On February 18, 2020, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) designated Rosneft Trading S.A. (Rosneft Trading), the Swiss-based brokerage arm of the Russian oil company major pursuant to Executive Order 13850 (Blocking Property of Additional Persons Contributing to the Situation in Venezuela), for operating in the oil sector of the Venezuelan economy. This high profile action by OFAC follows Rosneft Trading's continued brokerage of the sale and transport of oil from Petróleos de Venezuela, S.A. (PdVSA) after months of warning by the U.S. government.
Scope of the sanctions
As a result of this designation, U.S. persons are now prohibited from engaging in virtually all transactions with Rosneft Trading or any entity that is owned 50 percent or more (directly or indirectly) by Rosneft Trading, unless an exception applies. It follows that anyone continuing to do business with Rosneft Trading should not use U.S. dollars because U.S. dollar payments are generally processed through the United States financial system.
These sanctions are also relevant to non-U.S. persons. Specifically, non-U.S. persons will be exposed to a risk of blocking sanctions if it is determined that they have "materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of" Rosneft Trading or any entity owned 50 percent or more by Rosneft Trading. These terms are subject to broad interpretation, which gives OFAC substantial authority to sanction non-U.S. persons doing business with Rosneft Trading. This could include transporting cargo owned by Rosneft Trading or purchasing commodities from Rosneft Trading. OFAC has indicated that there is sanctions potential for non-U.S. persons doing business with Rosneft Trading. See, for example, OFAC FAQ 818.
These blocking sanctions do not apply to Open Joint-Stock Company Rosneft Oil Company (Rosneft Oil Company), Rosneft Trading's ultimate parent. Rather, the sanctions are limited to Rosneft Trading, as well as any entity in which it owns, directly or indirectly, 50 percent or more.
90-day wind-down period - General License 36
In conjunction with the designation of Rosneft Trading, OFAC issued General License 36 (GL 36), Authorizing Certain Activities Necessary to the Wind Down of Transactions Involving Rosneft Trading S.A. GL 36 specifically authorizes all transactions ordinarily incident and necessary to the wind-down of transactions involving Rosneft Trading (or any entity in which it has, directly or indirectly, a 50 percent or greater ownership interest). GL 36 is valid through 12:01 a.m. eastern daylight time, May 20, 2020.
GL 36 does not authorize the debiting of an account maintained by Rosneft Trading or a blocked subsidiary that is held at a U.S. financial institution. As such, even during the wind-down period, persons doing business with Rosneft Trading should be mindful as to the bank from which they are being paid. Additionally, GL 36 only authorizes transactions prohibited by Executive Order 13850 and therefore, all wind-down activities must continue to comply with Directive 2 and Directive 4 of the sectoral sanctions implemented pursuant to Executive Order 13662.
The shipping community
This recent activity by OFAC will be unwelcome to those who wish to buy, sell, or transport Venezuelan oil, irrespective of whether they have direct exposure to the United States or trades involving Rosneft. With OFAC having now designated both PdVSA and Rosneft, we anticipate that non-U.S. financial institutions, investors, and insurers will be increasingly circumspect in furthering the trade of Venezuelan oil after the conclusion of the wind-down period, particularly if the trade involves either of those entities. At the least, they will wish to see enhanced due diligence and robust counterparty screenings.
We note, however, that the sanctions regime imposed on Venezuela and PdVSA in particular is still not nearly as comprehensive as that against Iran, suggesting certain patterns of Venezuelan oil trade by non-U.S. persons remain outside the scope of the present sanctions. The landscape remains volatile and subject to change at short notice, however, and those persons that continue to trade with Venezuela are advised to monitor the situation closely and seek legal advice before lifting or trading in Venezuelan oil.
Client Alert 2020-066
