On 6 April 2018, OFAC imposed sanctions on 7 so-called Russian business "oligarchs" and12 companies which they own, as well as 17 Russian government officials, and a state owned Russian weapons trading company and its subsidiary which is a bank.
The sanctions were imposed under Executive Orders which have been in place since 2014 following developments in Ukraine (Executive Orders 13661 and 13662). The US Treasury stated that the sanctions were imposed in response to the Russian government's engagement in a range of malign activity around the globe and that Russian oligarchs and elites would no longer be insulated from the consequences of their government's destabilising activities
The sanctions take the form of travel bans and asset freezes (in other words "blocking sanctions"). The asset freezes prohibit US persons from directly or indirectly providing or receiving any funds, goods or services to or from the abovementioned individuals or entities which are listed as Special Designated Nationals (SDN). This prohibition applies to any entity in which an SDN or a number of SDNs have a 50% or more ownership interest. In addition, US persons must block assets belonging to SDNs.
Two general licenses have been put in place which are designed to allow US persons the opportunity to wind down operations with certain specified companies included in the 6 April 2018 sanctions.
- General Licence 12 authorises transactions and activities which are ordinarily incident and necessary to the maintenance or wind down of operations, contracts or other agreements with specified SDNs by 5 June 2018, provided the agreements pursuant to which these transactions or activities are carried out were in place before the sanctions were imposed. Any payment to or for the direct or indirect benefit of any such SDN must be made into a blocked, interest-bearing account located in the United States, and divestiture of interest in any such SDN is not permitted.
- General Licence 13 authorises transactions and activities which are ordinarily incident and necessary to divest or transfer debt, equity or other holdings in certain other specified SDNs by 7 May 2018, but any such divestment or transfer may not be made to a US person.
The US body responsible for managing sanctions of this nature is the Office of Foreign Assets Control (OFAC) of the US Treasury. While OFAC designates new individuals and companies under existing sanctions regimes on a weekly basis, the above sanctions are likely to have broader commercial impact and were imposed at a time of heightened tensions between the US and Russia.
Shortly after the sanctions were announced the Rouble fell 4 per cent against the US dollar, the global price of aluminium rose by 4 per cent, Russian markets shed between 7 per cent and 11 percent of their value, while shares on a range of international stock markets of the SDN entities and other companies in similar industries have taken hits of between 2 per cent and 40 per cent in share value.
So what makes this round of sanctions different?
Global integration of targets
First, the US has not historically imposed full blocking measures on individuals or companies which are as globally integrated as these new targets. Some of the key individuals and companies include:
- Vladimir Bogdanov, an oil tycoon and president of Surgutenftegaz, one of Russia's largest oil companies, who prior to the imposition of sanctions was reportedly worth US$ 1.77bn.
- Oleg Deripaska, the founder of one of Russia's largest industrial groups and an aluminium magnate, who prior to the imposition of sanctions was reportedly worth US$ 5.7bn.
- Suleiman Kerimov, an investor with a wide range of business interests in financial, mining, and oil companies, and prior to the imposition of sanctions was reportedly worth US$ 8.4bn.
- Igor Rotenberg, the son of Arkaday Rotenberg, who is a close friend of Vladimir Putin and already subject to international sanctions. His business interests include shares in various construction companies and he is reportedly worth US$ 1.14bn.
- Kirill Shamalov, the former son in law of Vladimir Putin, is on the board of Sibur, a Russian petrochemical company and prior to the imposition of sanctions was reportedly worth US$ 1.3bn.
- Andrei Skoch, who has interests in the mining and metals industry and prior to sanctions was reportedly worth US$ 5bn.
- Vicktor Vekselberg, the owner and president of the Renova Group, a global conglomerate and prior to the imposition of sanctions was reportedly worth US$ 16.4bn.
- United Company Rusal, listed on the Hong Kong stock exchange and the second largest aluminium producer in the world.
- Basic Element, a diversified industrial group with interests in energy, mining, manufacturing, financial services, construction, real estate and agribusiness, operating in Russia, the CIS, Africa, Australia, Asia, Europe and Latin America.
- EN+ Group, listed on the London and Moscow Stock Exchanges in 2017, and owner of the largest independent Russian power producer, significant coal assets and a logistics business.
- Renova Group, a large investment company specialising in aluminium, oil, energy and telecommunications, with operations across Russia, the CIS, Switzerland, South Africa and the US.
The extension of sanctions to entities in which one or more SDNs in the aggregate have a direct or indirect ownership of 50% or more, in the context of Russian owned companies which often have complex corporate structures, means that the potential number of companies and joint ventures actually caught by these sanctions goes well beyond those specifically included on the list.
Read the full list of targets
Extra-territorial reach
Second, following the passage of the Countering America's Adversaries Through Sanctions Act (CAATSA) in August 2017, any foreign person who knowingly and materially violates sanctions imposed on a Russian SDN or facilitates a significant transaction for or on behalf of any Russian SDN or their family member, is at risk of being made subject to US sanctions themselves.
These sanctions therefore do not just block Russian SDNs from business with US persons and access to the US financial system and US dollar transactions, but have the real potential to limit their ability to do business globally.
Non-US persons can take comfort from the fact that OFAC has confirmed that they would not take action against a foreign person for something that a US person would be permitted to do, meaning that the activities permitted under the general licences would also be permissible for non-US persons. However, the general licences are time limited, and significant risk and uncertainty will exist for non-US persons going forward.
Further, with global banks in recent times taking a very cautious approach to transactions with US sanctions targets, such reassurances from OFAC may not necessarily translate into a willingness to process payments. s226 of CAATSA mandates the imposition of sanctions on any foreign financial institution which facilitates a significant financial transaction on behalf of a Russian SDN, unless the President determines that it is not in the national interests of the US to impose such sanctions.
Practical consequences
The reaction of global financial markets illustrates just how integrated these new SDNs have become internationally.
Given the sanctions' potential extra-territorial reach this will likely lead to a number of consequences, some of which are easier to anticipate than others.
In particular, a significantly larger number of businesses around the world will have to actively consider the application of these sanctions to them and their activities. The time frames contained in the licences is limited. Businesses should take steps now to understand their exposure to these new sanctions and seek legal advice on the consequences for them to avoid the risk of being in breach.
The current state of diplomatic relations between Russia and the West is reminiscent of the Cold War, which creates uncertainty around future sanctions. This will likely depress the Russian market as a whole, not just the new SDNs. Leveraged Russian businesses (which are not SDNs and not subject to any sanctions) may increasingly find themselves in a situation where they may seek to dispose of non-core assets, consider international joint ventures and/or attempt to raise debt or equity finance outside of Russia. This may lead to financially attractive deals for opportunistic international investors who are willing to take the risk of further Russian sanctions at a later date.
In Russia, the government has declared their intention to offer support to some of the new SDNs. Russian business media also reported on the plans to create new economic zones in Russia, with attractive tax and business regime to compete with the Western and off-shore jurisdictions.
We will continue to monitor this fast-developing situation.
To guide clients with exposure to Russia in this fast-changing environment Ashurst has an integrated legal team in London, which combines sanctions expertise and Russian transactional experience.
