This past March, President Obama issued Executive Order (E.O.) 13662, targeting those parties dealing in certain sectors of the Russian Federation economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State. Such sectors highlight in E.O. 13622 included financial services, energy, metals and mining, engineering, and defense and related materiel. Today, the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) announced sanctions against certain parties in those sectors, and created a new list to identify these parties separate and apart from the Specially Designated Nations and Blocked Persons (“SDN”) List that they usually employ. The new list is called the Sectoral Sanctions Identification (“SSI”) List. OFAC also designated some parties under E.O. 13660 and E.O. 13661; two authorities also issued in response to the situation that has unfolded in the Ukraine over the past six months..

Today’s group of designees include:

1. Gazprombank OAO, VEB, OAO Novatek, and Rosneft who have been targeted for sectoral sanctions;

2. Eight Russian arms firms, including the Kalashnikov Concern, makers of the famed AK-47 assault rifle;

3. The “Luhansk People’s Republic” and the “Donetsk People’s Republic,” which have asserted governmental authority over parts of Ukraine without the authorization of the Government of Ukraine;

4. Aleksandr Borodai, the self-declared “prime minister” of the Donetsk People’s Republic,

5. Feodosiya Enterprises, a key shipping facility in the Crimean peninsula; and

6. Four Russian government officials, including Sergey Beseda, a senior Russian Federal Security Service official.

As for the first group identified above–Gazprombank OAO, VEB, OAO Novatek, and Rosneft–they are not considered to be blocked in the traditional sanctions sense of the term. Rather, U.S. persons can no longer have dealings in new equity with these firms, nor can they have transactions in debt with them if that debt will mature in over ninety (90) days. In other words, these firms will no longer be able to obtain medium or long term lending from the U.S.

The second group of designees were targeted pursuant to E.O. 13661, and for these designations the more traditional sanctions apply. As such, any assets coming under the jurisdiction of the United States which these parties own or control are to be blocked, and U.S. persons are prohibited from engaging in transactions with them. The full list of these parties is: 1) Almaz-Antey, 2) Federal State Unitary Enterprise State Research and Production Enterprise Bazalt, 3) JSC Concern Sozvezdie, 4) JSC MIC NPO Mashinostroyenia, 5) Kalashnikov Concern, 6) BP Instrument Design Bureau, 7) Radio-Electronic Technologies, 8) Uralvagonzavod, 9) Sergey Besesda, 10) Oleg Savelyev, 11) Sergei Neverov, and 12) Igor Shchegolev. Of interest in this group is the Kalashnikov Concern which, as noted above, is the Russian arms creator of the famed AK-47 assault rifle. It should be noted that OFAC has already offered guidance indicating that the sale of Kalashnikov Concern’s products are not blocked or prohibited so long as they are fully paid for before July 16, 2014 and the Kalashinkov Concern no longer retains an interest in any proposed sale of them.

Finally, there was yet another group of designees targeted pursuant to E.O. 13660. That group includes Luhansk People’s Republic (LPR), Donetsk People’s Republic, Aleksandr Borodai, and Feodosiya Enterprise. Just as with the E.O. 13661 designees, this group has been targeted for sanctions in the traditional sense. This means that U.S. persons are prohibited from transaction with them, and any assets they own which may come under U.S. jurisdiction will be blocked.

It’s pretty clear that most people will be most interested in the new sectoral sanctions under E.O. 13661. First, it targets some of the biggest economic actors in Russia. Second, it’s not your run of the mill use of sanctions, and therefore demonstrates how much flexibility OFAC has in making its designations, and how creative they can be in crafting what prohibitions should apply to certain targets.

As part of these sectoral sanctions the two banks which were designated, Gazprombank OAO and VEB, can no longer receive debt financed or extended by U.S. persons if that debt matures after 90 days. Further, no U.S. person can transact for new equity in these entities. For Novatek and Rosneft, the sectoral sanctions prohibit U.S. persons from lending to these entities when the debt matures after 90 days.

The difference between these parties is that the first two are operating in Russia’s financial sector, while the other two are operating in Russia’s energy sector. As such, Treasury has made it a point to move more aggressively against Russia’s financial sector, as opposed to its energy sector, presumably because it will have greater residual impact over large swathes of the Russian economy.

It must be reiterated that these sectoral sanctions are not blocking actions, and they do not prohibit any other transactions aside from what has been indicated above. For example, U.S. financial institutions may continue to maintain correspondent accounts and process U.S. dollar-clearing transactions for these firms, so long as those activities do not involve transacting in those transactions prohibited by the new sectoral sanctions. Nevertheless, it is likely that the U.S. private sector will react more harshly than just refraining from engaging those parties in the activities specifically prohibited by E.O. 13661’s sectoral sanctions.

Often times, U.S. persons move away from any type of transaction with a designated party regardless of it’s legality. This is because creating uncertainty and the perception of risk are sanctions greatest weapons. Therefore, despite the U.S. intending only to prevent the financing of new debt or transactions in new equity, it is likely that a significant number of U.S. business move away from dealing with the four firms targeted yesterday, as fear of the unknown could raise the risk profile of such deals and make U.S. parties reluctant to engage with them. That said, U.S. persons should keep in mind that transacting in or otherwise dealing in any debt or equity issued prior to July 16, 2014 on behalf of these firms (Gazprombank, VEB, Novatek, and Rosneft) is still permissible, and that other transactions with them are also permissible.

Despite this natural paranoia about dealings with the firms targeted for sectoral sanctions, I think OFAC did a good job providing clear, specific, and timely guidance on what transactions were and were not permissible. For example, OFAC clarified what they meant by debt and equity. First, they noted that debt included bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper, and that equity included stocks, share issuances, depository receipts, or any other evidence of title or ownership.

Further, they made it clear that these prohibitions are in relation to new debt or equity; namely such debt or equity issued after July 16, 2014. Moreover, they clarified that it’s not just the transactions in new debt or equity with these firms which is prohibited, it is also financing in support of such new debt or new equity; and any dealing in, including provision of services in support of, such new debt or new equity. Finally, OFAC noted that the prohibitions extend to rollover of existing debt if the rollover leads to the creation of new debt with a maturity of longer than 90 days. The key to remember here is that the debt prohibition requires a maturity date of longer than 90 days.

OFAC has also addressed the question of whether U.S. persons were prohibited from entering into derivatives contracts linked to debt or equity as result of these new sectoral sanctions. OFAC answered this question by issuing General License 1, which authorized certain transactions involving derivative products. This general authorization allows dealings in derivative products whose value is linked to an underlying asset that constitutes debt with a maturity of longer than 90 days or equity issued on or after July 16, 2014. However, it does not permit the holding, purchasing, or selling of underlying assets otherwise prohibited by the new sectoral sanctions.

These new sanctions and the way they are being implemented are drawing a lot of interest for obvious reasons. As the situation continues to develop, there will likely be further guidance issued, as the factual scenarios that are likely to result from these new sectoral sanctions will be varied and complex. It should be interesting to see how OFAC tackles the complexity of these new scenarios as it seems the agency is becoming more flexible and communicative, and less rigid and opaque in its approach. In other words, I don’t think there has been a more interesting time to be involved in the field of U.S. economic sanctions. Or maybe I’m just spending too much time in the office….