Ukraine & Russia: Recent Developments in Export

Controls & SanctionsSeptember 11, 2014

Kim Strosnider, Covington & Burling LLPCarol Fuchs, General Electric

Agenda

1. Overview of new measures2. U.S. sanctions developments3. New U.S. export restrictions targeting Russia’s

energy sector4. EU update5. Navigating the new measures

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Overview of Developments

• Ukraine-related sanctions began in March 2014 as series of fairly routine measures: – Asset blocking,– Entity List designations and– Revised export licensing policies.

• Tide turned in July 2014: range of new measures have transformed landscape for companies trading with Russia:– “Sectoral sanctions” and– New energy-related export control restrictions.

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U.S. Sanctions and List-Based Controls

Lists Relevant to Ukraine Sanctions

• Russia not subject to broad embargo; sanctions remain targeted and list-based.

• 3 key US lists for purposes of Ukraine/Russia sanctions:– List of Specially Designated Nationals and Blocked

Persons (“SDN List”)– Entity List– Sectoral Sanctions Identifications List (“SSI List”)

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OFAC SDN List• Maintained by U.S. Treasury

Department, Office of Foreign Assets Control (“OFAC”).

• New SDNs include individuals and entities in Russia’s financial, energy, and defense sectors, such as:– Kalashnikov Concern– United Shipbuilding– Russian politicians– Former Ukrainian politicians and

separatist leaders– Russian businessmen (e.g. Igor Sechin of

Rosneft)

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OFAC SDN List• Trade by U.S. Persons with SDNs is broadly prohibited.• SDN assets must be blocked when they come into the

United States or possession or control of a U.S. Person.• These trade restrictions and asset-blocking measures

also apply to entities owned 50% or more by one or more SDNs; updated guidance issued by OFAC in August 2014.

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BIS Entity List• “Entity List” names persons that have engaged in

activities the U.S. believes are contrary to its national security or foreign policy interests.

• List maintained by Commerce Department, Bureau of Industry and Security (“BIS”).

• License required for any person -- including a non-U.S. person -- to export, reexport, or transfer any item subject to the EAR to a party on the Entity List.

• Approximately 25 parties added to Entity List in connection with the crisis in Ukraine. Presumption of denial for a license to export/reexport to these parties.

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OFAC SSI List

• On July 16, 2014, OFAC established a new Sectoral Sanctions Identifications List (“SSI List”), which identifies for targeted sanctions:– Financial Institutions: Bank of Moscow, Gazprombank

OAO, Rosselkhozbank, Vnesheconombank, and VTB Bank, and

– Energy Companies: OAO Novatek, Rosneft Oil Company.

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OFAC SSI List• U.S. persons are prohibited from transacting in,

providing financing for, or otherwise dealing in: – New debt of longer than 90 days maturity for any SSI-

List parties or their property/property interests. – New equity for SSI-List financial institutions or their

property/property interests. • Prohibitions extend to dealings with entities

owned 50% or more by SSI List parties.• OFAC FAQs provide some guidance on new

directives, but many questions remain.

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New U.S. Export Restrictions Targeting Russia

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Russia-Related Export Controls

• Supplementing list-based sanctions, Commerce Department has enacted set of new export controls targeting certain trade with Russia:– Broad new licensing requirements for certain energy-

sector items. – Tighter controls on licensing for certain other items

(high tech, or subject to national security controls).

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Increasing U.S. Export Restrictions• Commerce Department, through BIS, controls items

subject to the Export Administration Regulations (“EAR”):– Items on Commerce Control List (“CCL”)– Non-sensitive EAR99 items not listed on CCL

• Authorization requirements depend on destination, end use, end user. – Destination restrictions found through review of CCL,

consideration of Commerce Country Chart– End use/end user restrictions found in EAR Part 744

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Increasing U.S. Export Restrictions• Recently, controls on exports to Russia tightened:

– BIS will deny licenses for exports/reexports to Russia or occupied Crimea of high-tech items that could contribute to Russian military capabilities.

• Similar policy at State Department for items controlled by the International Traffic in Arms Regulations (“ITAR”).

– End of favorable license review for exports/reexports to Russia of CCL items subject to national security (“NS”) controls.

• Other major development: addition last month of “Russian Industry Sector Sanctions” to the EAR.

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Russia Industry Sector Sanctions

• New rule published and effective August 6, 2014.• A BIS license is required to export from the United States to

Russia, reexport from a third-country to Russia, or transfer within Russia any item that is subject to EAR if:– Listed in a new EAR supplement or specified in any of eight Export

Control Classification Numbers (“ECCNs”) on the CCL and– The exporter, reexporter, or transferor knows -- or is unable to

determine whether -- the item will be used directly or indirectly in exploration for, or production of, oil or gas in Russian deepwater, Arctic offshore locations, or shale formations in Russia.

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Items in Scope: Must be Subject to EAR• The items specified in the new rule must be “subject to

the EAR”:– In the United States– In transit through the United States– U.S.-origin items, wherever located– Items manufactured outside the United States containing more

than 25% controlled U.S.-origin content (by value)– Certain foreign-made direct products of U.S. technology or

software

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Items in Scope: Supp. No. 2 to Part 746• Items listed in Supp. No. 2 to EAR Part 746 include certain:

– Pipes– Well tubings and casings– Drill bits and tools– Oilfield pumps– Gas separation equipment– Oil drilling and production platforms/machinery– Drilling derricks

• Items are identified by Census Bureau “Schedule B” numbers (not ECCNs because they are EAR99)

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Items in Scope: Existing ECCNs• Items classified under the following existing ECCNs are

in scope: – 1C992: Commercial charges and devices– 3A229: Firing sets and equivalent high-current pulse

generators– 3A231: Neutron generator systems– 3A232: Detonators and multipoint initiation systems– 6A991: Marine or terrestrial acoustic equipment– 8A992: Vessels, marine systems, or equipment and various

parts, components, and related items

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Items in Scope: New ECCNs• Items classified under the following new ECCNs

are in scope:– 8D999: Software specially designed for the operation

of unmanned vessels used in Russia’s oil and gas industry

– 0A998: Oil and gas exploration data and software• Includes seismic analysis data, hydraulic fracturing design and

analysis software and data, and hydraulic fracturing materials.• Broader than “technology” elsewhere controlled on CCL

(specific information necessary for the development, production, or use of items on the CCL)

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Restricted End-Uses: Deepwater, Arctic, Shale

• Knowledge requirement– Affirmative knowledge– Unable to determine whether . . .

• Direct or indirect use in oil or gas production or exploration• Russian deepwater

– More than 500 feet• Arctic offshore locations in Russia

– “Arctic” is undefined but BIS guidance expected• Shale formations in Russia

– “Shale” is undefined but BIS guidance expected

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BIS Licensing Policy• Presumption of denial: Applications for

licenses to export, reexport, or transfer the specified items for use in Russian deepwater, Arctic offshore, or shale projects that have the potential to produce oil.

• Case-by-case review: Applications for licenses to export, reexport, or transfer the specified items for use in Russian deepwater, Arctic offshore, or shale projects that have the potential to produce gas.

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BIS Rule: No Grandfather Provision• The new controls do not contain a “grandfather’

provision exempting exports, reexports, or in-country transfers in furtherance of contracts entered into prior to August 6, 2014.

• On the other hand . . .– Rule does not require items exported or reexported to

Russia prior to August 6, 2014 to be withdrawn from Russia.– Rule does not restrict exports, reexports, or in-country

transfers pursuant to a license granted by BIS prior to August 6, 2014.

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EU Sectoral Sanctions

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EU Sectoral Sanctions• Imposed by EU Council Regulation 833/2014 (effective

August 1, 2014)– Adopted at the EU level but implemented by Member States’

authorities, which can lead to differences in interpretation.• Regulation 833/2014 applies:

– To conduct by EU-incorporated entities and EU Member State nationals anywhere in the world.

– To conduct by any person, irrespective of nationality, in connection with activities occurring in the territory of the EU or (with regard to legal persons) in respect of business “done in whole or in part within the Union.”

– To conduct on-board any aircraft or vessel under the jurisdiction of a Member State.

EU Financial Sanctions• Financial-sector sanctions also imposed.• Article 5 of the EU regulation prohibits:

– Directly or indirectly purchasing, selling, providing brokering or assistance in the issuance of, or otherwise dealing with transferable securities and money market instruments with a maturity exceeding 90 days, issued after August 1 by certain financial institutions.

• Five banks listed: Sberbank, VTB Bank, Gazprombank, Vnesheconombank, and Rosselkhozbank.

• Also reaches these banks’ affiliates established outside the EU and those acting on their behalf/at their direction.

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Restrictions on Exports• Similar to the U.S. Russian Industry Sector Sanctions.• Imposes a licensing requirement for the sale, supply, transfer, or

export, after 1 August 2014, of certain “technologies” contained in Annex II of the Regulation.– Annex II includes “certain technologies suited to the oil industry for use in

deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia.”

• Presumption of denial if Annex II items are for “deep water” or “Arctic” oil exploration or production or for shale oil projects in Russia.

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PROGRAM EU ENERGY SECTOR SANCTIONS US ENERGY SECTOR SANCTIONSAUTHORITY EU 833/2014 (O&G) 15 CFR 732-774

JURISDICTION EU persons and legal entities, wherever located, and activities within EU

Items subject to the EAR (US-origin or foreign manufacture with more than de minimis US content)

NON-ORIGINATING ITEMS Whether or not originating in EU Items subject to the EAR

RESTRICTED ITEMS EU Annex II (HS Codes) 8 listed ECCNs and Supp 2 (Schedule B Numbers)

AUTHORISATION/LICENSE REQUIREMENT

All items on Annex II for any end use in Russia

Listed ECCNs and Supp 2 items if knowledge of deepwater (> 500 ft), Arctic offshore or shale end use in Russia for oil or gas exploration or production, or unable to determine whether such end use, or informed by BIS of such end use

STANDARD OF REVIEW No authorisation if EU has reasonable grounds to determine that items are for deepwater, Arctic or shale oil exploration or production in Russia.

Presumption of denial for deepwater, Arctic offshore, or shale oil exploration or production in Russia; case-by-case review for other projects.

PRE-EXISTING COMMITMENTS

Grandfather provision for contracts entered into prior to 8/1/14, but authorisation required and discretionary.

No grandfathering of pre-existing commitments; even shipments in-transit cannot proceed without license.

Summary of EU and US Russia Energy Sector Sanctions

Other EU Restrictions

• Export of certain infrastructure items/technologies (including energy) to be used in Crimea or Sevastapol

• Import of Crimea-origin goods into the EU• Traditional “country of origin” analysis doesn’t

translate well; Crimea isn’t a country.• Source with Crimea address ≠ origin Crimea.

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Imagination at work.

September 11, 2014

How to Implement Russia- & Ukraine-Related Sanctions

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In-House Challenges

• What are the facts?• Is legal analysis current? (e.g., rules change over the

weekend)• Have all applicable jurisdictions been evaluated?• If legal, what about reputational concerns?• Who reviews transactions?• How to review only once?• How to communicate internally?

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Implement the “LISTS”

• Incorporate Russia/Ukraine lists into company’s watchlist screening program. Make sure that all screening tools are updated promptly.

• Identify parties that are majority-owned by sanctioned individuals/entities.• Either research customers/suppliers or research listed names.• Use external third party researchers with Russian expertise (and

Russian language).• Explain to internal clients why these names are not automatically

captured by third party screening tools.• Track names on spreadsheet; clearly distinguish between

“blocked” and “financial” sanctions. Identify majority owner(s).

Screenshot: Russia/Ukraine Spreadsheet EXAMPLE

Prepare FAQ’s

• Be specific to your company.• Don’t just cite the law. Explain how it matters to your

business.• Explain what to do and where to get help.• Attach or link to source documents.• Mark for internal use only, if appropriate.• Before posting, obtain outside counsel review.

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Develop Flowcharts and Graphics

• Draw decision trees for each sanctions area, e.g., screening, energy, military.

• Draw separate charts for US and EU, if appropriate, or make summary chart highlighting areas of difference.

• Use VISIO for better clarity than PowerPoint.

EXAMPLEEXAMPLE

EXAMPLEPERMITTED PROHIBITED

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Communications

• Track news daily; report to senior management.• Directly relevant to sanctions.• Political news.• Economic/stock market info; e.g., value of ruble.

• Messages to distribution list promptly as changes happen.

• Designate focal points and escalation process.• Periodic team calls.• Training.• Internal website to post materials.

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Use Outside Counsel

• Obtain news immediately, even before law firm alerts.

• Clarify areas of confusion.• Check for accuracy and clarity.• Use non-US lawyers for non-US sanctions.

Questions?

Kim Strosniderkstrosnider@cov.com

+1.202.662.5816

Carol FuchsCarol.fuchs@ge.com

+1.202.637.4222

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