U.S. Prohibits New Investment in Russian Energy Sector by U.S. Persons and Importation into the United States of Certain Russian-Origin Energy Products; EU and UK Issue Supplemental Russia and Belarus Sanctions

U.S. Prohibits New Investment in Russian Energy Sector by U.S. Persons and Importation into the United States of Certain Russian-Origin Energy Products; EU and UK Issue Supplemental Russia and Belarus Sanctions

March 10, 2022, Covington Alert

Since Russia launched its full-scale invasion of Ukraine last month, the United States, European Union, and United Kingdom have imposed a wide range of sanctions and export control restrictions that have primarily targeted Russian banks, defense companies, and state institutions, along with President Vladimir Putin and individuals and entities closely associated with him. While the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) imposed property-blocking sanctions related to the Nord Stream 2 Pipeline on February 23, 2022, designating Nord Stream 2 AG and its chief executive officer (“CEO”) to the List of Specially Designated Nationals and Blocked Persons (“SDN List”), the measures to date have been more limited as they relate to Russia’s energy sector, consisting principally of tighter controls on exports and reexports to, and transfers within, Russia of refinery equipment.

On March 8, 2022, however, the Biden Administration issued a new executive order imposing significant and substantial sanctions targeting aspects of the Russian energy sector. In particular, the Executive Order prohibits new investment in the energy sector in the Russian Federation by U.S. persons and the importation into the United States of the following Russian-origin energy products: crude oil; petroleum; petroleum fuels, oils, and products of their distillation; liquefied natural gas; coal; and coal products. In addition, U.S. persons, wherever located, are prohibited from approving, financing, facilitating, or guaranteeing a transaction by a foreign person where the transaction by that foreign person would be prohibited if performed by a U.S. person or within the United States.

On March 9, 2022, the European Union adopted measures that include additional asset-freezing designations and measures targeting the Russian maritime sector. The EU also has adopted new sanctions targeting Belarus, which are broadly similar to restrictive measures the EU has imposed on Russia.

On March 10, 2022, the United Kingdom designated seven additional prominent Russian individuals under its asset-freezing sanctions and also announced on March 8 that it would phase out imports of Russian oil by the end of the year, though the phasing out would not be immediate.

Restrictions on New Investment in the Russian Energy Sector

An executive order that President Biden issued on March 8, 2022 (the “Executive Order”) prohibits new investment in the energy sector in Russia by U.S. persons, wherever located. “U.S. persons” include U.S. entities and their non-U.S. branches; individual U.S. citizens and lawful permanent residents (“green-card” holders), no matter where located or by whom employed; and persons present in the United States.

OFAC concurrently issued guidance in the form of a Frequently Asked Question (“FAQ”) on what constitutes a “new investment in the energy sector in the Russian Federation,” specifying that such “new investment” is a “transaction that constitutes a commitment or contribution of funds or other assets for, or a loan or other extension of credit to, new energy sector activities (not including maintenance or repair) located or occurring in Russia beginning on or after March 8, 2022.” See OFAC FAQ 1019. For purposes of this definition, a loan or extension of credit is any transfer or extension of funds or credit on the basis of an obligation to repay, or any assumption or guarantee of the obligation of another to repay an extension of funds or credit, including overdrafts, currency swaps, purchases of debt securities, purchases of a loan made by another person, sales of financial assets subject to an agreement to repurchase, renewals or refinancings whereby funds or credits are transferred or extended to a borrower or recipient described in the provision, the issuance of standby letters of credit, and drawdowns on existing lines of credit. Based on the FAQ guidance issued to date by OFAC, it does not appear at this time that the new investment restriction should prohibit U.S. persons from providing goods or services to, or engaging in other activities with respect to, pre-existing energy projects in Russia (i.e., projects that were underway as of March 8, 2022), or taking steps to wind down their involvement in such projects, as long as such activities do not involve restricted dealings with U.S.-sanctioned persons or activities otherwise prohibited by U.S. sanctions.

OFAC also confirmed that “energy sector” refers to a broad range of activities, including the procurement, exploration, extraction, drilling, mining, harvesting, production, refinement, liquefaction, gasification, regasification, conversion, enrichment, fabrication, or transport of petroleum, natural gas, liquefied natural gas, natural gas liquids, or petroleum products or other products capable of producing energy, such as coal or wood or agricultural products used to manufacture biofuels, the development, production, generation, transmission or exchange of power, through any means, including nuclear, electrical, thermal, and renewable. See OFAC FAQ 1019.

Prohibition on Imports into the United States of Russian-Origin Energy Products

In addition, the Executive Order prohibits the importation into the United States of a number of energy products of Russian origin, namely: crude oil; petroleum, petroleum fuels, oils, and products of their distillation; liquefied natural gas; coal; and coal products. OFAC noted in FAQ guidance that imports of other forms of energy of Russian origin are not prohibited by the Executive Order, though targeted prohibitions or restrictions could apply to certain energy-related dealings with specified Russian persons under other sanctions authorities, such as Executive Order 13662 or Executive Order 14024. See OFAC FAQ 1014. Among the energy products not subject to the import prohibition are uranium, wood, and agricultural products used to produce biofuels.

OFAC advised that the term “Russian Federation origin” refers to goods produced, manufactured, extracted, or processed in the Russian Federation, excluding any Russian Federation origin good that has been incorporated or substantially transformed into a foreign-made product. See OFAC FAQ 1019. The Executive Order does not prohibit imports into the United States of non-Russian origin items, even if such items transit through or depart from Russia. See OFAC FAQ 1014.

The importation of energy products of Russian origin into countries other than the United States does not expose non-U.S. persons to sanctions under the Executive Order, provided that such imports do not involve a sanctioned person or an otherwise sanctioned activity. See OFAC FAQ 1018. Furthermore, the Executive Order does not prohibit transactions such as the unwinding of contracts or other business-related activities by U.S. persons in order to comply with the import ban and does not prohibit U.S. persons from engaging in transactions to sell or re-direct shipments of items covered by the new import prohibitions that were previously destined for the United States. See OFAC FAQ 1016. The new Executive Order also does not appear to prohibit U.S. persons more generally from facilitating imports of Russian-origin energy products into countries other than the United States where such transactions do not involve U.S.-sanctioned persons or activities otherwise prohibited by U.S. sanctions.

New General License and Guidance on Pre-Existing General Licenses

OFAC issued the following general license in connection with these newly issued sanctions:

• General License No. 16 authorizes transactions ordinarily incident and necessary to the importation into the United States of crude oil; petroleum; petroleum fuels, oils, and products of their distillation; liquefied natural gas; coal; and coal products of Russian Federation origin pursuant to written contracts or written agreements entered prior to March 8, 2022, through 12:01 a.m. EST, April 22, 2022.

The new OFAC FAQs do not address the question of whether amendments on or after March 8 to a pre-March 8 contract will remove that contract from the scope of the general license, but amendments to material provisions of such contracts, including to the quantity of the goods to be imported, likely would render the general license inapplicable.

In addition, OFAC FAQs 1010 and 1017 make clear that the provisions of General License 8A, which permits transactions “related to energy” with specified sanctioned Russian financial institutions through June 23, 2022, continue to apply following the issuance of the new Executive Order. In particular, General License 8A continues to authorize transactions (including payments) involving the specified sanctioned Russian financial institutions that are related to the transport or purchase of petroleum and certain other energy products from Russia for import into countries other than the United States.

New EU Targeted and Sectoral Russia Sanctions

On March 9, 2022, the EU adopted additional sanctions measures, as summarized below.

Additional Asset-Freezing Designations

The Council Implementing Regulation (EU) 2022/396 has added 160 individuals to the EU-Russia asset-freezing list.

The listed individuals include:

• 14 prominent individuals involved in key economic sectors, including the metallurgical, agriculture, pharmaceutical, telecom, and digital industries sectors, as well as certain of their family members. These additional designations complement the listings of prominent individuals involved in the oil, gas, banking, media, and transport sectors, decided by the EU Council on February 23 and 28, 2022; and
• 146 members of the Russian Federation Council, who ratified decisions by the Russian Government in relation to the Treaty of Friendship, Cooperation and Mutual Assistance between the Russian Federation and the Donetsk People's Republic and the Treaty of Friendship, Cooperation and Mutual Assistance between the Russian Federation and the Luhansk People’s Republic.

Additional Measures Targeting the Maritime Sector and Amendments to Pre-Existing Restrictions

Council Regulation (EU) 2022/394 (the “Regulation”) introduces new export and associated services restrictions targeting the maritime sector. It is now prohibited to export to Russia, or to export for the purposes of placing on board a Russian-flagged vessel (subject to targeted exceptions), maritime navigation goods and radio communication technology (as listed in Annex XVI). The foregoing prohibition also extends to the provision of related services. The Regulation also adds the Russian Maritime Register of Shipping to the list of state-owned enterprises subject to debt and equity restrictions.

Finally, in the context of the debt and equity-related restrictions, the Regulation confirms that loans and credit can be provided by any means, including through “crypto-assets,” and amends the definition of “transferable securities” to also include “crypto-assets.”

New EU Sectoral Belarus Sanctions

On March 9, 2022, the EU also introduced new measures targeting the Belarusian economy. Those measures introduce specialized payment messaging service prohibitions, similar to those in the Russia sanctions regime, clarify that crypto assets fall under the scope of “transferable securities,” and further expand existing financial restrictions on Belarus by mirroring the financing and financial services measures recently implemented with regard to Russia. These new Belarus measures are set forth in Council Regulation (EU) 2022/398.

New UK Sanctions

Sanctions on Seven Russian Individuals

On March 10, 2022, the UK Government designated seven individuals under its Russia sanctions regulations. The designated individuals include Roman Abramovich, owner of the Chelsea Football Club in London and stakeholder in Russian companies in the natural resources sector; Igor Sechin, CEO of the Russian oil and gas company, Rosneft; Oleg Deripaska, a Russian business executive with interests in the natural resources and energy sectors; Dmitri Lebedev, Chairman of the Board of the Russian bank, Bank Rossiya; Alexei Miller, CEO of the Russian energy company, Gazprom; Andrei Kostin, President of the Russian bank, VTB Bank; and Nikolai Tokarev, President of state-owned oil and gas transportation services company, Transneft.

The foregoing individuals and assets that they own or control are subject to an asset freeze in the UK. The UK Office for Sanctions Implementation (“OFSI”) published a general license setting out terms on which Chelsea Football Club can continue to operate, which runs until May 31, 2022.

Restrictions Targeting the Aviation Sector

On March 9, 2022, the UK Government introduced new measures concerning the aviation sector. The Russia (Sanctions) (EU Exit) (Amendment) (No. 6) Regulations 2022 introduced the following new measures:

• A prohibition on Russian aircraft overflying or landing in the UK. This prohibition applies to aircraft registered in Russia or owned, chartered, or operated by a designated person or a person “connected with Russia” (as defined in the UK Russia sanctions regulations) and includes limited exceptions relating to safety.
• The creation of new powers for UK authorities to detain Russian aircraft, or to direct Russian aircraft not to enter or leave UK airspace or not to land in the UK.
• The creation of a new power for the UK Civil Aviation Authority (“CAA”) to refuse, suspend, or revoke permissions for Russian aircraft, and to prohibit registration under the CAA of aircraft owned, operated, or chartered by a designated person.
• The expansion of the definition of “restricted goods” and “restricted technology” to include “aviation and space goods” and “aviation and space technology,” thereby extending existing restrictions to prohibit the export of such goods to or for use in Russia.
• A prohibition on providing insurance and reinsurance services in relation to aviation and space goods and technology to a person “connected with Russia” or for use in Russia. Contravention of such prohibition will constitute a criminal offense.

The UK Government also issued a general license which authorizes until March 28, 2022 (in relation to contracts concluded before March 8, 2022):

a) the provision of insurance services to operators in the aviation and space goods/technology sector where the provider (i) did not reinsure their obligations to provide those insurance services prior to March 8, 2022; or (ii) reinsured their obligations to provide those insurance services prior to March 8, 2022, and no such reinsurance cover has, as a matter of applicable law, been rendered unenforceable, suspended, frustrated, or prohibited by any applicable sanctions; or

b) the provision of reinsurance services in relation to aviation and space goods or technology where the insurance obligations being reinsured have not, as a matter of applicable law, been rendered unenforceable, suspended, frustrated, or prohibited by any applicable sanctions.

Plans to Phase Out Use of Imports of Russian Oil

On March 8, 2022, the UK Government announced that it would phase out imports of Russian oil by the end of the year. As part of this measure, the UK Government will establish a new “Taskforce for Oil” that will work with companies in the period leading to the end of UK imports of Russian oil to find alternative oil supplies. To date, the UK Government has not yet published legislation or imposed specific restrictions on the import of Russian oil, but those measures will follow in due course.

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Covington’s International Trade Controls team—which includes lawyers in the firm’s offices in the United States, London, Brussels, and Frankfurt—regularly advises clients across business sectors, and would be well-placed to provide support in connection with the emerging Russia sanctions. Our trade controls lawyers also work regularly with Covington's Global Public Policy team—consisting of over 120 former diplomats and policymakers in the United States, Europe, the Middle East, Latin America, Africa, and Asia—many of whom have had substantial government experience in sanctions and export controls matters, and who regularly advise our clients on emerging sanctions policy matters and related engagements with government stakeholders.

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This web page provides information and resources, including several alerts covering the impact of recent sanctions and heightened export controls, as well as detail on other Covington practices that are involved in these multidisciplinary matters.

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