OFAC Targets Russian Banks, Defense Technology

Russian Banks and Defense Targeted by OFAC

Aug. 4, 2014

On July 29, 2014, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced the imposition of sectoral sanctions against additional entities operating within the financial services sector of the Russian economy.  These sectoral sanctions were imposed pursuant to Executive Order 13662.  The newly targeted entities are Bank of Moscow, Russian Agriculture Bank (a.k.a. Rosselkhozbank), and VTB Bank OAO, some of the most prominent banks in Russia.

Sectoral sanctions were first introduced against Russia on July 16, 2014, when OFAC issued two directives with the intent of limiting the access of certain entities to U.S. capital markets.  With respect to Directive 1, which focuses on Russia’s financial services sector, U.S. persons are now prohibited from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity to Bank of Moscow, Russian Agriculture Bank, and VTB Bank OAO, their property, or their interests in property.  To find out which Russian banks are currently subject to sectoral sanctions, please visit the Sectoral Sanctions Identifications (SSI) List on the Treasury’s website.

The imposition of these sectoral sanctions is a departure from OFAC’s regular use of the SDN List and blocking programs.  Instead of forthrightly denying these Russian entities access to the U.S. financial system and subjecting their property to blocking, the restrictions are narrowly tailored to bleed the entity of its access to U.S. dollar finance.  Sectoral sanctions are designed to change Putin’s decision making calculus with respect to Ukraine, but also limit the harm these sanctions will cause U.S. companies currently doing business with or in Russia.  Without clear cut lines, it is no surprise that many companies in the United States are having trouble interpreting these new prohibitions.

OFAC has attempted to assuage this uncertainty by publishing many frequently asked questions on its website regarding the SSI List and sectoral sanctions.  However, it is difficult to fully take into account the countless types of relationships, transactions, and arrangements that exist in a globalized market. Those with direct or indirect ties to any of the listed SSI entities should evaluate whether those ties are arguably covered by the prohibitions described in Directive 1.  It may also be advisable to request an interpretive opinion from OFAC.  But please note that OFAC only provides advisory opinions to transactions that fully describe the circumstances of a situation and are not hypothetical.

OFAC also imposed comprehensive sanctions against United Shipbuilding Corporation, a Russian state-owned company that manufactures, among other things, ordnance and accessories, and is engaged in shipbuilding, repair, and maintenance.  United Shipbuilding Corporation designs and constructs ships for the Russian Navy and is the largest shipbuilding company in Russia.

Unlike the actions taken against the banks pursuant to Directive 1, this action is made pursuant to Executive Order 13661.  The action places the company on the Specially Designated Nationals (SDN) List.

The consequences of this action are that U.S. persons are prohibited from dealing with the company.  It’s a “traditional” imposition of sanctions in the modern era of economic sanctions.  Additionally, all of the company’s property and interests in property in the possession of U.S. persons or located in the U.S. is blocked.

Again, U.S. persons should exercise discretion when transacting with Russian entities.  It is probably safe to assume that more defense and military-related companies in Russia will be targeted by OFAC as the Ukraine crisis continues.  Therefore, U.S. persons should probably avoid undertaking any long term or expensive transactions with Russian defense companies for fear of impending sanctions.

Disclaimer: Blog posts should not be relied upon as legal advice and are only provided for informational purposes.  Information contained in blog posts may also become outdated with the passage of time as laws change and U.S. foreign policy and national security objectives evolve.