On Friday, the White House issued new sanctions against Russia in response to Russian troop advances in eastern Ukraine that helped turn the tide of the conflict.  However, a fragile truce was struck a week ago between Ukraine and the separatists, and Russia is believed to have withdrawn a significant number of troops from Ukrainian territory.  Friday’s sanctions appear to be oddly timed in light of the deescalated military situation, and Putin responded defiantly, calling the move “strange”.  The Kremlin vowed to retaliate by issuing new sanctions of its own.  Although not yet formally announced, those sanctions are expected to prohibit the importation of foreign automobiles into Russia and ban Asia-bound flight from crossing Russian airspace.

The new U.S. sanctions should be viewed as an extension of the existing sanctions regime rather than any drastic change in policy.  As noted in our last post, the limited scope of the U.S. and EU sanctions programs evidences the importance of Russia to the global economy.  Friday’s  sanctions merely add parties to the SSI List and tighten existing credit restrictions on certain sectors of the Russian economy.  The new sanctions are a coordinated effort among several U.S. government agencies and can be boiled down to four key changes:

1.  OFAC amended the two existing SSI List Directives and also issued two new Directives (now totaling four).  The four Directives can be summarized as follows:

• Directive 1 – Prohibits U.S. persons from transacting, providing financing for or otherwise dealing in new debt of longer than 30 days maturity or new equity of persons listed under Directive 1 sanctions on the SSI List in the financial services sector of the Russian economy.  The former Directive 1 permitted debt with a maturity of 90 days.
• Directive 2 – Prohibits U.S. persons from transacting, providing financing for or otherwise dealing in new debt of longer than 90 days maturity with persons listed under Directive 2 on the SSI List in the energy sector of the Russian economy.  There is no material change to Directive 2.
• Directive 3 – Prohibits U.S. persons from transacting, providing financing for or otherwise dealing in new debt of longer than 30 days maturity with persons listed under Directive 3 on the SSI List in the defense and related materiel sector of the Russian economy.  This is a new directive.
• Directive 4 – Prohibits U.S. persons from providing, exporting or reexporting, directly or indirectly, to persons listed under Directive 4 on the SSI List in the energy sector of the Russian economy, any goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation or in maritime areas claimed by the Russian Federation and extending from its territory.  This is a new directive.

Directive 4 dovetails with a new U.S. Commerce Department (BIS) prohibition that was also issued on Friday.  Gazprom, Gazprom Neft, Lukoil, Rosneft and Surgutneftgas were all added to the “Entity List” maintained by BIS, which imposes licensing requirements for the export, reexport or foreign transfer of items subject to the EAR to these companies when the exporter or reexporter knows those items will be used in exploration for, or production from, deepwater, Arctic offshore or shale projects in Russia.  BIS maintains a general policy of denial for such licenses.  Here is the official BIS press release: http://www.bis.doc.gov/index.php/about-bis/newsroom/press-releases/107-about-bis/newsroom/press-releases/press-release-2014/742-u-s-commerce-department-expands-export-restrictions-aimed-at-russia-s-defense-sector.

2.  OFAC amended one existing General License under the Russian sanctions program and issued a new one:

• General License 1A – Amends General License 1 and authorizes U.S. persons to transact in derivative products whose value is linked to an underlying asset that constitutes (i) new debt with a maturity longer than 30 days or new equity issued by a Russian financial institution on the SSI List, (ii) new debt with a maturity longer than 90 days issued by a company in Russia’s energy sector listed on the SSI List, or (iii) new debt with a maturity longer than 30 days issued by a person in the Russian defense and related materiel sector listed on the SSI List.
• General License 2 – Permits U.S. persons to undertake all activities otherwise prohibited by Directive 4 that are ordinarily incident and necessary to the winding down of operations, contracts or other agreements involving persons in the energy sector of the Russian economy listed on the SSI List.

3.  OFAC added several new parties to the SSI List.  Note that the prohibitions placed on each party depend on the Directive under which that party has been listed:

• Transneft (Directive 2)
• Lukoil (Directive 4)
• Gazprom (Directives 2 and 4)
• Gazprom Neft (Directives 2 and 4)
• Rostec (Directive 3)
• Sberbank (Directive 1)
• Surgutneftegas (Directive 4)
• Bank of Moscow (Directive 1)

Rosneft has now been added to the SSI List under Directive 4 in addition to its prior listing under Directive 2.  U.S. companies are therefore no longer permitted to export any goods, services or technology to Rosneft for exploration or production for deepwater, Arctic offshore, or shale projects.

4.  OFAC added several new defense firms to the SDN List (with whom U.S. persons are prohibited from doing business):

• Almaz-Antey Air Defense Concern
• JSC V. Tikhomirov Scientific Research Institute of Instrument Design
• Kalinin Machine Plant
• Mytishcinski Mashinostroitelny Zavod
• Dolgoprudny Research Production Enterprise

BIS also added these same five defense companies to the “Entity List”, which imposes a license requirement for the export, reexport or foreign transfer of items subject to the EAR to these entities, with a presumption of denial.

These new sanctions have the greatest impact on U.S. companies in the financial services, defense and oil and gas industries.  However, President Obama has suggested that these new sanctions may be rolled back if Russia honors the truce in eastern Ukraine.  Russia’s threat of retaliatory sanctions may make a rollback of U.S. sanctions unlikely, but it remains to be seen.  If those new Russian sanctions are implemented, the U.S. automotive and airline industries will feel the brunt.  Russia has promised swift action, so expect those sanctions to be coming as early as this week.