties against OFAC’s SDN list and the EU sanctions list. Such screening is essential, because the sanctions currently are based upon designation of specific persons and related entities and should, therefore, be updated frequently to account for new designations by U.S. and EU officials.
- Due Diligence. Companies should conduct reasonable due diligence into their Russian counterparties to determine that they are not owned or controlled by Russian SDNs, and take similar measures with respect to any agents, freight forwarders, and other trading partners that might be dealing with Russia or Russian persons on their behalf.
- Monitoring Systems. Companies with exposure to expanded Russian sanctions should establish a point person to monitor rapidly changing sanctions rules and communicate necessary changes to all relevant parts of the organization, including personnel in sales, finance, accounting, logistics, and other relevant departments.
- Training. Companies should identify personnel who could be impacted by the new Russian sanctions and immediately brief them in the relevant requirements and implications for both existing and future business, including the possibility that future dealings with Russia or Russian entities could be barred without notice.
- Updating Compliance Programs. Companies that maintain export controls and economic sanctions compliance programs should immediately update them to account for the new Russian sanctions.
- Licensing Strategy. Companies that are or could be impacted by the new Russia sanctions should be prepared to file emergency licenses with OFAC to protect their commercial interests and limit liability exposure under existing contracts. Because OFAC licensing has been extremely slow in recent months, no company should rely on the expectation that it will obtain a favorable result quickly, even if the transactions in question involve normally licensable activity, such as trade in agricultural or medical products.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following:
Christopher M. Swift