Sensible precautions

Brett Hillis offers some guidance on how to navigate an increasingly complex sanctions landscape

Sanctions regimes in two of the world’s most important markets have grown more varied and more complex in recent years. US and EU sanctions have become out-of-step, and in the case of Iran, have become directly contradictory. Companies face an uncertain political environment in which to trade across borders – having to navigate these regimes, with increased uncertainties raised by the US’ withdrawal from the JCPOA, and with the potential problems caused by Brexit. While companies are increasingly using comprehensive contractual wording to mitigate their exposure to sanctions breaches, finding wording that covers all bases can be challenging. Having an understanding of the type of sanctions companies are potentially exposed to is a sensible precaution to avoid falling foul of any regime.

Whereas the US and EU were initially in sync regarding sanctions against Russia (imposed following the annexation of Crimea and in response to the ensuing conflict in Eastern Ukraine) the two have diverged over time. While the EU approach has remained relatively static – partially due to European reliance on Russia for its energy security, and the need for unanimity in the Council in order to make changes – the US has expanded its “secondary sanctions” regime, which potentially applies to non-US companies. Companies now risk becoming subject to sanctions by carrying out ‘significant transactions’ directly or indirectly with Specially Designated Nationals (SDNs).

Of particular note to the energy, oil and gas sectors, President Trump is legally required to impose sanctions on any person that ‘knowingly makes a significant investment’ in special Russian crude oil projects. This includes deepwater extraction, Russian Arctic exploration and Russian shale projects. Additionally, President Trump is entitled (albeit he has not yet done so) to impose secondary sanctions on non-US persons investing in enhancing Russia’s energy export pipelines, or providing goods, services or technology to support Russian pipes.

Further, the potential exposure of energy, oil and gas companies to secondary sanctions increased in April 2018 when the US Office of Foreign Assets Control (OFAC) designated numerous persons and entities – including seven oligarchs and 12 companies they own or control – as SDNs. As some of these companies and individuals are highly active and important to the industry, the imposition of sanctions restricts trading options for companies in the market.

Some pressure has recently been alleviated with OFAC’s removal of some companies from the SDN list, however companies are still advised to remain vigilant that they do not become entangled inadvertently in expansive US sanctions.

Since President Trump’s May 2018 decision to re-impose sanctions on Iran, including secondary sanctions, trade prospects with the oil-producing country have become both more limited and more complex. In response, the EU added certain US sanctions laws on Iran to the list of ‘blocked legislation’ under the EU Blocking Regulation, hence ‘protecting’ EU companies from the extraterritorial effects of these laws. This puts companies in a ‘catch-22’ situation – either risk severe penalties under the US regime if they do business with Iran, or breach the EU Blocking Regulation if they comply with the US regime. That said, in practice, there are relatively few instances where a company has been subject to enforcement action under the EU Blocking Regulation. In this connection, we have been advising companies on contractual obligations to help them address the risks arising from the different regimes.

It is notable that France, Germany and the UK have established the ‘Instrument for Supporting Trade Exchanges SPV’ (INSTEX) to facilitate payment for exports from Iran, theoretically providing a mechanism via which EU companies could continue trading. The operation of INSTEX has yet to be tried and tested and as such, it remains to be seen whether it will effectively mitigate the ‘catch-22’ situation companies face.

Recent developments
With regard to Russia, companies may take comfort in the fact that, on 27 January 2019, OFAC delisted Rusal, EN+ and EuroSibEnego from its SDN list, after oligarch Oleg Deripaska reduced his direct and indirect shareholding stake in the companies, and severed his control. While Mr Deripaska himself remains an SDN, trade with and investments in these influential companies is now permissible under the US sanctions regime. An added positive is that it was supported and lobbied for by the EU, demonstrating a level of co-operation across the Atlantic that had appeared to be missing in recent years.

However, in the US political climate, in which an investigation is ongoing into potential interference by Russia in the 2016 Presidential Election, and in which the Democratic Party has recently taken control of the House of Representatives, the potential of additional sanctions has increased. In the Senate, a large 57-vote bipartisan coalition formed to oppose the lifting of sanctions on the Deripaska-affiliated companies – only three votes short of the required supermajority to block such a move.

Finally, in Venezuela, OFAC has designated staterun petroleum company Petróleos de Venezuela, S.A. (PdVSA) as an SDN, prohibiting US persons from engaging in virtually all transactions with the company – a company with access to the world’s largest proven oil reserves. Further, US dollars cannot be used to transact with PdVSA, as is the case with any other SDN, and non-US persons risk exposure to the US “secondary sanctions” regime if they transact directly or indirectly with PdVSA. It is understood that the EU is currently reviewing their sanctions regime against Venezuela, in particular against certain individuals.

Reed Smith
Brett Hillis is Partner at Reed Smith. Reed Smith is a global relationship law firm with more than 1700 lawyers in 28 offices throughout the United States, Europe, Asia and the Middle East. Founded in 1877, the firm represents leading international businesses, from Fortune 100 corporations to mid-market and emerging enterprises. Its lawyers provide litigation and other dispute resolution services in multi-jurisdictional and other high-stakes matters; deliver regulatory counsel; and execute the full range of strategic domestic and cross-border transactions.

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