On February 18, 2020, OFAC designated Switzerland-based oil broker Rosneft Trading SA (“Rosneft Trading”), a subsidiary of Rosneft Oil Company, as a Specially Designated National (“SDN”) for “operating in the oil sector of the Venezuelan economy,” under Executive Order 13850. The US government had been weighing possible sanctions against Rosneft entities due to their activity in Venezuela for months. A US official stated during a briefing that Rosneft Trading handled more than half of Venezuela’s oil exports and took steps to conceal those shipments, and that this sanctions designation was “a reaction to the growing and increasingly central role of Rosneft in the affairs of Venezuela, particularly in the course of the last year.” Illustrating the policy deliberations that appear to have preceded this designation, a US Department of Energy official stated that this action was viewed as not likely to destabilize global oil markets, which have seen recent price declines.
OFAC also sanctioned Didier Casimiro, Rosneft Trading’s Chairman and President, who a State Department press release notes “also serves as Rosneft’s Vice President for Refining, Petrochemical, Commerce and Logistics.” It is noteworthy that the US government intentionally targeted an officer and director of the Rosneft parent entity. Mr. Casimiro’s profile on Rosneft’s website confirms that he holds that VP position, along with membership on the board of Rosneft and a small number of shares of Rosneft. The Rosneft web page listing other positions held by board members states that Mr. Casimiro “is Chairman of the Board of Directors at PJSC Saratov Oil Refinery, PJSC NC Rosneft – МP Nefteproduct, CJSC Rosneft-Armenia, LLC RNY, Rosneft Trading S.A., LLC «RNCommerce», LLC «RN-Refining», Chairman of the Supervisory Board at PRJSC LINIK, member of the Board of Directors at SLAVNEFT, Slavneft-YANOS PJSC, Rosneft Global Trade S.A., JSC SPIMEX, Rosneft Techno S.A., PJSOC Bashneft, LLC «RNForeign Projects», Nayara Energy Limited.” The designation of Mr. Casimiro, if he continues to hold these senior positions within Rosneft and other organizations, could potentially add compliance complications in doing business with Rosneft or those other organizations, along with the direct and more significant impact of these sanctions actions on Rosneft Trading and Mr. Casimiro himself.
For current business partners of Rosneft Trading, OFAC has issued General License No. 36, which authorizes until May 20, 2020 “all transactions and activities prohibited by” Executive Order 13850 “that are ordinarily incident and necessary to the wind down of transactions involving Rosneft Trading S.A., or any entity in which Rosneft Trading S.A. owns, directly or indirectly, a 50 percent or greater interest.” In addition to the May 20 termination date, this general license does not authorize “[a]ny debit to an account of Rosneft Trading S.A., or any entity in which Rosneft Trading S.A. owns, directly or indirectly, a 50 percent or greater interest, on the books of a U.S. financial institution,” or any other transactions that are prohibited by OFAC.
The pre-existing “SSI List” restrictions on Rosneft Trading remain in place during and after the wind-down period, prohibiting transactions or dealings in its “new debt” of longer than 60 days maturity (under OFAC Directive 2) and restricting the provision of goods, non-financial services, or technology relating to deepwater, Arctic offshore or shale oil projects (under OFAC Directive 4). A new Frequently Asked Question (“FAQ”) from OFAC offers a reminder that “those U.S. persons who are winding down transactions with Rosneft Trading S.A. should ensure all activities comply with any applicable Directive 2 and 4 prohibitions, because General License 36 only authorizes certain activities necessary to the wind down of transactions prohibited by E.O. 13850,” i.e. the full SDN blocking sanctions, and not these pre-existing Directive 2 and Directive 4 restrictions. OFAC notes that Rosneft Oil Company and Rosneft Trading have been subject to these Directive 2 and Directive 4 restrictions since July 2014 and July 2015, respectively.
This is another example of OFAC targeting a subsidiary of a major global company, while clarifying through guidance that the sanctions do not apply to the parent company directly. Elliot Abrams, the US Special Representative for Venezuela, stated today in a State Department briefing that in this case OFAC “went after the operational company.” This same pattern played out with OFAC’s designation (and subsequent partial de-listing, discussed here) of certain subsidiaries of COSCO Shipping Corporation Ltd. The new OFAC FAQs state that these “sanctions apply only to Rosneft Trading S.A., or any entity in which it owns, directly or indirectly, a 50 percent or greater interest. Blocking sanctions do not apply to this entity’s ultimate parent, Open Joint-Stock Company Rosneft Oil Company (Rosneft Oil Company). Similarly, blocking sanctions do not apply to Rosneft Oil Company or other subsidiaries or affiliates, provided that such entities are not owned 50 percent or more in the aggregate by one or more blocked persons or otherwise explicitly designated or identified by OFAC.”
However, today’s action will complicate dealings with the Rosneft parent entity. As noted above, OFAC’s simultaneous designation of Mr. Casimiro will add some compliance challenges in dealing with Rosneft or other organizations with which he is affiliated. In addition, any trades or other business with Rosneft would be prohibited by US sanctions if Rosneft Trading were involved, unless compliant with the wind-down authorization in General License No. 36 and the Directive 2 and Directive 4 restrictions.
Addressing the intended extraterritorial effects of these moves, a US official stated during a briefing that “We’ve seen that the impact of such designations goes far beyond the US-based businesses of these entities.” Elliot Abrams similarly emphasized during his briefing that “I think you will see companies all over the world in the oil sector now move away from dealing with Rosneft Trading.” With respect to other potential sanctions actions relating to Venezuela, he stated that “the two largest customers for Venezuelan oil are India and China, in that order. And we will be having conversations with the customers to advise them of U.S. policy with respect to the export of Venezuelan oil.” Mentioning Spain-based Repsol specifically, Mr. Abrams said “we will have conversations, no doubt, with – more conversations with Spanish officials and with Repsol, and would expect that, as we move forward, some of Repsol’s activities would have to change, and that would be true of other foreign oil companies in Venezuela as well.”
To address the situation of non-US business partners of Rosneft Trading, OFAC stated in the new FAQs that “Non-U.S. persons may wind down transactions with Rosneft Trading S.A. without exposure to sanctions under E.O. 13850, provided that such wind-down activity is: (i) consistent with General License 36; and (ii) completed prior to 12:01 a.m. eastern daylight time, May 20, 2020. Entering into new business involving Rosneft Trading S.A. will not be considered wind-down activity. Non-U.S. persons unable to wind down activities with Rosneft Trading S.A. before 12:01 a.m. eastern daylight time, May 20, 2020, may seek guidance from OFAC.” This statement indicates that any other types of business with Rosneft Trading, including any new business by non-US persons, will create potential US sanctions risk.
How this develops will be shaped in part by how Rosneft Trading (and potentially other Russian organizations including Rosneft itself) recalibrate their business with Venezuela and whether they are able to reach an understanding with the US government that may allow for a decrease in tensions, and potentially the removal of Rosneft Trading and/or Mr. Casimiro from the SDN list. At this point, the outlook is highly uncertain. The Trump administration has made clear that it intends to impose significant pressure on the Maduro regime in Venezuela, and these moves show that some collateral damage may be viewed as acceptable in getting to that goal. Elliot Abrams stated today in his briefing that “there will be more steps and further pressure in the coming weeks and months” on the Maduro regime, and “there will be other sanctions.”