On September 12, 2014, the Treasury Department's Office of Foreign Assets Control (OFAC) announced that it is extending targeted financial sanctions to Russia's largest bank, deepening existing sanctions on certain Russian financial institutions, expanding sanctions in Russia's energy sector, and increasing the number of sanctioned Russian entities in the energy and defense sectors. The Commerce Department's Bureau of Industry and Security (BIS) also announced plans to impose new export control restrictions on several Russian companies in the energy and defense sectors.

The newly announced sanctions are made pursuant to Executive Order 13661 Blocking Property of Additional Persons Contributing to the Situation in Ukraine (March 17, 2014) (Executive Order 13661) and Executive Order 13662 Blocking Property of Additional Persons Contributing to the Situation in Ukraine (March 20, 2014) (Executive Order 13662).

These tighter sanctions are in response to continued efforts by Russia to destabilize Ukraine. The European Union imposed similar sanctions. For information on the genesis of the Ukraine crisis, see Article, The Crisis in Ukraine: Lessons for Investors.

In July 2014, the US banned the export, reexport or transfer of certain oil technology to Russia (see Legal Update, US Imposes Stronger Sanctions on the Russian Energy Sector). Under the new sanctions, US persons are prohibited from exporting goods, services (not including financial services), or technology in support of the exploration or production for Russian deepwater, Arctic offshore, or shale projects that have the potential to produce oil. These restrictions apply to five Russian energy companies:

These sanctions are significantly broader than the July 2014 sanctions because they ban US companies from providing key services to these Russian companies, including geological services, management services and drilling services.

US persons have until September 26, 2014 to wind down applicable transactions with these entities pursuant to a general license issued by OFAC. For more information, see Directive 4.

These entities will also added to BIS's Entity List. Designation on this list imposes a license requirement for the export, reexport or foreign transfer of items subject to the Export Administration Regulations (EAR) to the designated entities, with a presumption of denial.

The new OFAC sanctions also prohibit US persons from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity to two more energy companies, Gazpromneft and AK Transneft OAO (see Directive 2). These restrictions already apply to OAO Novatek and Rosneft (see Legal Updates, US Imposes Stronger Sanctions on the Russian Energy Sector and Updated: Department of Treasury Further Expands Sanctions Against Russia).

Under previously announced sanctions, US persons were prohibited from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity to certain Russian financial institutions, including the Bank of Moscow, Gazprom Bank OAO and VTB Bank OAO. These sanctions have been tightened by reducing the maturity of the permitted debt from 90 to 30 days. These restrictions now also apply to Russia's largest bank, Sberbank of Russia (see Directive 1).

The new OFAC sanctions:

These entities will also added to BIS's Entity List.

The new restrictions on the Russian energy sector will have a significant impact on the Russian energy companies and, potentially, on US energy companies with interests in Russia. As a result of these sanctions, Russian companies have lost access to key fracking, horizontal and deepwater drilling technology and expertise that are needed to exploit Russia's oil reserves. Russia will need to look to other markets for this technology and expertise, which will be difficult given the dominance of US and EU companies.

In addition, Western companies, which have been heavily involved in the Russian energy sector, may need to cease a lot of their activities and reexamine their investments in the region. For example, ExxonMobil has a joint venture with Rosneft to explore Russia's Arctic, which began drilling activities in August. While these restrictions do not prohibit ExxonMobil or other Western companies from owning equity in energy companies, they may limit their contributions to these entities. Without access to Western technology and expertise, many market observers predict that exploration of Russia's Arctic will come to an abrupt stop.

The new sanctions will make it more difficult for major Russian companies to secure financing in the US and EU credit markets.