United States Expands Sanctions on Russia to Target Energy Sector

The United States has announced a further set of sanctions on Russia in response to continued Russian aggression in Ukraine that target Russia’s energy sector. On March 8, 2022, President Biden issued an Executive Order banning the import into the United States of Russian crude oil, certain petroleum products, liquified natural gas, and coal and prohibiting new U.S. investment in Russia’s energy sector. 

These new actions build upon earlier sanctions issued over the last several weeks in response to Russia’s invasion of Ukraine, which are discussed in our prior alerts: Biden Administration Continues to Broaden Economic Sanctions on Russia in Response to Ongoing Aggression in Ukraine, Biden Administration Issues Second Set of Sanctions on Russia Broadly Targeting the Financial and High-Tech Sectors, and Biden Administration Issues Initial Set of Sanctions in Response to Russian Invasion of Eastern Ukraine. 

These new sanctions, which have broad bipartisan support in Congress, signal an increased willingness of the Biden Administration to take actions targeting Russia’s economy, even if there is a domestic cost. Though the United States imports less than 10% of its crude oil from Russia, the sanctions are projected to lead to an increase in already record high gas prices. In addition, unlike the prior rounds of sanctions that were implemented multilaterally, due to Europe’s reliance on Russian energy, thus far only the United Kingdom has joined the United States in announcing restrictions on Russian energy imports.

The situation in Ukraine continues to develop and additional economic sanctions and other measures may be forthcoming from both the United States and its allies in response to continued Russian aggression.

Russia Energy Sector Sanctions

The Executive Order on Prohibiting Certain Imports and New Investments With Respect to Continued Russian Federation Efforts to Undermine the Sovereignty and Territorial Integrity of Ukraine (“the E.O.”) imposes two new prohibitions on transactions with Russia in response to its “unjustified, unprovoked, unyielding, and unconscionable war against Ukraine.”

First, the E.O. prohibits the importation into the United States of the following Russian-origin energy products: crude oil; petroleum; petroleum fuels, oils, and products of their distillation; liquefied natural gas; coal; and coal products. The prohibition has immediate effect for any new purchases of the covered Russian energy products. For purchases subject to pre-March 8, 2022 contractual arrangements, the Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued a general license authorizing a 45-day wind-down period to conclude pre-existing contracts through April 21, 2022.

Second, the E.O. prohibits U.S. persons from making new investments in Russia’s energy sector. “New investments” are defined by OFAC to mean: (1) a commitment or contribution of funds or other assets for new Russian energy sector activities; or (2) a loan or other extension of credit to new Russian energy sector activities, including any transfer or extension of funds or credit on the basis of an obligation to repay, or any assumption or guarantee of the obligation of another to repay an extension of funds or credit. The prohibition does not apply to funding or lending for maintenance or repair activities in Russia. U.S. firms with operations in Russia will need to consider whether those operations constitute activities in the energy sector. (That term is defined to include the procurement, exploration, extraction, drilling, mining, harvesting, production, refinement, liquefaction, gasification, regasification, conversion, enrichment, fabrication, or transport of petroleum, natural gas, liquified natural gas, natural gas liquids, or petroleum products or other products capable of producing energy, such as coal or wood or agricultural products used to manufacture biofuels, the development, production, generation, transmission or exchange of power, through any means, including nuclear, electrical, thermal, and renewable.) If so, this new measure prohibits the use of U.S.-sourced funds for such activities.

In addition, as with most U.S. economic sanctions, the E.O. prohibits U.S. persons from facilitating or financing transactions by non-U.S. firms (for example, a foreign subsidiary or non-U.S. business partner) if U.S. persons are prohibited from engaging in such transactions.

Implications

These new sanctions against the Russian energy sector continue to follow a targeted approach focused on specific sectors and malign actors in Russia and its ally Belarus. The United States has thus far refrained from imposing comprehensive sanctions on Russia and has said that it will continue to coordinate with its allies as it considers imposing “further costs.” Even so, global businesses, including major energy companies, many tech companies, credit card companies, global logistics providers, and most recently, food and consumer product companies have begun to voluntarily wind down their business operations in Russia. As Russian aggression in Ukraine continues, we expect additional economic sanctions and other measures to be forthcoming, along with further unilateral withdrawals by U.S. and European companies from the Russian market.

O’Melveny recognizes law clerk Dillon Roseen for his valuable contribution in researching and drafting this article.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Greta Lichtenbaum, an O’Melveny partner licensed to practice law in the District of Columbia, David J. Ribner, an O’Melveny counsel licensed to practice law in the District of Columbia and New York, and Dillon Roseen, an O’Melveny law clerk, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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