Update On Russia-Ukraine Sanctions: Significant Expansion Of Sanctions Presents Additional Compliance Challenges

On July 16, 2014, the United States announced another expansion of sanctions in response to events in southern and eastern Ukraine. The United States for the first time imposed sanctions against major Russian companies and banks - Gazprombank, Novatek, Rosneft, Vnesheconombank, which have been placed on a new Sectoral Sanctions Identification ("SSI") List. While SSI List sanctions are less far-reaching than standard "blocking" sanctions, they could represent a substantial challenge and complication for those doing business in and with Russia. The United States also extended "blocking" sanctions to an additional five Russian individuals, nine Russian/Ukrainian companies, as well as the Luhansk People's Republic and the Donetsk People's Republic. The European Union ("EU") is also reportedly considering broader sanctions against Russian and Ukrainian individuals and companies.

Apart from sanctions against a few dozen designated Russian and Ukrainian individuals and against 30 entities by the United States and two companies by the EU, U.S. and EU trade and investment with Russia generally remain unrestricted. While previously many observed that the sanctions prohibited only a tiny fraction of business involving Russia, the impact will become more substantial with establishment of SSI sanctions against four large Russian companies and banks and their 50%-or-more owned affiliates. Uncertainties about U.S. and EU authorities' application of existing sanctions and the likelihood of further expansion of sanctions present acute challenges for multinational companies, particularly given substantial legal penalties and reputational damage from sanctions violations.

In this fluid and uncertain environment, at least three steps are advisable as multinationals make decisions about whether to maintain or extend Russian business interests. First, companies should be as well-informed as possible about facts relevant to sanctions compliance, such as ownership profiles of Russian counterparties, and about existing and anticipated sanctions prohibitions. Second, companies should insist on contractual and other written protections to reduce potential sanctions liability. Finally, companies should have well-developed plans to extricate themselves from Russian business arrangements as needed depending on sanctions developments.

Expanded Sanctions

U.S. Sanctions: United States sanctions relating to Russia have taken four principal forms. First, and most recently, the U.S. Treasury Department's Office of Foreign Assets Control ("OFAC") introduced the SSI List to designate as sanctioned certain persons operating in sectors of the Russian economy previously identified as potential targets for sanctions, which include financial services and energy. OFAC has issued a sanctions directive that applies to the two banks on the SSI List and a second directive that applies to the two energy...