US Imposes Comprehensive Sanctions and Export Controls Restrictions on Lukoil and Rosneft

On Wednesday of this week, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) took a significant further step to increase economic pressure on Russia in connection with the war in Ukraine, sanctioning Russia’s largest two oil companies, Lukoil OAO (Lukoil) and OJSC Rosneft Oil Company (Rosneft). OFAC added both companies to the Specially Designated Nationals and Blocked Persons (SDN) List pursuant to Executive Order 14024, as they are entities operating in the energy sector of the Russian Federation. These actions have significant implications for financial institutions, exporters and other companies both in the U.S. and around the world.

As a result of this action, all of Lukoil’s and Rosneft’s property in the U.S. or in the possession or control of a U.S. person is blocked, and U.S. persons are prohibited from dealing in the property of either company. These prohibitions extend to the property of entities owned 50 percent or more in the aggregate by Lukoil, Rosneft and/or other blocked persons. While both Lukoil and Rosneft were previously subject to sectoral sanctions (e.g., broad restrictions on the provision of goods, services or technology in support of exploration or production for deepwater, Arctic offshore or shale projects), these new restrictions will, absent specific licenses from OFAC, effectively sever the companies’ relationship with U.S. persons, including a plethora of financial institutions.

This action follows in the footsteps of the U.K., including its overseas territories, targeting Lukoil and Rosneft last week with similar restrictions. The U.S. sanctions are also issued in tandem with the EU’s adoption of its 19th package of sanctions on Russia since 2022, which includes a ban on Russian liquified natural gas imports and increased restrictions on Rosneft (already sanctioned by the EU), though not rising to the level of an EU asset freeze.

Though OFAC — as is its custom in the wake of implementing significant new sanctions measures — has issued a series of temporary licenses to permit U.S. and allied nations’ companies to legally extricate themselves from any existing business with the targeted companies, the new sanctions’ effects are already becoming visible, as major Chinese and Indian oil importers have already reportedly suspended or reduced imports of Russian oil. Further disruptions to the world oil trade are likely to materialize in short order, as financial institutions back away from commercial dealings involving Lukoil and Rosneft due to the risk of OFAC levying “secondary sanctions” on those who “conduct or facilitate significant transactions” with or for entities designated under EO 14024.

Implications for Our Clients

• Though OFAC’s general licenses permit the temporary continuation of certain activities involving Lukoil and Rosneft, they are primarily aimed at permitting companies to extricate themselves from commercial relationships with the sanctioned entities. U.S. persons would be well-advised to reconsider any existing business and avoid engaging in any new business with the sanctioned companies. Where terminating such business is impractical, companies may apply for a specific license to engage in transactions not otherwise permitted under the general licenses, but OFAC tends to set a high bar for which specific licenses it approves under the Russian sanctions regime.
• Non-U.S. persons doing business in or with the energy sector should also assess their business for any contact points with Lukoil or Rosneft. Though in some cases U.S. sanctions may carry low risk of enforcement where a non-U.S. person’s business dealings lie outside U.S. jurisdiction, nevertheless many companies find themselves unwittingly subject to U.S. jurisdiction where some aspect of their commercial dealings touches on the U.S. or involves U.S. persons, such as where cross-border financial transactions indirectly route through U.S. financial institutions.
• In particular, oil and oilfield services operators, wary of their legal position in arbitration and litigation as engagements with Lukoil and Rosneft pause, will need to assess whether and how to terminate their agreements with those companies in light of these designations.
• Moreover, financial institutions outside the U.S. now face a risk of sanctions for dealing with Lukoil or Rosneft as clients, payees or other counterparties. One of OFAC’s intended goals in listing Lukoil and Rosneft as SDNs is to cut them off from the global financial system, and OFAC has access to extensive sources of information on global financial flows, as well as the oil and energy trade.
• In addition to sanctions, export controls restrictions now apply. Because of the specific executive order pursuant to which Lukoil and Rosneft were both designated, exports, reexports or transfers of items that are “subject to the [Export Administration Regulations]” are now prohibited to these companies absent a license from the Department of Commerce Bureau of Industry and Security, which will be reviewed with a presumption of denial. Thus, companies that deal in items subject to U.S. export control restrictions must now be aware that any provision of such items to these companies would constitute a violation of U.S. export control laws, absent relevant authorization.

Paul Hastings attorneys stand ready to advise our clients, as we have been doing for years, on the rapidly evolving frameworks of U.S., U.K. and EU sanctions on Russia, Iran and other jurisdiction around the world, and the downstream commercial and legal effects of designations like these across global operations.