Crisis in Ukraine: U.S. Imposes Additional Sanctions Targeting President Putin's Inner Circle

HIGHLIGHTS:

• The United States has blocked the assets of a number of senior Russian officials considered to be part of President Putin's inner circle as well as the assets of one Russian bank owned by targeted officials. U.S. companies are scrambling to determine if their trade partners are owned or controlled by these officials, and thus potentially subject to sanctions.
• President Obama issued a third Executive Order expanding authority to target entities in the Russian financial services, energy, mining, and defense sectors for sanctions.

On March 20, 2014, President Obama issued Executive Order 13662 further expanding the authorization of the U.S. to sanction parties for threatening stability in Ukraine. As outlined below, this Executive Order broadens the authorization announced in Executive Order 13660 of March 6, 2014 (see Holland & Knight alert, "Crisis in Ukraine: U.S. Imposes Targeted Sanctions," March 6, 2014), and expanded by Executive Order 13661 of March 16, 2014.

Following through on its threat, the U.S. government has now started actively targeting President Putin's inner circle for sanctions under this new authority. The U.S. is unlikely to impose comprehensive sanctions on Russia or Russian government-owned entities. However, if the crisis deepens, additional rounds of sanctions are likely against top Russian officials and select entities thought to be owned or controlled by them.

The fluid situation and rapidly changing sanctions create significant risk management challenges for companies doing business in Russia and parts of Ukraine. In particular, unlike typical individuals whose assets are blocked by the U.S. Treasury Department's Office of Foreign Assets Control (OFAC), some of the Russian oligarchs targeted for sanctions may own and control a number of companies which would then be considered sanctioned entities.

The Scope of U.S. Sanctions Under the Executive Orders of March 2014

Executive Order 13660 of March 6, 2014. Executive Order 13660 put in place legal authority for the U.S. government to take action against persons responsible for asserting authority over regions of Ukraine without authorization of the government of Ukraine. In particular, it requires U.S. persons (principally U.S. banks) to seize the property of persons designated under the Executive Order, as well as imposing a visa ban and blocking donations to these parties.

Executive Order 13661 of March 16, 2014. Executive Order 13661 expanded the scope of Executive Order 13660, by authorizing sanctions on, among others, officials of the Russian government and any individual or entity that is owned (50 percent or more) or controlled by, has acted for or on behalf of, or has provided material or other support to, a senior Russian government official. Executive Order 13661 included an annex listing the names of seven individuals who are subject to the sanctions.

Executive Order 13662 of March 20, 2014. This most recent Executive Order expands authorization beyond that in the prior two Executive Orders by authorizing sanctions on individuals and entities that operate in key sectors of Russia's economy, including the financial services, energy, materials and mining, engineering, and defense and related material sectors, and any individual or entity that is owned (50 percent or more) or controlled by, has acted for or on behalf of, or has provided material or other support to these sanctioned parties.

Designations to Date

To date, OFAC has designated approximately 30 parties as specially designated nationals (SDNs), including a few Ukrainian officials, several Russian government officials and members of the Russian leadership's inner circle, and one Russian bank (Bank Rossiya, a.k.a. Aktsionerny Bank Russian Federation). Under long-standing OFAC guidance, any entity owned or controlled by these persons should also be considered an SDN. U.S. persons are essentially prohibited from doing business with these designated persons, and are obligated to block and report to OFAC any assets owned by these persons in their possession.

Will the U.S. Congress Weigh In?

Currently, the Obama administration has been taking action, and coordinating sanctions with allies, without any intervention by Congress. According to a senior congressional advisor, Congress is working on a three-pronged legislative strategy to address the situation in Ukraine that includes:

• passage of a non-binding resolution condemning Russia's actions in Ukraine
• a proposal to provide loan guarantees to Ukraine
• a bill that would provide Ukraine with democracy, governance, civil society and security assistance, and impose economic sanctions on Russia

These actions would support and not fetter the Obama administration's efforts. However, as evidenced by U.S. sanctions legislation on Iran, congressional leaders have shown a willingness to dictate specific sanctions policy through legislation.   

Your Risk Management Requires Advance Planning

For companies doing business in Russia and Ukraine, managing and mitigating the risks is critical. The following are areas that are essential for companies to be proactive:

• stay current on which individuals and entities are being targeted for sanctions, and check to ensure that their business partners, principally in Russia and Ukraine, are not owned or controlled by these SDNs
• develop contingency plans if additional Russian entities or sectors are targeted for sanctions; for example, the U.S. government could cancel existing licenses for export of military or controlled dual-use goods or services to the Russian military or Russian defense industry
• consider and plan for the real possibility that Russia will counter with targeted sanctions of its own, or take other actions that would make doing business in Russia more difficult for U.S. companies

It is likely that the crisis and the sanctions will continue to change rapidly, therefore the information in this alert may quickly become outdated. Companies with potentially affected business operations should monitor events closely and institute advance planning now.

To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.