On March 12, 2020, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) designated TNK Trading International S.A. (TNK Trading), 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.
OFAC designated Rosneft Trading S.A. (as described in our previous client alert, “The United States Designates Rosneft Trading”), another Swiss-based subsidiary of the Russian state-owned oil major, Rosneft Oil Company (Rosneft), on February 18 for the same reason and pursuant to the same executive order. In its designation of TNK Trading, OFAC noted that Rosneft Trading S.A. transferred its allocated cargoes of Venezuelan oil to TNK Trading in an attempt to evade U.S. sanctions.
These actions are largely intended to convince the Kremlin and Russian companies to end their support for Venezuela’s oil sector, which the U.S. has sanctioned in order to deny funds and resources to the Maduro regime. Rosneft’s subsidiaries play an important role in Venezuela’s oil sector. TNK Trading and Rosneft Trading S.A. handled a large percentage of Venezuela’s oil exports in 2019, and in January 2020, TNK Trading purchased nearly 14 million barrels of crude oil from Venezuela’s state-owned energy company, Petróleos de Venezuela (PdVSA).
Scope of the sanctions
As a result of this designation, U.S. persons are now prohibited from engaging in virtually all transactions with TNK Trading or any entity owned 50 percent or more (directly or indirectly) by TNK Trading, unless authorized by a license (e.g., GL 36A, as described below).
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” TNK Trading or any entity owned 50 percent or more (directly or indirectly) by TNK Trading. These terms are subject to broad interpretation, which gives OFAC significant flexibility to sanction non-U.S. persons doing business with TNK Trading. Such business could include transporting cargo owned, shipped, or brokered by TNK Trading as well as purchasing commodities from TNK Trading.
These blocking sanctions do not apply to TNK Trading’s ultimate parent, Rosneft, but rather are limited to TNK Trading (or any entity in which it has a 50 percent or greater direct or indirect ownership interest). Of course, Rosneft and its subsidiaries continue to be subject to U.S. sectoral sanctions, specifically Directives 2 and 4.
90-day wind-down period - General License 36A
In conjunction with the designation of TNK Trading, OFAC amended General License 36 (GL 36), Authorizing Certain Activities Necessary to the Wind Down of Transactions Involving Rosneft Trading S.A., by issuing General License 36A (GL 36A), Authorizing Certain Activities Necessary to the Wind Down of Transactions Involving Rosneft Trading S.A. or TNK Trading International S.A. GL 36A authorizes U.S. persons to engage in all transactions ordinarily incident and necessary to the wind-down of transactions involving TNK Trading (or any entity in which it has a 50 percent or greater direct or indirect ownership interest). GL 36A is valid through 12:01 a.m. eastern daylight time, May 20, 2020. Non-U.S. persons may also engage in wind-down activities provided that they are consistent with GL 36A and that such activities cease by the time GL 36A expires.
Like GL 36, GL 36A does not authorize the debiting of an account maintained by TNK Trading or any of its blocked subsidiaries if such account is held at a U.S. financial institution. As such, even during the wind-down period, those doing business with TNK Trading should be mindful as to the bank from which they are paid. Additionally, GL 36A only authorizes transactions prohibited by Executive Order 13850 and therefore, all wind-down activities must continue to comply with Directives 2 and 4 of the sectoral sanctions.
The Venezuelan oil trade further constrained
A dynamic similar to that involving the Iranian energy sector is beginning to emerge, where non-U.S. financial institutions, investors, and insurers are increasingly avoiding participation in the trade of Venezuelan oil, even if the specific transaction being considered would not trigger, or has a low risk of triggering, U.S. sanctions. These financial players will, at minimum, wish to see enhanced due diligence and thorough counterparty screenings.
The sanctions regime imposed against Venezuela, and PdVSA in particular, is still not as comprehensive as that against Iran, but the landscape remains volatile and subject to change at short notice. We recommend monitoring the situation closely and seeking legal advice before trading with Venezuela.
Client Alert 2020-113
