OFAC Issues General License Extending Maintenance / Wind-Down Period for Rusal Dealings

On Monday, OFAC issued General License No. 14 under the Ukraine-Related Sanctions Regulations (URSR), authorizing the maintenance or winding down of business with United Company Rusal plc (Rusal) through October 23, 2018.  The imposition of sanctions on Rusal, which OFAC listed as a Specially Designated National (SDN) on April 6, had roiled the global aluminum market and sparked fears of a worldwide supply shock.  The Trump Administration appears to have taken these concerns on board in issuing the new general license, with Treasury Secretary Steven Mnuchin noting in a press release that the "the US government is not targeting the hardworking people who depend on RUSAL and its subsidiaries".  OFAC also issued new Frequently Asked Questions (FAQs) providing interpretative guidance regarding the new general license. As previously noted, OFAC designated Rusal as an SDN on April 6, cutting it off from all dealings with US persons and subjecting non-US persons to secondary sanctions to the extent they engage in "significant" transactions with the aluminum producer.  These restrictions also apply to all entities owned 50 percent or greater by Rusal.  To soften the blow of the designation, OFAC issued General License No. 12, authorizing the maintenance or winding down of business with Rusal through June 5.  However, the general license did not authorize US persons to export items to Rusal from the United States, and required any payments to Rusal to be made into a blocked account, restrictions that also carried significant implications for non-US persons. General License No. 14 provides significantly more extensive relief, authorizing the maintenance or winding down of business with Rusal and its subsidiaries through October 23, and removing the restrictions on exports and payments.  With regard to payments, the general license not only authorizes new payments to Rusal for maintenance or wind-down purposes, but also permits the unblocking of funds paid into a blocked account between April 6 and April 23 so that they can be used to make a payment to Rusal.  The general license thereby essentially permits all commercial activity consistent with the maintenance or winding down of business with Rusal through October 23, except for the following:

• divestiture of debt, equity, or other holdings in Rusal (but see General License No. 13, which authorizes limited divestiture activity);
• transactions with other blocked individuals and entities; and
• unblocking of property (except as noted in the paragraph above).

General License No. 14 requires US persons to submit a detailed report to OFAC regarding their transactions under the general license by November 2, 2018. OFAC also issued General License No. 12A, which supersedes General License No. 12 and makes a technical amendment to provide a cross-reference to General License No. 14 for Rusal-related dealings.  Therefore, the following URSR general licenses should be noted by companies impacted by the April 6 designations:

• General License No. 12A, for dealings with AgroHolding Kuban, Basic Element Ltd., B-Finance Ltd., EN+ Group plc, GAZ Group, Gazprom Burenie, JSC Eurosibenergo, Ladoga Menedzhment, NPV Engineering OJSC, Renova Group, and Russian Machines;
• General License No. 13, for divestiture or transfer debt, equity, or other holdings in EN+ Group plc, GAZ Group, and Rusal; and
• General License No. 14, for dealings with Rusal.

In issuing General License No. 14, OFAC issued FAQ issued FAQ 579, reiterating its guidance that non-US persons will not be subject to secondary sanctions for dealings with Rusal where a US person would not require a specific license for the same dealings-- that is, where the non-US person acts consistent with General License No. 14. OFAC also issued certain other FAQs which are worth quoting in their entirety:

576. Under what circumstances can OFAC give further sanctions relief to RUSAL or any other entity in which RUSAL owns, directly or indirectly, a 50 percent or greater interest? Consistent with OFAC regulations, parties may be removed by demonstrating a change in the circumstances that led to their designation. In the case of RUSAL, absent other adverse information and consistent with the facts and circumstances of any petition for delisting, the path for the United States to provide sanctions relief is through divestment and relinquishment of control of RUSAL by Oleg Deripaska.

On this point, it also worth mentioning the following comment in Secretary Mnuchin's press release: “RUSAL has approached us to petition for delisting.  Given the impact on our partners and allies, we are issuing a general license extending the maintenance and wind-down period while we consider RUSAL’s petition.”

577. I am a US person holding accounts for or other property of RUSAL or another entity in which RUSAL owns, directly or indirectly, a 50 percent or greater interest. Does General License 14 allow me to unblock this property? No. All accounts or other property of RUSAL or any other entity in which RUSAL owns, directly or indirectly, a 50 percent or greater interest blocked as of April 23, 2018 remain blocked, except for the use in maintenance and wind-down activities described in General License 14. US persons, however, may engage in transactions authorized by General License 14 that occur on or after April 23, 2018 without blocking payments associated with such transactions, except for transactions involving blocked persons other than RUSAL (including any other entity in which RUSAL owns, directly or indirectly, a 50 percent or greater interest).

For example, where a US bank froze assets of Rusal on April 6, those funds will remain blocked.  This is in contrast to payments to Rusal that US persons made into a blocked account, which can now be unblocked for authorized purposes as described above.

580. I am a foreign person that seeks to pay RUSAL or another entity in which RUSAL owns, directly or indirectly, a 50 percent or greater interest for goods or services connected with maintenance or wind-down activities authorized by General License 14. Am I required to deposit payment into a blocked account at a US financial institution in order for my payment to not be considered “significant” for purposes of section 10 of SSIDES, as amended by section 228 of CAATSA, or section 5 of UFSA, as amended by section 226 of CAATSA? No. US persons may engage in activities authorized by General License 14 that occur on or after April 23, 2018, except for activities involving blocked persons other than RUSAL (or any other entity in which RUSAL owns, directly or indirectly, a 50 percent or greater interest) without making associated payments into a blocked account. Similarly, foreign persons may engage in activities that would be authorized by General License 14 if engaged in by a US person without making associated payments into a blocked account.

Note that this leaves unanswered the question of whether non-US persons should make payment into a blocked account under General License No. 12A.

581. I am a US person that seeks to supply goods to RUSAL. Am I permitted to export those goods from the United States to RUSAL pursuant to General License 14? Yes. General License 14 does not restrict exports to RUSAL (or any other entity in which RUSAL owns, directly or indirectly, a 50 percent or greater interest), provided that the activity is for maintenance or wind down and consistent with the requirements of other federal agencies.

This is in contrast to General License No. 12A, which does not permit exports from the United States.

582. I am located outside of the United States and seek to export goods from a third-country location in connection with activity for the maintenance or wind down of an entity listed on General License 12A (or any other entity in which a listed entity in 12A owns, directly or indirectly, a 50 percent or greater interest). Would such exports be prohibited under General License 12A or otherwise subject to section 10 of SSIDES, as amended by section 228 of CAATSA, or section 5 of UFSA, as amended by section 226 of CAATSA? No. Although General License 12A does not authorize the exportation of goods from the United States, paragraph (c)(4) of General License 12A does not similarly apply to the exportation of goods from a third country to another location.

This answers a question that many non-US companies had raised.  However, this raises an interesting question: Does General License No. 12A authorize a US person to engage in an export outside the United States?  The plain language of the general license, along with this FAQ, suggests that this would be permitted, but it is not clear.

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The issuance of the general license reflects a potentially flexible approach that the Trump Administration may take regarding the latest round of sanctions designations, even as it maintains a high level of pressure on Russia overall.  Markets certainly responded to the news, with aluminum prices dropping sharply after soaring in the two weeks prior. Several things remain to be seen, including the disposition of Rusal's delisting request; whether more permissive general licenses will be authorized with respect to other SDNs; whether other SDNs are seeking to be delisted; and whether General License No. 14 will be revoked or extended.  All of these factors are part of the vast ecosystem of US-Russia relations, which are at their most tense and complex since the depths of the pre-détente Cold War years.  Stay tuned.