Today is the effective date of the expanded sanctions set out in Directive 4 under the U.S. Russia sanctions program, as amended by the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC) on October 31, 2017.  The amendment implemented Section 223 of the Countering America’s Adversaries Through Sanctions Act (CAATSA), signed into law by President Trump last August.  See our previous advisory.

As previously explained, the expanded Directive 4 prohibits U.S. persons from providing goods, services (except financial services), or technology in support of any project worldwide for exploration or production of oil from deepwater, Arctic offshore, or shale in which certain designated Russian entities or their subsidiaries own a 33% or greater ownership interest, or a majority of the voting interests.  OFAC has issued FAQ guidance regarding how to calculate ownership interest where a designated entity owns an indirect ownership stake in a project.

The new restrictions are applicable to projects “initiated” on or after today, January 29.  OFAC has provided guidance regarding when a project is “initiated” for purposes of Directive 4:

For purposes of subsection 2 of Directive 4, a project is “initiated” when a government or any of its political subdivisions, agencies, or instrumentalities (including any entity owned or controlled directly or indirectly by any of the foregoing) formally grants exploration, development, or production rights to any party.

The restrictions set out in Directive 4 prior to the October 2017 amendment, which focused only on projects in Russia, remain in effect.  There is a nuance to those restrictions, set out in subsection 1 of the directive, that is notable.  Subsection 1 prohibits U.S. persons from providing goods, services (except financial services), or technology in support of projects in Russia for exploration or production of oil from deepwater, Arctic offshore, or shale that “involve” designated Russian entities or their subsidiaries.  Note the distinction between this restriction and that of subsection 2, which targets all such projects worldwide:

  • Subsection 1, targeting exploration or production in Russia, applies to projects that “involve” designated entities or their subsidiaries– with the term “involve” being potentially rather broad, and open to interpretation.
  • Subsection 2, targeting exploration or production worldwide, applies to projects where a designated entity or its subsidiary owns a 33% or greater interest, or a majority of the voting interests.  This is more straightforward, and arguably narrower than subsection 1.

The main takeaway is that while both restrictions are significant, projects in Russia are particularly risky.