US Energy Sanctions: Restrictive but Lenient*

*Editor’s Note: On March 4, Russia enacted a law that criminalizes public opposition to, or independent news reporting about, the war in Ukraine. The law makes it a crime to call the war a “war” rather than a “special military operation” on social media or in a news article or broadcast. The law is understood to penalize any language that “discredits” Russia’s use of its military in Ukraine, calls for sanctions or protests Russia’s invasion of Ukraine. It punishes anyone found to spread “false information” about the invasion with up to 15 years in prison.

On March 8, President Biden issued an intimidating executive order titled "Prohibition of Certain Imports and New Investments Relating to the Russian Federation.”**The foreign media and politicians have emphasized the devastating consequences of this decree for the Russian economy, which almost amounts to an embargo on Russian energy exports.

About half of Russia's exports are oil, petroleum products, and gas at a time when world energy prices are low. As of March of this year, Russia's oil and gas exports have become more important due to the suspension of settlements and supply chains for other export items, as well as the spike in oil and gas prices.

It is crucial that Russian authorities and exporters understand the details of U.S. sanctions, which provide loopholes even certain permissible transactions that Americans have left in.

The U.S. Treasury Department, which oversees the Office of Foreign Assets Control, provides clarification about the technical details of Biden’s sanctions. OFAC does not simply interpret presidential executive orders, but provides general and individual approvals for sub-sanctioned goods, transactions and individuals.

In summarizing the OFAC explanations, the following significant aspects must be emphasized:

• Existing energy projects and investments by U.S. companies in Russia can continue, and oil, petroleum products and gas from these projects should simply be delivered to developing nations (i.e., excluding the United States);
• Investments or loans for new projects are prohibited, but not for maintenance or repair of existing projects;
• Americans can buy Russian energy goods that have been used by U.S. companies to produce their goods; this is a literal translation, which can be interpreted in different ways;
• Until June 24, energy transactions can be conducted with sub-sanctioned Russian banks through third-party non-U.S. banks;
• Almost every clarification contains clauses about the possibility of extending general permits and issuing individual permits.

So, Biden issued an executive order on March 8 prohibiting the importation into the United States of crude oil, petroleum, petroleum fuels, oils and products of their distillation, liquefied natural gas, coal, and coal products of Russian Federation origin. The order also bans new investment in the energy sector in the Russian Federation by a United States person, wherever located; and any approval, financing, facilitation, or guarantee by a United States person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited if performed by a United States person or within the United States.

OFAC 1019 preliminarily interprets a number of important terms and provides a number of exceptions:

“Russian Federation origin” means goods produced, manufactured, extracted, or processed in the Russian Federation, excluding any good originating in the Russian Federation that has been incorporated or substantially transformed into a foreign-made product.

“New investment in the energy sector in the Russian Federation” means a transaction that constitutes a commitment or contribution of funds or other assets for, or a loan or other extension of credit to, new energy sector activities (not including maintenance or repair) located or occurring in the Russian Federation beginning on or after Mar. 8, 2022.

OFAC 977 provides that the term "energy-related" includes oil, gas, petroleum products, coal, biofuel wood, uranium, electricity, and renewable energy. Wood, uranium, and electricity are not yet subject to the March 8 restrictions.

OFAC 1018 provides that continued importation into jurisdictions outside the United States of products of Russian origin that are prohibited from entering the United States under the March 8 executive order is permitted if the importation of such products of Russian origin outside the United States is not associated with a sanctioned person and non-U.S. persons are not sanctioned under the executive order.

OFAC 1020 cites the Caspian Pipeline Consortium as an example of permitted crude oil transactions. Distribution systems, such as those of the CPC, which can separate different sources of crude oil, allowing crude oil not originating in the Russian Federation to be sold and shipped separately. The ban excludes imports of goods not originating in the Russian Federation, even if such goods transit through or exit the Russian Federation.

OFAC 1014 does not prohibit the importation of goods not originating in the Russian Federation, even if such items transit through or are exported from the Russian Federation (with the caveat of prohibiting transactions with certain Russian persons under other sanctions decrees).

OFAC 1010 provides that the executive order does not prohibit U.S. citizens from engaging in transactions involving the sale or diversion of items that were shipped on or after March 8 and were previously destined for the United States.

OFAC has issued a General License 8A relating to Russia, which permits U.S. persons to process energy-related transactions involving Russian sub-sanctioned financial institutions, including those involving the Central Bank of Russia, until Jun. 24, 2022, unless the deadline is extended.

OFAC 976 [978] provides that for a U.S. financial institution to participate in transactions, they must be processed indirectly through a nonsanctioned financial institution outside the United States.

OFAC has issued a General License 16 authorizing limited imports of these sub-sanctioned items under preexisting written contracts or written agreements until April 22, 2022 (FAQ 1015). OFAC may issue separate licenses on a case-by-case basis to authorize shipments made after Apr. 22, 2022.

General License 13 authorizes U.S. citizens to pay the taxes, fees or import duties necessary for the day-to-day operations of such persons in the Russian Federation. This license expires on Jun. 24, 2022.

General License 9A authorizes all transactions prohibited by the Russian Sovereign Transactions Ordinance for interest, dividends or maturity payments. General License 10A authorizes all transactions to terminate derivatives, repurchase agreements entered into before March 1, 2022. GL 9A and 10A expire on May 25, 2022.

This extensive list of exceptions demonstrates that Biden's March 8 decree was primarily a publicity stunt. Primarily, it is aimed at American voters, and explains how Russia is influencing the price of gas which has nearly doubled at American gas stations. This masks the fact that Russian oil and oil products imported into the United States account for only 3% of U.S. consumption, and U.S. oil companies are seizing the moment to make super profits.

As a result of this decree, Western European leaders are pushing for sanctions against Russian energy carriers, especially those who fell for the bold title and didn't read the OFAC explanations. Ordinary European consumers are also getting their share of explanations for how Russia is supposedly the reason for higher gasoline prices.

The decree has caused panic among wealthy Russians as well, particularly those who have significant amounts of money in sanctioned banks and who have temporarily calmed down after the banks increased interest rates.

The above excerpts from the OFAC explanations are available to every Russian, and should be reviewed since they are published on the website and can be fairly well translated using an automatic Google translator.

*Editor’s Note: The correct title, verified by the White House, is “Executive Order on the Prohibition of Certain Imports, Exports, and New Investment With Respect To Continued Russian Federation Aggression.”