US Bans Russian Oil Imports, Restricts Investment in Russian Energy Sector | Skadden, Arps, Slate, Meagher & Flom LLP
On March 8, 2022, President Joe Biden released Executive Order (EO) 14066which prohibits the import of oil, gas and other Russian energy products into the United States and imposes sweeping bans on new US investment in the Russian energy sector, as well as the facilitation of such transactions by foreign persons.1 It is the latest in a series of actions taken by the Biden administration in response to the Russian invasion of Ukraine and follows recent efforts by the US Congress to legislate an import ban. U.S. businesses and individuals — particularly those investing in energy companies, participating in energy projects with Russian partners, or financing such ventures — should carefully consider the impact of these measures on their business and ensure that they are in compliance.
Executive Order Overview
The EO prohibits three categories of activities:
- The importation into the United States of Russian crude oil; oil; petroleum fuels, oils and products of their distillation; liquefied natural gas; coal; and coal products (the import ban);
- “New investment” by US persons in the Russian energy sector (the investment ban); and
- Any approval, financing, facilitation or guarantee by a US person of transactions by foreign persons that would be prohibited by the EA if carried out by a US person or inside the United States (prohibition of facilitation).
We address each element below.
Import ban
Import bans are rarely used except in the context of more comprehensive economic sanctions. The US government generally relies on generally applicable tariffs and quotas to regulate oil imports, such as the quota system implemented under the now defunct Mandatory Oil Import Program.2
Both UK and EU have taken steps to drastically reduce their imports of petroleum and petroleum products from Russia by the end of 2022.
The import ban only applies to products of Russian origin. In its FAQ, the US Treasury Department’s Office of Foreign Assets Control (OFAC) clarified that goods subject to EO are deemed to be “of Russian Federation origin” if they are “produced , manufactured, mined or processed in Russia.” Goods that are mined outside of Russia and simply transit through or exit Russia will not be considered to be of Russian origin.
OFAC explained that the goods are no longer of Russian origin if they have been incorporated or “substantially transformed” into a product produced abroad. The OFAC FAQ does not offer a definition of “substantially transformed”. In trade law, however, “substantial transformation” generally refers to a method of determining country of origin when a product originating in a country undergoes a fundamental change (normally as a result of processing or workmanship) of shape, appearance, nature or character in another country, which considerably increases the value of the good.
OFAC has provided a limited exemption from the import prohibition based on written agreements entered into prior to the signing of the EO. General License (GL) 16, which was issued the same day as the EO, authorizes transactions that are “ordinarily incidental and necessary to the importation of” covered products under written contracts dated before March 8, 2022. The authorization in GL 16 only applies until 12:01 a.m. Eastern Daylight Time on April 22, 2022. Import activities that occur after this time—even under pre-EO contracts—would be subject to the prohibited, unless the general license is extended or the activities are otherwise authorized by OFAC. OFAC has clarified in its FAQ that it may issue specific licenses on a case-by-case basis for shipments made after April 22, 2022. OFAC’s FAQ also states that the OE does not prohibit U.S. persons from Engage in transactions to sell or redirect to other jurisdictions shipments of Covered Products that were previously destined for the United States.
New investment ban
The OE also prohibits any new US investment in the Russian energy sector. As the The Biden administration explainedthe measure is intended to ensure that American companies and American investors do not “support Putin’s efforts to develop energy production inside Russia”.
Under the investment ban, ‘persons of the United States’, wherever located, are prohibited from making ‘new investments’ in the ‘energy sector of the Russian Federation’ . As is standard in most sanctions programs, the OE defines “US person” as any US citizen, lawful permanent resident, or entity organized under the laws of the United States or any jurisdiction in the States. United States (including foreign branches), or anyone in the United States3
The IB does not define the term “investment”. But in its FAQ, OFAC explained that a “new investment in the energy sector of the Russian Federation” is “a transaction that constitutes a commitment or contribution of funds or other assets for, or a loan or other extension of credit to new energies”. sector activities (excluding maintenance or repair) located or occurring in the Russian Federation on or after March 8, 2022. In other words, the investment ban applies to U.S. investments in stocks, debt, or other financial arrangements involving “new energy sector activities” in Russia from March 8, 2022. .
OFAC’s FAQ interprets “loans or extensions of credit” broadly to include, but are not limited to, overdrafts, currency swaps, loan purchases made by another person, and drawdowns on existing lines of credit. . Note that Russia linked GL 8A issued on April 15, 2021, remains valid until June 24, 2022 and allows certain “energy-related” transactions involving specified Russian financial institutions, but does not allow transactions specifically prohibited by the new EO
Finally, the IB does not define the term “energy sector”. But OFAC clarified in its FAQ that this term extends beyond the products covered by the import ban to include the development, generation, production, transmission or exchange of electricity, for all means, including renewable energies. Specifically, OFAC explained that the investment prohibition applies to “new energy industry activities” excluding maintenance and repair activities, and that for the purposes of EO , the “energy sector” includes:
supply, exploration, extraction, drilling, mining, harvesting, production, refinement, liquefaction, gasification, regasification, conversion, enrichment, manufacture or transportation petroleum, natural gas, liquefied natural gas, natural gas liquids or petroleum products or other products capable of producing energy, such as coal or wood or agricultural products used to make biofuels, development, production, generation, transmission or exchange of energy, by any means, including nuclear, electric, thermal and renewable.
We recommend that investors carefully review all such investments on a case-by-case basis with legal counsel.4
Facilitation ban
The EO also prohibits “any approval, financing, facilitation or guarantee” by a U.S. person of a transaction by a foreign person where such transaction would be prohibited under the EO if conducted by a U.S. person or in the United States. United.5 Although OFAC’s FAQ for EO does not define the term “facilitation”, OFAC has used the concept of facilitation in several other sanctions programs, which may be instructive here. Under these programs, activities that may constitute prohibited facilitation include, but are not limited to, approving, assisting, supporting, or participating in business planning or decision-making.6
Thus, consistent with other sanctions programs, U.S. persons – whether individuals or corporations – will need to carefully assess their involvement, however indirect, in transactions by foreign persons prohibited by the EO. .
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1 EO Section 1(a).
2 24 Fed. Reg. 1781, 1781-1822 (March 12, 1959), Proclamation 3279: Adjusting Imports of Petroleum and Petroleum Products into the United States; see also law of June 16, 1933, ch. 90, § 3, 48 Stat. 196.
3 EO Section 1(a)(iii).
4 The investment ban works alongside recently implemented export controls on oil and gas refining equipment and other sanctions (discussed in our March 9, 2022and February 26, 2022customer alerts).
5 EO Section 1(a)(iii).
6 See, for example., 31 CFR Part 560 (Iranian Transactions and Sanctions Regulations).
