By Jeffrey Rinde and Frank Tang
On April 6, 2018, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) announced new sanctions against Russia by adding seven Russian oligarchs and 12 companies they own or control, 17 senior Russian government officials, the primary state-owned Russian weapons trading company and its subsidiary, a Russian bank, to its list of Specially Designated Nationals and Blocked Persons List (“SDN List”).
Although this is not the first time that the Trump administration imposed sanctions against Russia, this latest round of sanctions is surely the most significant taken to date. The designations include major publicly-traded companies that are listed on the London and Hong Kong stock exchanges and have tens of thousands of customers and investors throughout the globe. The sanctions are unprecedented in that OFAC has never previously designated similar companies, meaning global companies seeking to comply with these sanctions will now face substantial uncertainties and challenges.
An SDN designation prohibits U.S. persons, including U.S. companies and financial institutions, as well as their foreign branches, from engaging in any transactions with the designee or with entities in which they hold an aggregate ownership of 50% or more. The 50% rule extends the sanctions to entities owned 50% or more by the SDNs, even if those companies are not themselves listed by OFAC. Practically speaking, the opacity of ownership in the Russian economy will make the 50% rule extremely difficult to carry out and operationalize.
Sanctions on companies range from Basic Elements Limited and EN+ Group PLC, an energy, minerals, and hydropower conglomerate, and United Company RUSAL PLC, one of the world’s largest aluminum producers. These sanctions have not only already impacted a substantial portion of a core global community - the aluminum market, but are also preventing further trading in these companies’ shares, a move that could harm mutual funds, pension funds, and investors that have long held shares in these companies worth billions of dollars.
In turn, OFAC has issued two time-limited general licenses, General Licenses 12 and 13, permitting companies and individuals to undertake certain activities and transactions in order to “wind down” business dealings related to the designated parties. General License 12, which expires June 5, 2018, authorizes U.S. persons to engage in transactions and activities with the 12 oligarch-owned designated entities that are “ordinarily incident and necessary to the maintenance or wind down of operations, contracts, or other agreements” related to these 12 entities. General License 13, which expired on May 7, similarly allowed transactions and activities otherwise prohibited under the April 6 sanctions. The license allowed transactions and activities to “divest or transfer debt, equity, and other holdings” in three designated Russia entities: EN+ Group PLC, GAZ Group, and United Company RUSAL PLC. In practice, it is uncertain how the General Licenses will work since the designations have depressed the share prices of the sanctioned parties, and it is unknown who might be willing to purchase the shares even if U.S. holders are permitted to sell them.
The sanctions also raise significant concerns and practical challenges for U.S. and non-U.S. companies alike, with particular risks for investors as well as the manufacturers, suppliers, and customers of the SDN companies. For investors and fund managers, they will need to conduct significant due diligence into the participants and ownership structures of their funds to determine whether sanctioned persons or entities are involved. Investors and fund managers are allowed to continue to try to sell to non-U.S. persons but given the challenge in finding willing buyers, they will need to prepare for potentially holding the blocked assets long-term by way of setting up sequestered accounts. As for those within the supply chains of sanctioned companies, from suppliers of commodities to finished goods, as well as the customers of the sanctioned companies, the concern and implication will be potentially replacing these key commercial relationships which will become extremely difficult, if not prohibited, to maintain.
The April 4th sanctions will likely trigger Russian retaliation as well. Prime Minister Dmitry Medvedev has stated that Russia should consider targeting U.S. goods or goods produced in Russia by U.S. companies when considering a possible response. If carried out, any such measures will only further implicate U.S. business dealings with Russian entities.