Private banks, Arctic LNG 2 and companies from the UAE were subject to US anti-Russian sanctions

The new package of US anti-Russian sanctions, published on November 2, continues the policy of maximally blocking possible ways to circumvent existing restrictions. That is why the list included many companies from the UAE and other jurisdictions that only connect certain payments or consulting services with Russia. There are also plenty of Russian companies, banks and even institutions on the list; the new sanctions, according to experts, most significantly affect the Russian fuel, energy and financial sectors.

A special feature of the latest package of US anti-Russian sanctions is the large list of companies from various industries included in it. Moreover, many of these companies are registered outside Russian jurisdiction and are not foreign subsidiaries of legal entities of the Russian Federation. Thus, 15 companies from the UAE were included in the SDN list. The likely reasons why this happened is illustrated by OFAC’s comment regarding one of these companies, ARX: “The company participated in finding ways to transfer rubles from sanctioned VTB with conversion into dollars, and also reduced the risks of identifying client assets if he faces sanctions.” “It is noteworthy that each new sanctions list includes more and more foreign companies and persons associated with them, and not only the “subsidiaries” of Russian persons included in the list. The new list includes residents of the UAE, Turkey, Cyprus, Sweden, Latvia, and Ireland,” says Anton Namenov, senior partner at Pen & Paper. The new sanctions, according to Delcredere lawyer Artem Kasumyan, “continue the previously chosen track in the form of narrowing access to the dollar financial system, limiting the supply of prohibited goods, and a blow to the technological and production sectors of the Russian Federation.”

In addition to the breadth of coverage in the new package, experts immediately identified three main topics: the Arctic LNG-2 project, a large number of banks with a significant base of individual clients and the St. Petersburg Exchange, focused on trading in foreign securities.

Oxygen is blocked from liquefied gas

The US Treasury has added Arctic LNG-2 LLC, which is responsible for the implementation of NOVATEK’s second LNG project Arctic LNG-2, to the sanctions list. The project, costing about $25 billion, involves the construction of three liquefaction trains of 6.6 million tons per year, the first of which should be launched before the end of the year, with shipments expected to begin in early 2024. The second line of the project should be built in 2024, the third in 2026.

The sanctions mean that all transactions with Arctic LNG 2 are prohibited, but a special OFAC license until January 31, 2024 allows certain transactions necessary to “dispose, transfer or facilitate the alienation or transfer of debt or assets” of the company.

The key question is whether, after the introduction of sanctions, NOVATEK will be able to sell LNG from the project under long-term contracts or will consumers, including project shareholders, refuse to fulfill them? NOVATEK owns 60% in Arctic LNG-2. The remaining shareholders – the French TotalEnergies, the Chinese CNPC and CNOOC, as well as the consortium of the Japanese Mitsui and JOGMEC – each have 10%. According to the terms of entry into the project, each of the foreign shareholders signed a long-term contract to receive LNG in proportion to its share, that is, 2 million tons per year. The sanctions will likely prevent the fulfillment of contracts, as payments for cargo will not be possible. On the other hand, termination of long-term contracts can lead to multi-billion dollar litigation.

Theoretically, foreign shareholders, primarily TotalEnergies and Japanese companies, may try to exit the capital of Arctic LNG-2. However, Kommersant’s interlocutors doubt that the Russian authorities will allow such transactions: it is very likely that companies from unfriendly countries will be faced with a choice – to comply with either concluded contracts or US sanctions, and in the latter case, actually lose their shares in the project, as happened with Shell’s share in Sakhalin-2.

The sanctions will also likely require a reformatting of the structure of external financing, the volume of which was initially planned at €9.5 billion, with the rest to be financed by shareholders. The problem, according to Kommersant’s sources, does not seem acute and is not new. In fact, TotalEnergies and the Japanese have no longer financed their contribution since the beginning of the conflict in Ukraine, and Russian banks were ready to replace the small contribution of European financial institutions to project financing. Sergei Kondratiev from the Institute of Energy and Finance recalls that as of October 2022, Arctic LNG 2 has selected €6 billion in project financing. “I think that, with a high probability, Western banks collectively provided less than €0.4 billion, and the undrawn quota from Russian and Chinese banks can be estimated at €0.9 billion,” says the expert, believing that a change in the project financing scheme will have limited influence.

Getting into the SDN-list will further complicate the logistics of the project, as it will require the involvement of a separate fleet of LNG tankers, since as a result they will also fall under sanctions and will not be able to work on other foreign projects. The shipment of LNG from Arctic LNG-2 has already been hampered by the latest package of US sanctions: in September, Arctic Transshipment LLC, which manages two LNG floating storage units (FSUs) in Murmansk and Kamchatka, was included in the SDN-list, and the vessels themselves (“Saam UGS” and “Koryak UGS”).

With their help, NOVATEK planned to transship LNG from ice-class tankers to conventional gas carriers and sell gas on FOB terms based on these FSUs. This would allow NOVATEK to reduce the cost of gas logistics from Arctic projects, as well as reduce the cost of chartering conventional tankers. The contractor for the construction of Arctic LNG 2, Arctic Energies LLC, was also sanctioned.

In general, previous experience of imposing sanctions, for example, against the largest Russian producers of ferrous metals, gold and diamonds shows that if the world market for the corresponding raw materials is large enough, exports to friendly countries remain available even to sanctioned projects and companies. However, they have to sell their products at a discount, which can reach significant values, especially in the first stages of building logistics and payment infrastructure.

Banks are cutting off dollars

Seven Russian banks were subject to US blocking sanctions: Pochta Bank, Absolut Bank, HKF Bank, RRDB, Russian Standard Bank, Blank Bank and Russian Regional Bank. In addition, the Luxembourg East-West United Bank, 100% owned by AFK Sistema (also subject to blocking sanctions), was included in the SDN list.

Inclusion in the SDN list means for the bank the freezing of its assets in the United States and a ban on settlements in dollars with any American counterparties. You also cannot buy foreign shares and currencies through the brokers of these banks. In total, more than 40 banks have been included in the SDN list since February 2022. “This is a developing trend of cutting off Russian banking infrastructure from the western perimeter. If previously large or state-owned banks were subject to sanctions, now the caliber is decreasing,” says Mr. Namenov.

The reasons for including new organizations in the blocking list have not been disclosed. However, most banks treated this news as expected. The essence of their comments boils down to the general phrase that the sanctions “will not have a significant impact on the bank’s work”, “customers will not feel the impact of restrictive measures in any way.”

However, with one caveat. Pochta Bank, Russian Standard Bank and RRDB have in circulation cards of the Chinese payment system UnionPay, which banks actively issued so that Russian citizens could make payments abroad. The payment system has not yet made any statements regarding the continuation or termination of cooperation with the banks affected by the new sanctions. Transactions with UnionPay cards abroad may be suspended in the near future, Russian Standard Bank notified. “The bank recommends that clients abroad withdraw cash from their cards. The bank’s commission for withdrawing cash abroad on November 2–3 will be returned,” they clarified. At the same time, UnionPay cards will continue to work in the Russian Federation. All accounts are still active, and funds placed in Pochta Bank are available both in branches and in remote channels and can still be used in full in Russia, they noted.

Investors without foreign securities

The inclusion of St. Petersburg Exchange in the OFAC sanctions list has already affected its activities – trading in foreign and Russian shares on the site was suspended on November 2 at 18:00. At the same time, OFAC issued a license to exit the securities of the St. Petersburg Exchange until January 31, 2024. The exchange itself claims that the imposed sanctions will not affect client assets. They note that trading will not be held on November 3, but the exchange plans to start it on November 6. Shares of the St. Petersburg Exchange fell in price by 19% at the end of the day in trading on the Moscow Exchange.

“Perhaps the most painful thing is that the St. Petersburg Exchange will be subject to blocking sanctions, which means for it a complete cessation of settlements in dollars, listing of American issuers and trading in their shares,” says Mr. Imenov.

According to Dmitry Lesnov, head of the client service development department of Finam Financial Group, some brokers have already closed access to trading for their clients on the site. A Kommersant source on the stock market said that Tinkoff Investments and BCS have closed access to trading on the St. Petersburg Exchange for their clients. Tinkoff Investments declined to comment; BCS reported that until 18:00 the broker accepted and executed orders for the purchase and sale of foreign securities, adding that they were studying the documents and would inform clients as news appeared.

As Kommersant’s interlocutor in the financial market noted, after being included in the SDN list with the platform, “foreigners will not work not only from unfriendly countries, but from conditionally friendly ones, since the risks of secondary sanctions frighten everyone.” At the same time, what happened will affect not only the brokerage business, but also the business of management companies, “since there are funds on the market that traded foreign securities on the St. Petersburg Exchange.” He believes that the funds will have to be reformatted, but the problem remains “who will buy such assets and at what price.”

Experts interviewed by Kommersant view the prospects for the withdrawal of assets with skepticism. According to the managing director of Ivolga Capital, Dmitry Alexandrov, “it is not very clear where everything can be transferred and how realistic it is to meet the deadlines.” The question of what will happen to foreign shares, in particular American ones, “remains open for now,” notes Mr. Lesnov. Partner in the international trade law, customs, sanctions practice at Melling, Voitishkin and Partners, Vladimir Efremov, noted that, based on the decision of the US Treasury, payments in favor of the exchange should be blocked in special accounts. From this, he said, it follows that “some operations can still be carried out, but banks will deal with each such transaction individually.”

Now the St. Petersburg Exchange pays quite a lot of attention to the Asian direction and other friendly platforms, so it is possible that in the near future it will have the opportunity to provide access to securities from friendly countries, Mr. Lesnov believes.

Tatiana Dyatel, Anna Zanina, Ksenia Dementieva, Ksenia Kulikova, Vitaly Gaidaev