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Sanctions on Russia and Impact on Investment Activities of U.S. Companies

On July 27, 2017, Senate passed the Countering America’s Adversaries Through Sanctions Act (the “Act”), a piece of bipartisan legislation imposing new sanctions on Russia.1 It imposes a sectoral sanction that bans Russian banks from obtaining outside credit and bans certain types of partnerships with oil and gas companies in Russia.2 For example, ExxonMobil terminated its joint venture with Rosneft, the largest Russian oil company, to drill for hydrocarbons in the Kara Sea. Exxon estimated a $720 million loss as a result.3 In addition, the Act prohibits U.S. companies from selling directly or indirectly any technology for use in Arctic oil drilling and production or shale projects.4

Background & Obama’s Sanctions

The Act was enacted primarily to codify and extend Obama’s sanctions on Russia. Obama’s first executive order was signed on March 6, 2014,5 just ten days before Crimea became a de facto territory of the Russian Federation. The EO aimed to impose sanctions and block American property ownership of certain Russians, as determined by the Treasury and the Secretary of State, who contributed to the situation in Crimea.6 The two subsequent executive orders, issued on March 16, 2014, Blocking Property of Additional Persons Contributing to the Situation in Ukraine,7 and March 20, 2014, Blocking Property of Additional Persons Contributing to the Situation in Ukraine,8 (together, the “Executive Orders”), extended the list of sanctioned individuals and entities and introduced a new type of sanction that is sectoral.9 They also authorized the Secretary of the Treasury to impose restrictions on a number of sectors of the Russian economy, including financial services, energy, metals and mining, engineering, and defense and related material.10

On May 8, 2014, the Office of Foreign Assets Control (“OFAC”) issued the first set of regulations related to the Executive Orders.11 Names of individuals and entities were incorporated into OFAC’s Specially Designated Nationals and Blocked Persons List (“SDN List”).12 On July 16, 2014, the Secretary of the Treasury, after consultation with the Secretary of State, issued a determination that the Executive Orders apply to the financial services and energy sectors of the Russian economy.13 On September 12, 2014, the Secretary of the Treasury extended sectoral sanctions to the defense and related material sectors.14

On December 18, 2014, The Ukraine Freedom Support Act added sanctions against Russia, prohibiting:

(1) any person making a “significant investment” in Arctic offshore, shale, or deepwater projects with the potential to produce oil in Russia;

(2) any financial institution knowingly engaging in significant transactions relating investment in Arctic offshore, shale, or deepwater projects in the Russian Federation with the potential to produce oil; or

(3) any financial institution facilitating significant financial transactions for any listed person or entity under Ukraine-related sanctions.15

More importantly, Congress prohibited U.S. individuals and companies from engaging in transactions with a number of large entities, such as Bank Rossiya, which has been called the “personal bank of Putin,” the Volga Group, a holding company owned by a close ally of Putin, and Almaz-Antey, a state-owned defense company.16

On December 28, 2016, President Obama issued an annex to one of the Executive Orders, which authorized sanctions on certain Russian entities and individuals who were engaged in significant malicious activities that undermine democratic processes or institutions.17

Sanctions Impairing Investment Activities

The Act primarily sought to codify and close loopholes related to the sanctions imposed by the Executive Orders. Codification is important, as it should ensure that the current Administration, or any other future administrations, cannot unilaterally lift them. As Senator Chuck Schumer noted, “These sanctions will stay in place unless Congress disapproves.”18 The Act will also require congressional review for any subsequent changes to the policies.19 It is fair to say that the Act was built on the existing framework of the Executive Orders.

The Act authorized the Secretary of the Treasury to modify its previous directives, shortening the maximum permissible duration of new debt extended to designated entities or individuals. For entities in the financial sector, the maximum duration of new debt has been changed to 14 days; for entities in the energy sector, the maximum has been changed to sixty days.20

The President may also impose sanctions to a person who:

1) knowingly invests in Russian energy export pipelines; or

2) knowingly sells, leases, or provides goods, services, information or technology for construction of Russian energy export pipelines.

This effectively puts Gazprom’s Turkish Stream and Nord Stream II on notice, as these two companies are building pipelines with Russia to circumvent Ukraine.21 Since the U.S. intends to apply this law externally, EU officials have warned the nation that “they have paths to oppose secondary sanctions that harm EU interests, including a potential WTO complaint and use of the EU blocking statute that prohibits compliance with extraterritorial sanctions.”22

In addition, the President shall sanction a person who knowingly invests $10 million or more (or combination of investments of at least $1 million, equalling in aggregate $10 million during 12-month period) or facilitates such an investment if it “directly and significantly contributes to the ability of the Russian Federation to privatize state-owned assets in a manner that unjustly benefits” Russian officials or their family members or close associates.23 In other words, anyone investing $10 million in a Russian privatization deal will be penalized, as such an investment is viewed as enriching Putin.24 It is unclear if a “person” applies to anyone or only to US citizens, permanent residents, or persons otherwise residing in the U.S.

Technology Sanctions

The Act also prohibits the provision, exportation, or re-exportation, directly or indirectly, of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil involving listed individuals and entities.25

The restrictions apply to projects worldwide if listed persons own a controlling interest in such a project or own a 33% or greater non-controlling interest in the project.26 The goal is to “block Russia from obtaining horizontal drilling techniques used in American shale oil fields,” leaving Russia behind the curve.27.

Indirect Sanctions for Evaders

The Act also targets foreign individuals and entities who facilitate prohibited transactions.28 The Act covers persons, who:

1) knowingly materially violate Ukraine-related sanctions; or

2) knowingly facilitate any significant transaction, including “deceptive” or “structured” transaction, for or on behalf of any person subject to U.S. sanctions with respect to Russia, or a child, parent, spouse, or sibling of a designated person.29

These sections target only foreign persons and the President must impose sanctions on these individuals or entities.30

To Be Continued…

The Act also requests a number of reports. For example, the Treasury, Director of National Intelligence, and State Department must submit names and asset lists of Russia’s leading oligarchs who have ties to Putin “and other members of the Russian ruling elite.”31 In addition, these agencies must examine within six months of the law’s passing whether or not investing in Russian sovereign bonds and the “full range of derivative products” should be included in a further ban.32.


The economic impact of the Ukraine-related sanctions for the United States is unclear. Some U.S. business representatives, including the Chamber of Commerce and the National Association of Manufacturers, “raised concerns that U.S. sanctions on Russia could disrupt the operations of U.S. firms in Russia.”33 At the same time, Russia, the world’s twelfth-largest economy, accounts for only a small portion of overall U.S. international economic activity, taking “less than 2% of total U.S. merchandise imports, less than 1% of total U.S. merchandise exports, less than 1% of U.S. foreign direct investment (“FDI”), and less than 1% of FDI in the United States.”34

Sanctions present significant implications for private equity funds. While the ability of these funds to invest millions of dollars in long-term portfolio companies is impaired by the sanction rules that are rapidly changing in unpredictable ways, there are also some upsides. Firms that can stay up-to-date regarding the sanctions and the government’s views on policy and enforcement will be able to take advantage of changes in policies and be the first to invest in newly opened markets when sanctions are lifted.35

Under the Act, there is a wide range of penalties available to the President, ranging from revocation of U.S. import-export bank privileges and ineligibility for U.S. export licenses to loss of access to loans from U.S. financial institutions totaling more than $10 million in a twelve-month period. The wide range of penalties combined with the President’s discretion over enforcement raise significant risk and uncertainty for market players. Although these sanctions may only impair business activities in certain sectors and with listed persons, unpredictability of government responses to potential escalations of political conflict in the future imposes a significant risk for investors and may impact investments to the Russian economy as a whole.

  1. Jeremy Herb, Senate sends Russia sanctions to Trump’s desk, CNN (July 27, 2017),

  2. Kenneth Rapoza, Taking A Deeper Look Inside The Senate’s New Anti-Russia Bill, Forbes (June 16, 2017),

  3. Id. 

  4. Id. 

  5. Blocking Property of Certain Persons Contributing to the Situation in Ukraine, 79 FR 13493 

  6. See id. 

  7. 79 FR 15535. 

  8. 79 FR 16169. 

  9. Id. 

  10. Id. 

  11. 31 C.F.R. § 589.201. 

  12. Id. 

  13. Announcement of Treasury Sanctions on Entities Within the Financial Services and Energy Sectors of Russia, Against Arms or Related Material Entities, and those Undermining Ukraine’s Sovereignty, US Dep’t of Treasury (May 8, 2014),

  14. Announcement of Expanded Treasury Sanctions within the Russian Financial Services, Energy and Defense or Related Materiel Sectors, US Dep’t of Treasury (Sep. 12, 2014),

  15. 22 U.S.C.A. § 8924 (West). 

  16. Rebecca M. Nelson, U.S. Sanctions and Russia’s Economy, Cong. Res. Service (Feb. 17, 2017),

  17. Taking Additional Steps to Address the National Emergency with Respect to Significant Malicious Cyber-Enabled Activities, 82 FR 1. 

  18. Rapoza, supra note 2. 

  19. 22 U.S.C.A. § 9511 (West). 

  20. 22 U.S.C.A. § 9523 (West). 

  21. Rapoza, supra note 2. 

  22. Congress Overwhelmingly Passes New Sanctions Against Iran, Russia, and North Korea, Fried Frank at 3 (July 27. 2017),,%20Russia,%20North%20Korea.pdf

  23. 22 U.S.C.A. § 9527 (West). 

  24. Rapoza, supra note 2. 

  25. 22 U.S.C.A. § 9523 (West). 

  26. Id. 

  27. Rapoza, supra note 2. 

  28. 22 U.S.C.A. § 8909 (West). 

  29. 22 U.S.C.A. § 8909 (West). 

  30. Paul Marquardt, Congress Reaches Agreement on New Sanctions against Russia, North Korea, and Iran, Cleary Gottlieb (July 27, 2017),

  31. Rapoza, supra note 2. 

  32. Id

  33. Nelson, supra note 16, at 8. 

  34. Nelson, supra note 16, at 9. 

  35. David Mortlock & Steven Gartner, Economic Sanctions: Risk and Opportunity for Private Equity, Financier Worldwide (Sept. 2016),