On July 16, 2014, the U.S. Treasury Department (Treasury) expanded economic sanctions against the Russian Federation in connection with the ongoing conflict in Ukraine. On July 29, 2014, in response to, among other things, the shooting down (on July 17) of Malaysia Airlines Flight 17 over eastern Ukraine, the Treasury again expanded sanctions against Russia – this time in coordination with further sanctions imposed by the European Union (EU). These latest sanctions are significant because they are targeted at large enterprises in key sectors of Russia’s economy, including its financial and energy sectors, rather than directly at participants in the separatist movement in Ukraine and their supporters.

Background

Against the backdrop of the seizure of government buildings in Crimea by pro-Russian separatists, the purported declaration of independence from Ukraine by Crimea and Crimea’s subsequent signing of a treaty joining the Russian Federation, the United States imposed sanctions in March 2014 against the leaders of the rebellion in Crimea and their supporters in the Russian Federation. During the period beginning shortly after the takeover of government buildings in Crimea and ending shortly after the annexation of Crimea by Russia, President Barack Obama issued three executive orders relating to the situation in Ukraine. These orders were issued under the authority granted to the President by the U.S. Constitu­tion and various laws (including the International Emergency Economic Powers Act (50 U.S.C. § 1701 et seq. (IEEPA)) and the National Emergencies Act (50 U.S.C. § 1601 et seq. (NEA)).

• On March 6, 2014, the President issued Executive Order 13660 (EO 13660)¹ finding that certain activities in the Crimean region of Ukraine by separatists threatened the national security and foreign policy of the United States. Under the terms of this Executive Order, the Secretary of the Treasury – in consultation with the Secretary of State – was authorized to block all property and interests in property of persons found to be complicit in, among other things, actions threatening the peace, stability and territorial integrity of Ukraine that are or come within the United States or that are or come within the possession or control of any U.S. person.²

• On March 16, 2014, the President issued Executive Order 13661 (EO 13661)³ relating to Ukraine. Whereas EO 13660 was directed at the separatists in Ukraine, EO 13661 was aimed at officials in the government of the Russian Federation, persons operating in the arms and related materiel sectors of the Russian economy and those acting at their behest. EO 13661 authorized the Secretary of the Treasury – in consultation with the Secretary of State – to block the property and interests in property of such persons and supporters. Immediately following the issuance of EO 13661, the Treasury made the first specific designation of various individuals as “specially designated nationals” (SDNs) under EO 13660 (various Crimean separatists and Viktor Yunukovych, the Russian-supported ex-President of Ukraine) and EO 13661 (various Russian government officials).

• On March 20, 2014, the President issued Executive Order 13662 (EO 13662)⁴ relating to Ukraine. EO 13662 authorized the Secretary of the Treasury – in consultation with the Secretary of State – to block the property and interests in property of persons who “operate in such sectors of the Russian Federation economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, such as financial services, energy, metals and mining, engineering, and defense and related materiel.” Unlike EO 13660 and EO 13661, both of which contemplated sanctions in connection with persons threatening the territorial integrity or sovereignty of Ukraine, EO 13662 required no such connection. Rather, EO 13662 permits sanctions merely based on a business acting in particular sectors of the Russian economy.

Following EO 13662, there have been a series of expansions of Ukraine-related sanctions through the Treasury’s naming as SDNs additional individuals and entities believed to be involved in separatist movements in Crimea and, later, in eastern Ukraine, as well as various supporters in the Russian Federation.⁵ Any property and interests in property of such SDNs that are or come to be in the United States, or that are or come to be within the possession or control of any U.S. person (collectively, Blocked Property) may not be transferred, paid, exported, withdrawn or otherwise dealt in unless such transaction is authorized under the implementing rules.⁶ However, prior to the "sectoral sanctions" discussed below, the Treasury had not issued sanctions under EO 13662 against persons merely because they operated in particular sectors of the Russian economy (other than those operating in the arms sector).

U.S. and Allies Impose Additional Restrictions and Sanctions on Russia

Beginning on July 16, 2014 – before the downing of Malaysia Airlines Flight 17 over eastern Ukraine – the U.S. government issued a series of new sanctions aimed at key sectors of the teetering Russian economy. After the downing of the Malaysian passenger plane, the U.S. government added to the Ukraine-related sanctions in coordination with its European allies.

• On July 16, 2014, the Treasury issued the first set of “sectoral sanctions” under the Ukraine-related sanctions regime. Acting under EO 13662, the Treasury issued sanctions prohibiting U.S. persons from (1) dealing in new equity or new debt of longer than 90 days’ maturity for two major Russian state-owned banks, Gasprombank OAO and VEB, and (2) dealing in any new debt of longer than 90 days’ maturity for the Russian energy firms of OAO Novatek and Rosneft. The Treasury stopped short of declaring these banks and energy firms SDNs, which would have resulted in the blocking of virtually all transactions by U.S. persons with them. Also, acting under EO 13661, the Treasury designated and blocked the assets of eight Russian state-owned defense technology firms. The Treasury designated as SDNs and blocked the property of three entities and one individual under EO 13660 and four Russian officials under EO 13661.

• On July 29, 2014, the Treasury enhanced the sanctions on Russia’s financial and defense sectors by (1) expanding the list of financial institutions sanctioned under EO 13662 to include three additional major Russian state-owned banks (VTB Bank, Bank of Moscow and Russian Agricultural Bank) and (2) designating and blocking the assets of United Shipbuilding Corporation, pursuant to EO 13661, for operating in the arms or related materiel sector in Russia. For reasons that are not clear, one of the largest government-controlled banks in Russia – Sberbank – was not on the initial list of persons subject to sectoral sanctions nor on the list added on July 29.

• On August 6, 2014, the U.S. Department of Commerce’s Bureau of Industry and Security issued new final rules amending the Export Administration Regulations (EAR) to impose certain license requirements involving Russia.⁷ The amended rules impose significant new restrictions on the export or re-export of technologies and goods used in the exploration for or production of oil or gas in the Russian deepwater, offshore Arctic or shale projects. Importantly, the EAR amendments impose a policy of denial on licenses for the supply of the specified goods and technology intended for use directly or indirectly for exploration or production from Russian deepwater, offshore Arctic or shale projects that have the potential to produce oil. Importantly, however, these restrictions were not targeted at current oil and gas production, but to reduce Russia’s ability to produce oil in more technologically challenging future projects.

On July 31, 2014, the EU issued its own sanctions, which had been limited at that time towards individuals. The EU’s sanctions largely mirrored many of the newer sanctions imposed by the United States against Russia, including the sanctions against Russia’s five largest banks, prohibition against military assistance and the restriction on the sale, supply, transfer or export of oil and gas-related equipment and technologies.⁸

Conclusion

Due to the continued Russian support of Ukraine rebels and escalating violence, as well as the ineffectiveness of previous sanctions, the U.S. and EU continue to ratchet up political and economic pressure. With the recent addition of the “sectoral sanctions” described above and the evolving nature of the targets of Ukraine-related sanctions, it is vital that persons conducting business in Russia or with Russian individuals or entities proceed with caution to avoid violating the various current sanction regimes and would be best served seeking legal advice on planned activities.

^1. _{79 Fed. Reg. 13493 (Mar. 10, 2014). A copy of this Federal Register notice can be accessed here.}

^2. _{A U.S. person is defined by the implementing rules as “any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.”}

^3. _{79 Fed. Reg. 15535 (Mar. 19, 2014). A copy of this Federal Register notice can be accessed here.}

^4. _{79 Fed. Reg. 16169 (Mar. 24, 2014). A copy of this Federal Register notice can be accessed here.}

_{^5. The Treasury made additional designations on March 20, 2014, April 11 and 28, 2014, May 8, 2014, June 20, 2014 and July 16 and 29, 2014. Presently, the number of individuals and entities added to the SDN listing under the Ukraine-related sanctions stands at approximately 90.}

^6. _{The rules implementing EO 13660, EO 13661 and EO 13662 (Executive Orders) can be found at 79 Fed. Reg. 26365 (May 8, 2014). The prohibitions against transactions involving Blocked Property also extend to any property and interests in property owned by an entity in which the SDN owns, directly or indirectly, a 50% or greater interest. Individual SDNs blocked by the Executive Orders are also denied entry into the United States.}

^7. _{EAR Section 746.5.}

^8. _{Council Regulation (EU) No. 833/2014 (Jul. 31, 2014).}