A Brief, Informal and Incomplete Review of U.S. Sanctions on Russia
This review is to outline the basic provisions of the U.S. sanctions on Russia that have been in effect since the Ukraine crisis unfolded in 2014. The review is not a comprehensive legal analysis of the subject matter, nor should it be understood to be a complete guide throughout the many sanctions programs currently in place. This review gives a basic understanding of how the U.S. sanctions and Russia’s counter-sanctions are affecting the businesses concerned.
What are U.S. Sanctions?
U.S. sanctions are an important tool of the U.S. foreign policy-making process. Although there’ve been voices speaking about the effectiveness and objectivity of U.S. sanctions, they have been in active use from the beginning of the nineteenth century onwards. The declared objective of sanctions is twofold: (i) to change the political behavior of the target country, and (ii) to increase costs for the target country should it continue to ’misbehave’.
The first set of sanctions on Russia was introduced in 2014. The official excuse for the introduction of these sanctions was the alleged annexation of Crimea and destabilization of the situation in Ukraine. Along with the United States, the European Union, Canada, Australia, Switzerland, Norway and some other countries have introduced a similar array of sanctions. In the United States, there are several Governmental agencies in charge of sanctions administration. In practice, the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”) is in charge of Russia sanctions, although another agency, the Bureau of Industry and Security (“BIS”), may have jurisdiction in certain cases, especially those concerning military and dual-use products.
Types of Sanctions on Russia
There are several sanctions programs targeting Russia.
First is the so-called Specially Designated Nationals and Blocked Persons (“SDN”) program. This is a list of individuals and legal entities whose assets and property are deemed blocked if in the United States or within the possession of a United States person. No U.S. person, either individual or an organization, is entitled to make any deals with a SDN, unless expressly authorized by OFAC.
Second is the so-called Sectoral Sanctions Identifications (“SSI”) program. The nature of SSI is complex. In short, only selected industries are targeted by the SSI sanctions. The SSI sanctions affect Russia’s energy sector in three sub-categories, i.e. the extraction of, respectively, sub-Arctic hydrocarbon deposits, deep water hydrocarbon deposits, and shale hydrocarbon deposits, as well as services and assistance associated therewith. The SSI sanctions also apply to certain financing and equity transactions limiting the possibility for selected Russian financial institutions to borrow on Western markets.
Third is the Crimea-related sanctions program. As a general rule, any dealings between U.S. and Crimean persons are prohibited, save for a limited scope of humanitarian and private non-commercial transactions on the basis of OFAC general licenses.
Fourth, are the sanctions set forth the in U.S. Countering America’s Adversaries Through Sanctions Act of 2017 (“CAATSA”), which targets, inter alia, oligarchs close to the Kremlin, the defense & intelligence sector, cyber-security, as well as (non-U.S.) third parties entering into “significant” transactions with Russian sanctioned persons.
There’s a wide array of U.S. sanctions administered by BIS, State Department and other Government authorities, although of lesser importance for the purposes of this review. Those sanctions are case-specific and require separate discussion, if needed.
Who Might Be Affected by U.S. Sanctions?
It is easier to say who is not affected by U.S. sanctions. These are: (i) Russian individuals or Russian companies who transact in Russian Rubles only, have no dealings or connections with non-Russian parties, do not travel abroad, and do not have non-Russian officers, employees or beneficiaries, and (ii) foreign (non-Russian) companies and individuals who have no connection with Russia whatsoever, direct or indirect.
Anyone who does not fall under either of the two categories above may be exposed to U.S. sanctions. Not only may this exposure occur due to a direct violation of the sanctions regime, but it also may occur because of an indirect breach of sanctions due to negligence or to the obfuscation of sanctions.
An indirect breach of sanctions may take place due to the so-called extraterritorial application of U.S. sanctions. This means that a U.S. person (individual or corporate) is bound by the U.S. sanctions irrespective of his/her location. This may cause a direct conflict of interest in some cases. An illustrative example of this rule is a situation where a U.S. person works for a Russian company (or a subsidiary of it) which becomes sanctioned by OFAC. On the one hand, this person must do his/her best to properly perform his/her work. On the other hand, being a U.S. citizen, he/she must do whatever possible to block/freeze all the assets and property of his/her employer.
Another example of the extraterritorial application of U.S. sanctions is so-called secondary sanctions. According to CAATSA, a foreign person may be sanctioned if he/she facilitates a significant transaction with a person subject to U.S. sanctions with respect to Russia, or that person’s child, spouse, parent or sibling. By virtue of the first case of putting two persons, China’s Equipment Development Department and its director, Li Shangfu, on the SDN list on the basis of the CAATSA secondary sanctions rule, OFAC has set a disturbing precedent of the extraterritorial application of U.S. regulations to persons from third countries. This is a major risk factor when dealing with Russian businesses, especially for their European and Asian counterparts.
There’s one more thing that adds to the complexity of sanctions matters. According to some court precedents, there’s a risk that an attempt to apply U.S. sanctions in Russia may trigger liability for the parties concerned, as Western sanctions are understood to contradict the basic principles of public order in Russia and, therefore, are illegal ab initio. Businesses may be stuck between a rock and a hard place, having to apply U.S. sanctions on one hand, and not having to apply them, on the other hand.
Also, U.S. sanctions apply not only to those specifically included on the SDN/SSI lists, but also to those companies 50% or more owned by a SDN or SSI, directly or indirectly (the so-called 50% Rule). In some instances it may take quite some time to figure out whether a particular company is exposed to sanctions, as indirect control may not be so obvious.
What to Do?
First, don’t panic. The U.S. sanction program for Russia is not comprehensive and only targets selective businesses. There are “comprehensive” sanctions programs for other countries, i.e. Iran, Sudan, Syria etc. The core principle of those sanctions programs is that everything is prohibited unless expressly authorized. Although the U.S. and other countries’ sanctions remain a risk factor these days, they shouldn’t be interpreted as a complete prohibition of doing business in Russia.
Second, we recommend that you properly assess the sanctions-related risks. A risk assessment may include a cross check of one’s counterparts sanctions-wise (especially the 50% Rule), a review of relevant contractual arrangements in terms of potential sanctions exposure, and a review of sanctions-related clauses in contracts and other legal arrangements that help to identify and assess sanctions-related risks. Also, it is a commonly accepted practice these days for large companies to have adopted internal rules and policies on sanctions.
We hope this article helps, although it is very basic. The bottom line is that, despite the pressure of U.S. sanctions, it is still possible for foreign and domestic businesses to operate successfully in Russia. That said, it is essential for businesses to know what sanctions-related rules are applicable to a particular case.