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U.S., EU Ramp Up Economic Sanctions Against Russia

Wednesday, August 13, 2014
Sandler, Travis & Rosenberg Trade Report

The United States and the European Union recently levied substantial additional economic sanctions against Russia in response to its alleged efforts to destabilize eastern Ukraine. The new measures include an EU ban on defense trade with Russia and on exports of dual-use goods to military end-users in that country, as well as restrictions by both sides on exports that could aid oil production in Russia. Officials indicated that further sanctions are possible if “if Russia refuses to change course.” Moscow has responded by banning imports of many food and agricultural products from the U.S. and the EU, a move that some observers say is more likely to harm Russian consumers than U.S. and EU exporters.

Exports. The U.S. Department of Commerce’s Bureau of Industry and Security has instituted a policy of denying exports, reexports or foreign transfers to Russia of certain items that may be used for exploration or production from deepwater, Arctic offshore or shale projects that have the potential to produce oil or gas. Similarly, the EU said that exports of certain energy-related equipment and technology to Russia will be subject to prior authorization by competent member state authorities and that export licenses will be denied if products are destined for deep water oil exploration and production, Arctic oil exploration or production, and shale oil projects in Russia.

BIS has also added another Russian defense technology company to its Entity List based on a determination that this company is involved, or poses a significant risk of becoming involved, in activities contrary to U.S. national security and foreign policy interests. Designation on the Entity List imposes a license requirement for the export, reexport or foreign transfer of items subject to the Export Administration Regulations to the designated entity, with a presumption of denial. This company has also been designated by the Treasury Department pursuant to Executive Order 13661 for operating in the Russian arms and defense sector, thus freezing any of its assets within U.S. jurisdiction and prohibiting transactions involving this firm by U.S. persons or within the U.S.

The EU has imposed (1) an embargo on the import and export of arms and related material from/to Russia and (2) a prohibition on exports of dual-use goods and technology for military use in Russia or to Russian military end-users (all items in the EU list of dual-use goods are included), both of which will apply only to future orders. The U.S. has previously imposed similar restrictions.

Export Financing. The U.S. Department of Agriculture suspended all bilateral export credit and development financing for Russia, the Overseas Private Investment Corporation suspended consideration of any new financing and insurance transactions in Russia, and the Export-Import Bank of the U.S. imposed a hold on all new financing for exports to Russia.

Banks. Treasury prohibited U.S. persons from providing new financing to three additional major Russian state-owned financial institutions, limiting their medium- and long-term access to U.S. capital markets. Treasury said it has not blocked the property or interests in property of these banks, nor has it prohibited transactions with these banks beyond these specific restrictions.

EU nationals and companies are now barred from buying or selling new bonds, equity or similar financial instruments with a maturity exceeding 90 days that are issued by major state-owned Russian banks, development banks, their subsidiaries and those acting on their behalf. Services related to the issuing of such financial instruments (e.g., brokering) are also prohibited.

Crimea. The EU banned new investment in the following sectors in Crimea and Sevastopol: infrastructure projects in the transport, telecommunications and energy sectors and in relation to the exploitation of oil, gas and minerals. Key equipment for these sectors may not be exported to Crimea and Sevastopol, and finance and insurance services related to such transactions may not be provided.

Individuals. The EU added eight persons and three entities to the list of those subject to an asset freeze and a visa ban for providing support to or benefiting from Russian decisions makers responsible for the destabilization of eastern Ukraine and the illegal annexation of Crimea. There are now 95 persons and 23 entities subject to these EU restrictions.

Russian Response. Calling the expanded sanctions “destructive and short-sighted,” Russia has responded by banning or restricting for one year imports of agricultural produce, raw materials and foodstuffs from the U.S., the EU and other countries that have imposed or supported economic sanctions against Russia. A specific list of affected items has yet to be officially released. Press accounts indicate that the retaliation will affect about one percent of total U.S. agricultural exports and about ten percent of EU exports but may be most harmful to Russia itself, which imports about 40 percent of its total food supply. U.S. and EU officials have indicated that they may challenge Russia’s measures at the WTO.

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