#1Pending#2CONTENTS What's Newest Basic Framework - US/EU/UK.. US Sectoral Sanctions - OFAC ..... 5 .... 16 .19 • US Sectoral Sanctions – BIS - . US Direct Sanctions - SDNS .27 35 US Crimea Sanctions 48 CAATSA / Guidances / Lists 49 • Export Pipeline Sanctions.... ...63 CBW Act Sanctions ..... Proposed Further US Laws.... 66 72 • EU Sectoral Sanctions .74 • EU Crimea Sanctions .... .... 85 . EU Direct Sanctions (SDN-like, etc.) ... UK Sanctions (post-Brexit)... .86 .....87 Russia's Countersanctions.... 89#3Pending#4Pending#5Pending#6Pending#7What's Newest (cont'd) US intelligence community assessment findings released in March re election interference March multi-faceted sanctions packet re Navalny poisoning/imprisonment etc. quite limited effect on business State Dept. overarching 2 March announcement new round of Chemical and Biological Weapons Act (CBW Act) sanctions: ܀ somewhat broadens the coverage scope and tightens exemptions (re exports of national security-sensitive items, etc.) from what was already in place re the earlier Skripal poisoning - see slides 8 and 66-71 including new amendment of Int'l Traffic in Arms Regs. (ITAR) section 126.1 to include Russia in list of countries subject to policy of denial for exports of defense articles and services (with exception in support of gov't, and limited duration exception for commercial space cooperation) CAATSA section 231(e) List of Specified Persons - six more Russian entities (all scientific / research institutes - presumed to be connected with Russia's chemical weapons program) placed on it, such that any person knowingly engaging in a significant transaction with any of them would be subject to sanctions 54 and 57 - see slides E.O. 13382 sanctions (SDN designations) re weapons of mass destruction (WMD): against the FSB and its head Alexander Bortnikov (re the Navalny poisoning), the Main Intelligence Directorate (GRU) and the two GRU officers (re the 2018 Skripal poisoning – though they had already been designated under other authorities), and three of the same institutes that were just targeted also for the section 231 List - see immediately above E.O. 13661 sanctions (SDN designations): against seven senior Russian gov't officials (at Defense Ministry, Presidential Executive Office, FSB (Bortnikov), Prosecutor General, and the Penitentiary Service) - all for actual/presumed oversight involvement in the Navalny poisoning and imprisonment ܀ some of the seven individuals having been sanctioned by the EU and UK in Oct. 2020 and some more by the EU in March 2021 (see slides 86 and 88) and, like EU, no designation of more oligarchs as Navalny had proposed be done And related/follow-on State Dep't 15 April designations release Morgan Lewis 7#8Pending#9What's Newest (cont'd) Most recent Nord Stream 2 ("NS2") gas export pipeline sanctions developments No new sanctions in the fresh April 2021 sanctions packet Biden Admin continues trying to navigate between desire for solidarity with close ally Germany and congressional press (see report) to block NS2 completion The new 15 April EO does include a provision authorizing sanctions against any Russian person/entity involved in "cutting or disrupting gas or energy supplies to Europe, the Caucasus, or Asia" - which could be meant as fresh warning to Gazprom (and perhaps an attempt to mollify congressional anti-NS2 hawks) OFAC's 19 Jan. 2021 SDN designation of the Fortuna (one of the primary vessels involved in NS2 pipelaying in the Baltic Sea) and its Russian owner co. KVT-Rus - and then their designation again in late Feb. 2021 (under both PEESA, and CAATSA section 232 - see slides 10, 55, 63-65) related late Feb. PEESCA-mandated Biden Admin. report to Congress - emphasized / named the several companies known to have stopped participation the project because of sanctions (including a number of global insurers) late Feb. / early March loan funding suspension announcements by two of the five European energy company participants in NS2 - but with the project co. assuring that there is already full funding to complete the work some US Congress pressure on Biden Admin. for further sanctions (including 3 March Senators' letter to President Biden and 5 March House of Reps. letter to Secretary Blinken naming several primary and support vessels (mostly Russia- registered) other than Fortuna - including the long-publicized Admiral Cherskiy - also involved in the NS2 pipelaying) continuing spectrum of NS2 views in EU - incl. some renewed opposition in reaction to the Navalny events, and also some hardening German gov't support per perceived need for more Russian gas to help wean economy from nuclear and coal Apparent resumption of Russian vessels' pipelaying work as of early 2021, and most recent Russian pronouncements that all will be finished before end 2021 Recent continuing speculation and reports on German gov't / Biden Admin. possibly willing and working toward compromise that would allow NS2 to be completed without further sanctions in return for agreement on reliable mechanism to shut it down in event Russia reduces gas flow through Ukraine below agreed level in future (and some possible further deal element) the still-effective termination / sunset provision in the original PEESA/NDAA 2020 would allow for such a deal (see slide 64) Morgan Lewis 9#10What's Newest (cont'd) Tightened late 2020 sanctions aimed at NS2 PEESA / NDAA 2020 of Dec. 2019, and related actions and threats already had real effects on NS2 (see slides 63-65) And then the follow-on "Protecting Europe's Energy Security Clarification Act" (PEESCA): comprising section 1242 (pp. 558-560) of National Defense Authorization Act for 2021 (NDAA 2021) – enacted in Dec. 2020 by Senate override of Trump veto PEESCA clarifies/expands the PEESA / NDAA 2020 anti-NS2 measures adopted in Dec. 2019 (see slide 63) by, among other things, extending the reach to foreign companies that facilitate the sale, lease or provision of (in addition to selling, leasing or providing) NS2 (and TS2) pipe-laying vessels provide necessary or essential underwriting services, insurance, reinsurance for such vessels provide necessary or essential services or facilities for technological upgrades or installation of welding equipment, or retrofitting or tethering of such vessels provide necessary or essential pipeline testing, inspection or certification But there is a stated exception for EU, EU member states, Norway, Switzerland and UK gov'ts, and any gov't entity of any of them that is not operating as a business enterprise and the President may waive sanctions if he finds it is in national interest and submits such finding to Congress and required consultations with EU member states and Norway, Switzerland and UK before imposing any such sanctions These amending provisions were made effective back to NDAA 2020's Dec. 2019 in-force date And the CAATSA sec. 232 related important development: July 2020 State Dep't amendment of Oct. 2017 Guidance (see slide 65) Morgan Lewis 10#11What's Newest (cont'd) Other recent OFAC actions of note 23 Dec. 2020 further general license extensions to 21 July 2021 on dealings with the major automotive co. GAZ Group (a Deripaska asset not yet delisted) - see slide 38 below 18 Feb. 2021 Settlement Agreement (for $507K) with BitPay Inc., a US digital currency payment processing co., for 2000+ violations during 2013-18 of the Crimea (and also Cuba, N. Korea, Sudan and Syria) sanctions programs 5 Jan. 2021 update/slight refinement of FAQ 545-re what is a "significant transaction" in applying CAATSA sec. 228 secondary sanctions provisions (see slides 56-57) 14 Dec. 2020 announcement of new Non-SDN Menu-Based Sanctions (NS-MBS) List - see slide 62 Morgan Lewis 11#12Pending#13Pending#14Pending#15What's Newest (cont'd) Russia Controversial anti-sanctions dispute law - came into effect in June 2020 - Seeks to force into Russian court many disputes involving Russian (and other) sanctioned persons/entities ... whether or not the dispute relates to the sanctions And provides for Russian court to issue anti-suit injunction against proceedings in foreign courts or arbitral tribunals, and to award damages up to amount of damages claimed by foreign party in proceedings abroad See our Lawflash of June 2020; and court practice is developing since then (we can elaborate) See slides 89-93 for other enacted and pending further countermeasures against US/EU sanctions (and Ukraine) - Including draft amendments (re asset blocking, and low 25% control threshold, etc.) to Special Economic Measures Law And newest April 2021 proposed amendments to same law and to Currency Control Law Recent statement by a Russian official urging cut in use of USD - and continued reports of Russian companies (including oil producers) trying to do this, to Euro (or other currencies), for deals having no other US link - see slides 20 and 82 below And some other Russian gov't initiatives directing pension and similar funds away from banks that are under or are supporting anti-Russian sanctions advancing establishment/acceptance of Russian institute certification of Russian-produced oil & gas industry equipment as substitute for US API certification Also, developing Russian court practice and general view that a contract clause allowing termination / escape from liability on account of anti-Russia sanctions may violate public policy / be unenforceable Morgan Lewis 15#16Pending#17Pending#18Pending#19Pending#20US Sectoral Sanctions - OFAC (cont'd) Finance / Capital Markets (cont'd) Per Directive 2 (as amended / effective Nov. 2017, per CAATSA): new debt financing with maturity of >60 days (revised down from >90 days) for these designated entities or their subs (50%-or-more owned), and transactions dealing in such debt • Gazpromneft • Novatek Rosneft Transneft and here again, note the amended SSI Lists issued since 2015 to date - naming / singling out several specific Rosneft, Novatek and Transneft subs – to which the same two above-noted (re Directive 1) coverage caveats apply - Per Directive 3 (still as of 12 Sept. 2014 - not amended): new debt financing, maturity of >30 days, for Russian Technologies (Rostec) or its subs (≥50%-owned), and transactions / dealing in such debt (and see new FAQ 887) and note that Rostec is also a CAATSA section 231 listed defense-industry entity (see slide 54 re the added Rostec- dealings burdens/risks this entails, for US as well as non-US persons) and Rostec subsidiary Rosoboronexport (and its subs) now also SDN per 2018 designation And see related OFAC FAQS FAQ 395 as amended, re permissible / prohibited US persons' activities with regard to L/Cs involving designated companies under Directives 1, 2 and 3 FAQ 419 as amended, re permissible / prohibited payment terms for US persons' sale of goods / provision of services to, and progress payments for long-term projects with, designated companies under Directives 1, 2 and 3 FAQ 371 re corresp. banking - OK only if the underlying transaction is permissible (thus seems stricter than under EU rules) in other words, mere use of USD, without more, could violate - which is main reason why Russian companies, including oil exporters, are trying to move from Euro (or other currencies) as possible for transactions that have no other US link) Also need to consider possible treatment of certain equipment lease contracts as sanctions-prohibited debt financing And note OFAC General License 1B (of Nov. 2017) - Authorizing transactions by US persons (and otherwise within the US) involving derivative products having value linked to underlying asset that is prohibited debt (or equity) under Directives 1-3 (and see related updated FAQ 372) Note (see slides 70-71) that the CBW Act ban on US banks' lending doesn't extend to Directives 1-3 SSI state entities Morgan Lewis 00#21US Sectoral Sanctions - OFAC (cont'd) Energy Directive 4 prohibits (as amended/effective Jan. 2018, per CAATSA) without license The provision, export or reexport, directly or indirectly, of goods, services (except financial services) or technology "in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil" in Russia involving any of these designated entities or their subs (50%-or-more owned) Gazprom • Gazpromneft • Lukoil Rosneft . Surgutneftegaz And keep in mind various SSI List amendments to date - singling out several Rosneft, Gazprom and Surgutneftegaz subs (and again with the same above-noted slide 19 coverage caveats applying) Note also the 2015 BIS special designation of South Kirinsky field (only part of it is deep water)... which hasn't yet been expanded to other such "borderline" fields Morgan Lewis 21#22US Sectoral Sanctions - OFAC (cont'd) - And, per CAATSA section 223 (enacted 2017), the Directive 4 scope was expanded to cover such projects worldwide, where one or more of these five designated Russian cos. has/have a (i) ≥33% ownership interest or (ii) majority of the voting interests but this scope expansion applies only to such outside-Russia projects that are "initiated" after Jan. 2018 which means (per FAQ 536) the date when the host government (or authorized agency etc.) "formally grants exploration, development, or production rights to any party" - thus, should not apply to outside-Russia projects where the Russian company(ies) obtained its/their interest at any time after the relevant gov't grant of rights (but there could be fact/law/interpretation nuances here) note also that, per related FAQ 537, OFAC's "50% rule" - regarding involvement of SSI entity(ies) in such project - will apply to determine whether either of the sanction thresholds (≥33% direct or indirect ownership interests or majority of voting interests) is passed The further proposed DASKA Act, if ever enacted, would further broaden sanctions coverage of oil E&P projects both inside and outside Russia (see slides 8 and 72) Morgan Lewis 22#23US Sectoral Sanctions - OFAC (cont'd) Energy (cont'd) Note OFAC FAQ 413 (and similar BIS) clarification that "deepwater" = over 500 ft. And OFAC FAQ 418 (and similar BIS) Clarification that “shale project" doesn't include E&P through shale to locate or extract oil in reservoirs Also, apparently, not all hard-to-extract = shale (not addressed further in later FAQ updates) And OFAC FAQ 421 - Re "Arctic offshore" = offshore field north of Arctic Circle Including an Oct. 2017 clarification that this bar doesn't cover horizontal drilling operations originating onshore that extend to seabed areas above Arctic Circle And OFAC FAQ 420 - re only production (and not midstream / downstream) activities are covered Morgan Lewis 23#24US Sectoral Sanctions - OFAC (cont'd) Energy (cont'd) For in-Russia projects, the Directive 4 reference to "in Russia or in other maritime area claimed by [Russia] and extending from its territory" - is understood to mean/include Any offshore areas (inland / territorial seas, EEZ or Shelf): this is per a BIS FAQ answer, and analogous explanations under other-country sanctions rules (and is consistent with EU Reg. clarifications) - but see the cautionary note at bottom of slide 39 And Caspian Sea zone claimed by Russia (the similar EU sanction might not cover this?) As well as the Black Sea shelf area extending from Crimea (despite non-recognition by US as being part of Russia) And note the FAQ 414 clarification that this sanction doesn't apply if an otherwise- covered project has the potential to produce only gas - But does apply if potential for both (often not clear; per factual / evidentiary showing) And note that BIS (and likely OFAC too) considers condensate = oil (even though the old ban on export of US crude oil, which gave rise to the equivalence rule, has been lifted) And most Russian gas fields have some condensate (as South Kirinsky does) Morgan Lewis 24#25Pending#26Pending#27US Sectoral Sanctions – BIS Export / Reexport Restrictions - The basic-limited August 2014 initial BIS Russia sanctions / license requirements applying to any Russian end-users/uses - When the exporter knows the items will be used directly or indirectly in exploration for or production of oil or gas in Russian deepwater, Arctic offshore, or shale formations Or is unable to determine whether the item will be used in such projects And presumption of denial when for use in such projects "that have the potential to produce oil" (here again, grey area where could produce both gas and oil) And importantly, as noted above, BIS considers that condensate This August 2014 regulation restricts (requires license for): = oil Only specifically designated ECCN items and also several listed types of drill pipe, casings, wireline, downhole equipment (per Supp. No. 2 to Part 746.5 of the EAR) for all Russian entities when used in Russian deepwater, Arctic offshore, or shale projects Expressly including, but not limited to • drilling rigs • parts for horizontal drilling • drill pipe and casing • software for hydraulic fracturing • • seismic acquisition equipment high pressure pumps • remotely operated vehicles compressors, expanders, valves, risers • • • • drilling and completion equipment subsea processing equipment Arctic-capable marine equipment wireline & down-hole equipment Morgan Lewis • • 27 77#28Pending#29Pending#30Pending#31US Sectoral Sanctions - BIS (cont'd) Export / Reexport Restrictions (cont'd) March 2021 BIS new Entity List designations - 14 Russian, German and Swiss entities (see slide 8) BIS new licensing restrictions on (and waivers re) export / re-export / transfer of national security- sensitive items to Russia (see slides 8 and 66-67) And broader general military end-use / user restrictions for Russia (and other countries) 2020 chronology - Feb. 2020 final rule tightening some Country Group designations - affecting some exports and reexports to Russia (based on missile, nuclear, and chemical & biological weapons proliferation concerns) April 2020 publication of two final rules (effective 29 June 2020) and one proposed rule (also now issued as final rule) targeting national-security-controlled exports and re-exports to Russia, China and Venezuela, as follows elimination of Civil End-Users ("CIV") license exception # the CIV had allowed exports of items controlled for national security reasons to a few countries including Russia, if for civilian end use, per simple confirmation by internal due diligence this benefitted US companies in some high-tech sectors such as semiconductor, sensors, telecom, aircraft, other advanced manufacture but US exporters and enforcement officials have been finding it increasingly difficult to distinguish between military and commercial sectors in destination countries including Russia now exports previously authorized by the CIV exception will require a specific license from BIS, regardless of end use/user (unless another license exception applies) - this presumably affects the civil-use exception recognized under the two rounds of CBW Act sanctions (see slides 66-71) thus US companies may need longer lead time for such sales (and need to evaluate related technology transfer arrangements) Morgan Lewis 31#32Pending#33US Sectoral Sanctions - BIS (cont'd) US Dep't of Justice March 2021 announcement of guilty plea agreement with Russian company and its owner, for their part in conspiracy to evade BIS- administered sanctions against Russia - attempted export of American-made turbine for use in Russian Arctic offshore oil drilling (and see further background news here and here) Another notable important BIS action with regard to Russia 2019 reported opposition to a US company's export to affiliates of United Aircraft Corp. (owned by Rostec) of high-tech composite material needed for new-generation Russian passenger liner MS-21 and reported related US pressure on Japanese producer of same material; this sparked Russian gov't support development of local substitute (see report) - reportedly now being certified, production kick-off anticipated for 2022 See BIS 2015 Guidance on Due Diligence to Prevent Unauthorized Transshipment / Reexport of Controlled Items to Russia Expresses BIS concern "about efforts by front companies and other intermediaries who are not the true final end users..." Special focus on third-country freight forwarders and other dubious parties listed as an export item's final destination See also OFAC May 2020 Guidance to Address Illicit Shipping and Sanctions Evasion Practices Morgan Lewis 33#34Pending#35US Direct Sanctions - SDNS Specially Designated Nationals (SDN) List Intro / Basics Based on EOS 13660 and 13661 of March 2014, 14024 of 15 April 2021, etc. These are the US "direct" sanctions (as opposed to the SSI "sectoral" sanctions) - All US persons' dealings with - including payments to or receipt of goods / services from - individuals or company SDNS (and subsidiaries) are generally prohibited, and US persons must block their assets Absent applicable general or specific license from OFAC (see slides 40 and 46 below) Possible further penalties - essentially same as above for other OFAC (and BIS) sanctions violations Plus risk of application of CAATSA-based secondary sanctions - see slides 49-62 below Against non-US companies/ individuals that initiate or continue dealings with designated SDNs ("for knowingly facilitating significant transactions for or on behalf of" them - per OFAC April 2018 release) See also OFAC FAQS 574, 579, 580, 589, 590 and 627 - and see generally slides 60-61 below Note: there have been some CAATSA-based SDN designations to date (including Russian companies and individuals in the cyber sector) SDN Individuals Some industry executives / oligarchs have been on OFAC's SDN list since 2014 (and then expanded further in 2015-20) - most notably Initially Messrs. Sechin, Timchenko, Rotenberg - and then Technopromexport's CEO (per the Siemens turbines scandal of 2017); and another Kremlin insider Yevgeniy Prigozhin in 2016 April 2018 dramatic expansion: including Messrs. Deripaska (control of RUSAL, En+, Basic Element, GAZ Group, etc.), Vekselberg (controls Renova, etc.), Miller (Gazprom CEO), Kostin (VTB CEO), Bogdanov (Surgutneftegaz CEO) and Kerimov These designations followed the US Treasury Dept. CAATSA sec. 241 Report to Congress listing many of Russia's senior political figures, oligarchs, and "parastatal entities" (see slides 58-59) And in Feb. 2020 Didier Casimiro, CEO of simultaneously SDN-designated Rosneft Trading S.A. (and he's now a Rosneft SVP), under Venezuela sanctions Some fear in early 2021 of further leading oligarch designations in connection with Navalny events, but hasn't happened yet (though could still) - see slides 7 and 73 Morgan Lewis 35#36Pending#37Pending#38Pending#39Pending#40Pending#41Pending#42Pending#43Pending#44US Direct Sanctions - SDNS (cont'd) Note: State Dep't Oct. 2017 CAATSA section 231(e) listing of Russian defense / intelligence sector entities (see slide 54) - supplemented with 45 more individuals and entities in late 2018 (see below), and 6 more in early March 2021 (see slide 7) This is the List of Specified Persons ("LSP"): doesn't itself impose SDN (or any other sanctions) on them But many were already SDNS and some were SSIS (including Rosoboronexport - now is both), and there is likely chilling effect in practice on US / other companies' willingness to do business with them (see linked list of them at slide 51), and other companies risk having some SDN-like sanctions imposed on themselves under CAATSA section 235 for some kinds of "significant transactions" with them (see State Dep't announcement (slide 51), and slides 54 and 57) See further discussion on this at slides 54, 56-57 and 60 below And SDN designations of Sept. 2018 – per CAATSA section 231 (defense/intelligence-related) Against EDD (Equipment Development Dep't), a weapons-purchasing entity of the Chinese military - for taking delivery of advanced aircraft and missiles from Rosoboronexport of Russia, which is on the CAATSA section 231 List of Specified Person (LSP), and is also an SDN (see slide 54 below) and EDD's director these were the first-ever SDN designations under CAATSA section 231 (for significant transactions with the Russian defense or intelligence sectors) announced by State Dep't (which also set out the specific sanctions chosen and being applied) - and also corresponding OFAC SDN designations announcement of Sept. 2018 See also new Turkey sanctions mandate in NDAA 2021 (section 1241) - for purchase of Russian S-400 air- defense missile system - including statutory finding that this was a "significant transaction" per CAATSA section 231 (see next slide and slide 57) Morgan Lewis 44#45Pending#46Pending#47Pending#48Pending#49Pending#50Pending#51Pending#52Pending#53CAATSA / Guidances / Lists (cont'd) - CAATSA: requires the President to impose sanctions - from a few menus of possibilities, mostly involving penalties re business with/in the US - in various contexts (upon findings, and with some carve-outs/waiver possibilities - in other words, de facto discretion) including against: per CAATSA section 224 - US or non-US persons that knowingly engage in significant activities undermining cyber-security on behalf of the Russian gov't, materially assist, sponsor, or provide support for, or provide financial services in support of same (no general State or OFAC Guidance yet on this provision - but there has been some application... see slides 42 and 45) per CAATSA section 225 (and see the Oct. 2017 State Dep't Guidance), non-US companies and individuals that knowingly make significant investment in deepwater, Arctic offshore or shale oil projects in Russia (as written, could be whether or not one of the Directive 4 Russian cos. is involved - and the State Dept. Guidance doesn't clarify) per CAATSA section 226 (and see the Oct. 2017 OFAC Guidance), Russian and other foreign financial institutions ("FFIS") that knowingly engage in / facilitate "significant" transactions involving any of the Directive 4-type oil projects in Russia, certain defense-related activities, or Gazprom's withholding of gas supplies per CAATSA section 228 (and see the Oct. 2017 OFAC Guidance), non-US companies and individuals that knowingly - this being the broadest/most worrisome CAATSA provision # materially violate, attempt or conspire to violate or cause a violation of any Russia sanction facilitate "significant transactions" (including "deceptive or structured transactions") for or on behalf of any person that is subject to any Russia sanction - or child, spouse, parent or sibling of same though the related OFAC Guidance does go some way to calm fears of over-expansive application with respect to SSI sanctioned entities (see slides 60-61 below for details) but note also the section 225 stiffened requirement to impose sanctions on any FFI that knowingly facilitates a significant financial transaction for any SDN Morgan Lewis 53#54CAATSA / Guidances / Lists (cont'd) per CAATSA section 231 (and see Oct. 2017 State Dep't List and Guidance), US or non-US companies and individuals that knowingly engage in a significant transaction with a Russian defense intelligence sector entity on the List of Specified Persons see the List, expanded as of 2 March 2021 (see slides 42-44 above) - and again note that a company's appearance on it doesn't itself mean any new sanction against it ... (but some were already SDNs or SSIS e.g., Rosoboronexport, which was on the list, has since been made an SDN) these include some defense-sector companies that also have important civilian-oriented production (e.g. Sukhoi, Tupolev, and holding companies United Aircraft, United Shipbuilding) but the State Dep't Guidance (in FAQ) stresses that: ✓ for now at least, purely civilian end-use / end-user transactions, and not involving intelligence sector, are not likely to be considered "significant" and that transactions with the FSB (which is also on the List) are unlikely to be considered "significant" if necessary to comply with FSB rules or law enforcement/ admin. actions / investigations involving FSB re import / distribution / use of IT products in Russia and payment of related processing fees to FSB (i.e., this dovetails with OFAC General License No. 1 of Feb. 2017 - see slide 46 above) and from another State Dep't release of Sept. 2018 it appears that only the actual listed companies and not necessarily their subsidiaries are covered (at least not yet) per CAATSA section 233 (and see Oct. 2017 OFAC Guidance), US or non-US cos. and individuals that with actual knowledge make or facilitate investments into privatization of Russian state-owned companies (of $10M, or combination $1M+ bites for $10M total in a year) where the process "unjustly benefits" RFG officials or their close associates / family (this is also one of the CAATSA sections covered in further Sept. 2018 EO - see slide 59) Morgan Lewis 54 4#55CAATSA / Guidances / Lists (cont'd) Per CAATSA section 232 (and see Oct. 2017 State Dep't Guidance as updated/stiffened July 2020- detail and link at slide 65), creating discretionary power for the President, in coordination with US allies, to impose various possible sanctions on US or non-US cos. or individuals that knowingly invest or are otherwise involved substantially in construction (or modernization, repair) of energy export pipelines by Russia - e.g., Nord Stream 2 - namely: make an investment that directly and significantly contributes to the enhancement of Russia's ability to construct energy export pipelines, or sell, lease or provide to Russia, for such construction purpose, goods, services, technology, information or support that could directly and significantly facilitate the maintenance or expansion of construction, modernization or repair of Russian energy export pipelines if any of the above has fair market value of >$1 million, or an aggregate fair market value of >$5 million during any 12-month period there are some remaining softening points re CAATSA section 232 in the State Dep't Guidance clarification (despite the July 2020 update having closed the general grandfathering provision that had seemed to exempt Nord Stream 2) - namely: covers only energy export pipelines that originate in Russia, and not those originating outside and transiting through Russia - thus, safe harbor for the CPC pipeline and would not target investments / activities related to standard repair / maintenance of pipelines already in commercial operation as of 2 August 2017 AND see slides 10 and 63-65 re the Dec. 2019 additional PEESA/NDAA 2020 sanctions and now PEESCA/NDAA 2021 further tightening aimed directly against Nord Stream 2 and newest 2021 Fortuna (pipelaying vessels) and KVT (owner) SDN designations Morgan Lewis 55 55#56Pending#57Pending#58Pending#59Pending#60CAATSA / Guidances / Lists (cont'd) Some further CAATSA interpretative / application points Important issue: whether all any of these tightened and new anti-Russia secondary sanctions may be imposed against Russian as well as other non-US companies / individuals by the technical CAATSA wording, yes - though such imposition against "target-country" persons isn't traditional in US sanctions practice and the fact of only CAATSA section 226 (amending UFSA section 5) being expressly aimed at "Russian and other foreign financial institutions" (emphasis added) might be taken as another sign that otherwise Russian entities/individuals are not intended to be caught - i.e., that they are and can continue to be more easily targeted by existing/future primary sanctions as SDNS or SSIS but in fact in 2018 a number of Russian companies and individuals have been SDN-designated for cyber-related activities under CAATSA section 224 (and some Russian companies/ individuals already put on the section 231 LSP List, and others, might be vulnerable to same) and Fortuna/KVT designations (per CAATSA sec. 232 and PEESA) in early 2021 - see slide 9 In any event, here again, the mere possibility / threat of such application against otherwise non- sanctioned or at least non-SDN Russian companies / banks now makes some of them pause before doing possible sanctions-targeted business with sanctioned or possibly sanctioned Russian companies (especially with SDNs) under any of the CAATSA provisions And non-Russian companies / banks certainly have become more cautious about doing any such business with Russian cos. (whether sanction targets or not) in general... all the more so with the April 2018 SDN designations (core-economy oligarchs / their companies) and some newer US actions Morgan Lewis 60#61Pending#62Pending#63Pending#64Pending#65Export Pipeline Sanctions (cont'd) And State Dep't Oct. 2020 guidance on PEESA (prior to Dec. 2020 PEESCA / NDAA 2021 enactment) Clarifying that knowingly providing vessels for construction of such project "may cover foreign firms or persons who provide certain services or goods that are necessary or essential to the provision of operation of a [pipelaying vessel]" Including "providing services or facilities for upgrades or installation of equipment for those vessels, or funding for upgrades or installation of equipment for those vessels" And see The closely related CAATSA section 232 (slide 55), and The July 2020 updated / stiffened State Dep't guidance thereon removed key grandfathering carve-out for pipeline projects (such as NS2) that were underway upon CAATSA's August 2017 enactment also removed the carve-out for investments and loan agreements made before August 2017 - thus evidently exposing anew the participating European energy companies and other "finance partners" to risk of section 232 sanctions but accompanying State Dep't FAQs somewhat softened this aggressive new stance - by indicating that pre- July 2020 participation as such would not be targeted (see FAQS 3-5) the FAQs also stress intended CAATSA 232 application to proposed TurkStream second line (TS2) All the above taken together (plus direct threat letters by senator Cruz of Dec. 2019 and August 2020) already had real effects on NS2 very much so - the undersea pipe-laying for which wasn't quite complete: the contractor Allseas immediately suspended pipe-laying and then announced that it would not resume work and another direct threat letter of 5 August 2020 from Senator Cruz and two others to executives of the German port that has been serving as staging area for completion of NS2 (which triggered considerable backlash in Germany) then the further tightening US sanctions (by law and executive guidances) and related threats through 2020 and into early 2021 continued to scare off non-Russian supporting participation (by insurers and then DNV-GL, the leading Norway-based certification agency) – thus causing further/ongoing delay Morgan Lewis 65#66Pending#67CBW Act Sanctions (cont'd) And some of the waivers to restrictions on arms sales and commerce NS-sensitive items that were supplemented in connection with the first round CBW Act sanctions in August 2018 will continue, including: items eligible for some standard license exceptions (need to carefully check the details) - i.e., no license application needed safety-of-flight items (for civil passenger aviation) - case-by-case licensing still OK "deemed exports/reexports" to Russian nationals in the US – licensing permitted on case-by-case basis unless otherwise prohibited to wholly-owned US (and other foreign-company) subsidiaries in Russia on same basis in support of government space cooperation - on same basis for state-owned/-funded enterprises - case-by-case licensing, but presumption of denial (not clear) But other export-related waivers from 2018 are now removed, including items that were subject to some other standard license exceptions (again, need to carefully check the details) for export/reexport of NS items to commercial end-users in Russia for civil end-uses (such applications will now be reviewed under "presumption of denial") for exports of US Munitions List items and NS items in support of commercial space flight activities are to be removed following a six-month transition period (after which, subject to presumption of denial) Morgan Lewis 40 67#68Pending#69Pending#70Pending#71CBW Act Sanctions (cont'd) OFAC CBW Act Directive of 2 August 2019 - provides definitions/details on the US bank lending sanctions, confirming that: foreign branches of US banks, as well as US branches and subs of foreign banks, are covered gives further wide definition of US "bank" - including depositories, securities/options brokers and dealers, forward contract and foreign exchange merchants, securities and commodities exchanges, investment companies, and employee benefit plans confirms that "Russian sovereign" means any Russian ministry, agency or sovereign fund (including Central Bank, National Wealth Fund, Ministry of Finance) - but does not include Russian state-owned enterprises (though again, keep in mind OFAC SSI Directives 1 and 2) and now see also OFAC Directive 1 of 15 April 2021 (related "US financial institutions" broad definition) and new OFAC FAQ 891 (narrow scope of covered Russian sovereign instrumentalities) State Dep't Notice in 26 August 2019 Fed. Reg. memorialized the new CBW-related export control sanction, but also incorporated and appeared to somewhat expand/adjust the first-round export control sanction (slides 66-69) so special caution is needed with regard to any possibly sensitive exports/reexports to Russia (and all the more so per newest Commerce/BIS rules - see generally slides 12, 27-34) Note also the risk of imposition of secondary sanctions on non-US persons under CAATSA (see slides 49-62) for certain violations of the CBW Act sanctions - - The CBW Act (and the EO triggering this second round) isn't among the sanctions acts specifically covered under CAATSA (see its section 222(a)) But CAATSA sec. 228 catches anyone who "facilitates a significant transaction" for or on behalf of "any person subject to [US] sanctions..." (i.e., could mean any sanctions); and would now be caught under EO 14024 of 15 April 2021 in any event Morgan Lewis 71#72Proposed Further US Laws See slide 8 for newest proposed additional sanctions law as of early 2021 DASKA Act (DASKAA) Dec. 2019 amended draft approved by Senate Foreign Relations Committee; and Senate sponsors' 18 Dec. 2019 statement, and State Dept's 17 Dec. 2019 letter stating Administration's opposing views As of fall 2020 some renewed focus on possibly moving it forward to enactment - though nothing more on this yet in 2021 Would amend/enlarge CAATSA in various ways (incl. enlarging scope of possible secondary sanctions - applicable to non-US persons) ... including mandating sanctions against: Russian malicious cyber activities; shipbuilding industry; individuals and parastatal entities thought to be close to President Putin (and their family members, and financial institutions engaging in significant transactions with them) a wide range of Russian domestic energy projects, and global energy projects involving certain Russian companies, including making investments in LNG "export facility located outside of [Russia]" (with low $ thresholds) making investments in energy project (unclear meaning) outside Russia that also has involvement by a Russian parastatal or state-owned/controlled company (where total value of project is >$250 million) that sell, lease, provide to Russia goods, services, technology, financing or support that could directly/significantly contribute to Russia's ability to develop/produce crude oil resources in Russia (including with respect to associated infrastructure) excludes maintenance of existing projects USG to issue guidance as to (i) scope/application of the exception, and (ii) listing specific covered goods, services, technology, financing, support US persons' dealing in Russian sovereign debt (this would expand the current limited CBW Act ban re Russia's sovereign debt - see slide 70) Menu of possible sanctions is from existing CAATSA (mainly re commerce in/with US) Morgan Lewis 72#73Pending#74Pending#75Pending#76EU Sectoral Sanctions (cont'd) Energy (cont'd) But authorization shall not be granted for supply etc. of Annex II items if reasonable grounds to determine that is for Russian oil (incl. condensate?) E&P projects: ܀ in waters deeper than 150 meters (circa 492 feet) in offshore areas north of the Arctic Circle in shale formations by way of hydraulic fracturing (but not including E&P activities through shale formations to locate/extract oil from non-shale reservoirs) except for execution of obligation arising from contract concluded before 1 Aug. 2014 - or, per Dec. 2014 liberalization, from "ancillary contracts necessary for the execution of such contracts", or items necessary in case of certain events threatening health, safety or environment in fact, there have been many such license applications / approvals since 2014 to date (for European and US companies, and EU subsidiaries / JVs of Russian energy companies) and further note - EU has not followed US CAATSA / OFAC Directive 4 expansion of coverage to any such project worldwide having ≥33% ownership or >50% voting interest by designated Russian company(ies) Morgan Lewis 76#77EU Sectoral Sanctions (cont'd) Energy (cont'd) Restricted activities include (per Reg. art. 3a, as amended Dec. 2014): Provision, directly or indirectly, of specified types of "associated services necessary for" deepwater, Arctic offshore, shale oil E&P projects (same litany-detail as for art. 3 - see slide 75 above) in Russia including in its EEZ and Continental Shelf (again note uncertainty re Russia's Caspian zone): these specified types of services: . drilling • completion services • well testing • logging • supply of specialised floating vessels* [* Note: EU Guidance Note FAQ 10 exempts "supply vessels such as platform supply vessels, anchor handling tug and supply vessels or emergency response vessels"] and the same exceptions apply for execution of an obligation arising from a prior (pre-12 Sept. 2014) contract / agreement or follow-on ancillary contracts, or services necessary in case of certain events threatening health, safety or environment again, otherwise apparently no scope for authorization here - rather, a pure prohibition for / to all (if neither of the above two carve-outs applies) but may be attainable for activities (per Reg. arts 3 or 3a) in shallow-water portion of mixed shallow/deep water field? Morgan Lewis 77#78Pending#79Pending#80Pending#81Pending#82EU Sectoral Sanctions (cont'd) Loans - for Energy (and Military) Companies and Banks (cont'd) Certain carve-outs provided (per Reg. art. 5.3, amended as of Dec. 2014) Trade finance exemption: for "loans or credit having a specific / documented objective to provide financing for non-prohibited imports or exports of goods and non-financial services between the [EU] and any third State" (intended for use by targeted entity) But not for purpose of funding any such entity (see art. 12) Practical approach to the interplay here: compliant vs. circumvention? (see Reg. art. 12) And see EU Guidance Note FAQ 11: this exception "should be interpreted narrowly" (but also FAQS 11-21 clarifications) And note these further EU Guidance Note FAQ clarifications Post-Sept. 2014 cancellation of a pre-Sept. 2014 loan = prohibited new loan (FAQ 25) A new term deposit at a targeted bank isn't barred (but see FAQ 27 re circumvention) Correspondent banking (or other payment / settlement services) is in itself # making or being part of arrangement to make new loan or credit (FAQ 28, and see FAQs 1 and 2) - contrast this with the US/OFAC position, see slide 20 Payment terms/delayed payment for goods / services per se prohibited loan/credit - but warning that may suggest circumvention if (per FAQ'30) "not in line with normal business practice", or "have been substantially extended" since 12 Sept. 2014 Some forms of prepayment finance for Russian oil producers are permissible (and occurring daily) Note the Feb. 2020 UK Office of Financial Sanctions Implementation announcement of penalty against a major UK-based bank for making several loans to then-Sberbank-sub. Denizbank of Turkey in violation of Reg. article 5.3 Morgan Lewis 82#83Pending#84Pending#85Pending#86Pending#87Pending#88UK Sanctions (post-Brexit) (cont'd) New Russia sanctions Guidance of June 2020 - updating original May 2019 guidance, and now with FAQS The FAQS reflect the same points as those comprising the EU Guidance Note last amended 2017 (see slide 18 above), but not as complete coverage With these notable differences banks "payment and settlement services" (i.e., corresponding banking) are construed as "making" or "being part of an arrangement to make" a new loan or credit to a targeted entity (compare UK FAQ 6 with EU FAQ 28) - thus aligning UK's position with the US position (see OFAC FAQ 371) the EU Regulation loan and trade finance sanction exceptions for EU subsidiaries/ trade with the EU are narrowed to UK subsidiaries/trade with the UK - which will require extra care, not to violate either rule in applicable cases Sept. 2020 amended Notice and annexed list of blacklisted persons per EU Council Reg. 269/2014 (see slide 86) Also noteworthy I UK gov't Nov.-Dec. 2020 exchange of letters (inquiry and response) clarifying UK sanctions policy post-Brexit "The Global Human Rights Sanctions Regulations 2020" of July 2020, imposing SDN-like blocking sanctions on initial list of several Russian (and Saudi, Myanmar and North Korean) officials alleged to be involved in gross human rights violations Implementation of Oct. 2020 sanctions against six Russian officials and a chemistry institute for the Navalny poisoning previously enforced under the EU's chemical weapons sanctions regime (see slide 14 above) No newest further 2021 human rights designations yet akin to the US/EU ones re Navalny imprisonment etc., but may come Gov't initiative to crack down on Russian oligarchs' "money laundering" ... with reported further attention to this in Jan. 2021 Morgan Lewis 88#89Pending#90Pending#91Pending#92Pending#93Russia's Countersanctions (cont'd) • Foreign blocking statutes (such as Russia is in process of developing / implementing) and US law practice: What would be OFAC's (or a US court's) reaction, if Russia's blocking legislation is enacted in some form, and a company (US, European, Russian, etc.) acts in a way that violates a US sanction (e.g., deals with an SDN individual or entity) on account of the new Russian-law mandate not to reject such dealings? This is a complex subject in itself, which can't be quickly summarized; suffice it to say here that OFAC might take such claimed foreign-law mandate into account as one mitigating factor in an enforcement proceeding, but will not be controlled by it the leading US court decision in the United States v. Brodie case on this subject to date - essentially rejected such a defense raised by a US company (involving in part an earlier version of the EU Blocking Statute - see also slide 61) - Morgan Lewis 93 333#94Pending#95Pending