Managing Legal and Business Risks Under the Russia/Ukraine Sanctions

On October 9, 2014 a team of US, Russia and UK based Latham & Watkins lawyers hosted “Managing Legal and Business Risks Under the Russia/Ukraine Sanctions: Views from the US, Europe and Moscow,” a webcast focusing on the legal and practical impact of the current and emerging sanctions against Russia as well as Russia’s response.

The presenters included US-based partners Les Carnegie and Eric Volkman, UK-based counsel Charles Claypoole, and Russia-based partners Mikhail Turetsky and David Stewart.

In this Q&A interview, the team offers an overview of the discussion. For more information on the content and impact of specific US and EU sanctions as well as the response from Russia, a recording of the full webcast is available online through October 9, 2015.

What has been the US approach to imposing sanctions on Russia thus far?

Carnegie: In the US the lead sanctions authority is the Office of Foreign Assets Control (OFAC). In March of this year, President Obama issued three executive orders in quick succession. Together, these three executive orders provide the foundation of the US sanctions program against Russia. The way that OFAC began to implement the sanctions was predictable. The agency added parties to its public blacklist, called the List of Specially Designated Nationals and Blocked Persons (SDNs). For the most part, US financial institutions and US companies have long devised solutions to guard against dealings with so-called SDNs with the help of sophisticated screening software.

The most challenging part of these new Russia sanctions has been the so-called sectoral sanctions. Unlike some other US sanctions programs, which are very blunt instruments and prohibit most activities with a country or party, the Russia-related sectoral sanctions are designed to target only certain activities involving certain parties. That is, in part, what makes compliance so challenging because both the parties and the underlying activity need to be analyzed. Computer-based screening solutions can’t do that.

Can you elaborate on the differences between traditional  and  sectoral sanctions?

Volkman: The first wave of Ukraine-related sanctions, which was in March 2014, followed the pattern of OFAC’s traditional sanctions programs, with certain entities and individuals in Russia and Crimea being designated as SDNs. These designations have the effect of blocking the property or interests in property of the listed entities, effectively prohibiting US persons from dealing with them or their property. Initially, these designations were limited to certain Russian political figures and Ukrainian separatists, but subsequent designations included Russian financial institutions and several oligarchs close to President Putin, some of whom had considerable holdings outside of Russia.

The sectoral sanctions, which were implemented through several executive orders, really represented a different kind of animal than the traditional SDN program. OFAC issued a series of four directives that imposed targeted sanctions on specific activities of certain identified entities operating in three specific sectors of the Russian economy: the financial services, energy and defense sectors. Entities sanctioned under this program are identified on a newly created so-called Sectoral Sanctions Identification (SSI) list. US persons are prohibited from engaging in certain activities with respect to these SSI list entities, depending on the directive under which they were sanctioned. Like the SDN program, the SSI prohibitions also extend to entities owned 50 percent or more by a listed entity. What is really important to recognize at the outset about this SSI entity program, is that SSI entities are not SDNs. Most US persons’ dealings with SSI entities are still permitted.

How have US export controls changed in light of the Russia/Ukraine situation?

Carnegie: Complementing OFAC’s targeted sanctions, US export control authorities have also joined the front lines. The two agencies are the Commerce Department’s Bureau of Industry and Security (BIS) and the State Department’s Directorate of Defense Trade Controls (DDTC). BIS regulates exports and re-exports of dual-use items, as well as some military items. BIS has added parties in Russia to its entity list and implemented certain end-use and end-user restrictions relating to military end-use, military end-users, as well as certain energy projects in Russia. Separately, through DDTC, the State Department regulates the export and the temporary import of defense articles, as well as the provision of defense services. Since late March 2014, DDTC has suspended its review and the issuance of export licenses for exports of defense articles and defense services to Russia. 

What do the European sanctions against Russia look like? How do they differ from the US sanctions?

Claypoole: The EU sanctions on Russia have been closely aligned with the US sanctions, but they are different in several important respects. It is critical that if you are a business that has a presence in both the US and the EU, you need to be compliant with both regimes. That is more important with the Russia sanctions than it ever has been before. Some of the EU sanctions are more extensive than the US sanctions, and some are less. 

The four general categories of the EU sanctions are: (1) the asset freeze, (2) the restrictions on access to EU capital markets, which is similar in some respects to some of the US SSI sanctions, (3) the trade restrictions enforced in the EU, which are differently formulated than the US sanctions, and (4) the specific Crimea-focused sanctions that we have enforced here in Europe, which are different from anything that is enforced in the United States. Obviously the situation is evolving all the time, and it is important to be diligent to ensure that your businesses are apprised of developments. 

What has been the Russian government’s official response to the US and EU sanctions?

Turetsky: As you might imagine, the Russian government is pretty upset about the Western sanctions. It doesn't consider them to be fair, and it has been long thinking about retaliatory measures. It didn’t respond to the first and the second packages of the sanctions, but it did respond to the third package, which came out in July and August 2014. The most widely published side of the Russian response was the import ban on food products originating in countries that imposed sanctions on Russia. The thinking there is that the government was trying to find an industry that would be most effected in Western countries by retaliatory measures.

In addition to the food bans, there are also bans imposed on certain individuals. There have been several packages of those bans and the idea is that the Russian government was trying to mimic the SDN concept in the US. They created a series of lists, including one list of human rights violators, which has some persons associated with Guantanamo and related matters on it, and a separate list of individuals who, in Russia’s view, create a threat to Russian security. That list includes US Senator John McCain and a number of other US politicians. Individuals on this list cannot enter Russia and to the extent they have any assets in Russia, they would be frozen. In addition to those public bans, there are reportedly confidential lists as well. So, some of the foreigners flying into the Moscow airport may find out that their visa is not valid and will be denied entry into the country. This hasn’t been widespread, but this possibility should be taken into account. 

There is also a ban on procurement of certain foreign goods for public purposes, meaning state vendors won’t allow certain foreign goods to participate in the market. Additionally, there have been extensive reactions to the international payment systems. In the spring of this year, in response to the US sanctioning certain banks, international payment systems stopped processing payments for those banks and the Russian government got pretty upset. Legislation has been passed to respond to that situation, and essentially that legislation targets international payment systems and creates certain difficulties for their operations. We are hoping that the situation will somehow be normalized in way that would be acceptable to the international payment systems and the Russian government. 

Do you expect to see additional Russian counter-sanctions in the future? If so, what might these be?

Stewart: We have compiled a list of potential Russian counter-sanctions that we’ve seen in the local press, or that have been discussed by politicians, or that we just think are feasible. By no means is this comprehensive — the Russian government could surprise us all at any time. But, to start off, something that seems self-evident is that Russia could potentially implement a US-style ban on doing business with certain foreign parties and certain foreign jurisdictions. There could be an extension of the import bans and individual bans.

There are also a couple of draft laws in the Duma right now, one of which would severely limit the right of foreign investors to own media outlets in Russia. This could potentially upend some fairly significant investments in the Russian market and cause some significant restructurings if it is passed. Another slightly more advanced law in the Duma is an expropriation law, which would state that, for example, were an SDN to lose his property in the United States, then the Russian government would theoretically have the right to seize the United States’ property in Russia, which could be an embassy, planes, or any other part of the US government’s property that enters Russia, and then give it to that SDN.

And, of course, like any other government, there are general deportation rights as well as the possibility to limit visas and enact currency controls. There have even been discussions of space industry restrictions.