OFAC Substantially Revises Guidance Regarding “New Investment” in Russia

On June 6, 2022, the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury issued seven new FAQs (the “New FAQs”) that, among other things, substantially revise OFAC’s prior definition of “new investment” under Executive Orders (“E.O.s”) 14066, 14068, and 14071 (collectively, the “Investment E.O.s”) under the U.S. Russia sanctions program, 31 C.F.R. Part 587.  OFAC’s previous guidance in FAQ 1019 has effectively been revoked and replaced with a substantially broader definition of “new investment.”  Companies contemplating business in the Russian Federation should assess their potential exposure to U.S. primary and/or secondary sanctions (as applicable) as a result of the New FAQs.

We summarize the key takeaways from the New FAQs here, and provide further detail below:

• Former FAQ 1019 defined “new investment in the energy sector” as involving an investment in “new energy sector activities” occurring within Russia. OFAC has now withdrawn this interpretation.  The New FAQs no longer define “new investment” in terms of “activities.”  Instead, the New FAQs broadly define “new investment” as (i) a commitment of capital or other assets, (ii) for the purpose of generating returns or appreciation, (iii) made on or after the effective date of the relevant Investment E.O. (See FAQ 1049).
• By severing the link between “new investment” and new “activities” in Russia, the New FAQs capture a broad range of passive and/or active investments, e.g., any acquisition of existing (or new) equity shares in a Russian company, or of real estate other than property for non-commercial, personal use; any agreement requiring a commitment of capital or assets for a project or joint venture in Russia; any agreement offering royalties or profits “in the Russian Federation”; any commercial lending agreement; and; any purchase of rights to “natural resources” in Russia. (See FAQ 1049).
• In addition to prohibiting new investments in entities in Russia, the prohibition on “new investment” may include lending funds to or purchasing an equity interest in “entities outside of the Russian Federation,” if: (i) the funds are “specifically intended for new projects or operations in the Russian Federation”; and (ii) the revenues of the entity are “predominantly derived from its investments in the Russian Federation.”  As OFAC permits parties to rely upon “information available to them in the ordinary course of business,” the additional due diligence obligations imposed by this guidance (if any) may vary.  (See FAQ 1055).
• Finally, “new investment” does not include: (i) contracts for the sale or purchase of goods or services made according to ordinary commercial sales terms; (ii) “maintenance” of investments in Russia made prior to the relevant E.O., including ongoing funding of pre-existing subsidiaries; or (iii) the wind down or divestment of any investment in Russia.  For example, U.S. persons and financial institutions are permitted to advise upon and otherwise facilitate the wind down and divestment of investments in Russia (on behalf of the sellers, but not the buyers, of such investments).  Moreover, U.S. persons are not required to divest, and may hold funds that contain debt or equity securities issued by Russian entities, with certain limitations.  (See FAQs 1050, 1051, 1052, 1053).

FAQ 1049

This FAQ asks what is meant by the term “new investment” as used in the Investment E.O.s.

OFAC’s response represents its most complete statement to date on the definition of “new investment.”  In relevant part, OFAC indicates “investment” means “the commitment of capital or other assets for the purpose of generating returns or appreciation,” whereas “new investment” refers to “such a commitment made on or after the effective date of the . . . prohibitions” in the Investment E.O.s.

Notably, “new investment” is not limited to situations where the underlying agreement itself was entered into on or after the relevant date.  Rather, OFAC states that “[n]ew investment also includes such commitments pursuant to the exercise of rights under an agreement entered into before the effective dates of the respective E.O. prohibitions, where such commitment is made on or after the effective dates of the respective E.O. prohibitions.”

OFAC lists six categories of transactions that it will consider “new investments” in the absence of an exemption or authorization by OFAC:

• The purchase or acquisition of real estate in the Russian Federation, other than for noncommercial, personal use;
• Entry into an agreement requiring the commitment of capital or other assets for the establishment or expansion of projects or operations in the Russian Federation, including the formation of joint ventures or other corporate entities in the Russian Federation;
• Entry into an agreement providing for the participation in royalties or ongoing profits in the Russian Federation;
• The lending of funds to persons located in the Russian Federation for commercial purposes, including when such funds are intended to be used to fund a new or expanded project or operation in the Russian Federation;
• The purchase of an equity interest in an entity located in the Russian Federation (see FAQs 1054 and 1055); and
• The purchase or acquisition of rights to natural resources or exploitation thereof in the Russian Federation.

In addition, OFAC lists three “[e]xamples” of transactions that it will not consider to be “new investments”:

• Entry into, performance of, or financing of a contract, pursuant to ordinary commercial sales terms, to sell or purchase goods, services, or technology to or from an entity in the Russian Federation (e.g., a payment of an invoice for goods, where payment is made within the contracted time period and such payment does not involve participation in royalties or ongoing profits);
• Maintenance of an investment in the Russian Federation, where the investment was made prior to the effective date of the respective E.O. prohibitions, including maintenance of pre-existing entities, projects, or operations, including associated tangible property, in the Russian Federation (see FAQ 1050); and
• Wind down or divestment of a pre-existing investment, such as a pre-existing investment in an entity, project, or operation, including any associated tangible property, located in the Russian Federation (see FAQs 1053 and 1054).

FAQ 1050

This FAQ asks what types of transactions are considered to be “maintenance” activities for purposes of the Investment E.O.s.

In response to this FAQ, OFAC clarifies that (i) if an investment was made prior to the effective date of the Investment E.O.s and (ii) involves “maintenance,” it is “generally” excluded from the prohibition on new investment.

OFAC states that “maintenance” includes the following;

• Transactions to ensure continuity of pre-existing projects or operations located in the Russian Federation, including payments to employees, suppliers, landlords, lenders, and partners;
• The preservation and upkeep of pre-existing tangible property in the Russian Federation; and
• Activities associated with maintaining pre-existing capital investments or equity investments.

“Maintenance” also includes all transactions ordinarily incident to performing under an agreement in effect prior to the effective date of the relevant Investment E.O., “provided that such transactions are consistent with previously established practices and support pre-existing projects or operations.”  OFAC states that U.S. persons may also “modify or alter pre-existing agreements, or enter into new contracts or agreements, provided that any transaction under such contracts or agreements are consistent with previously established practices and support pre-existing projects or operations.”  The terms “consistent with” and “support” are not defined, and OFAC says that it will “consider all relevant facts and circumstances, including the transactions history between contract parties,” to assess whether activity is “consistent with” past practice.

The following activities are not “maintenance”:

• the expansion of pre-existing projects or operations beyond those in effect prior to the effective dates of the Investment E.O. prohibitions, even if pursuant to a pre-existing agreement, where such expansion occurs on or after the effective dates of the respective Investment E.O. prohibitions.
• commitments pursuant to the exercise of rights under a pre-existing agreement where such commitment is made on or after the effective dates of the respective Investment E.O. prohibitions.

Finally, “maintenance” must not involve blocked persons or otherwise violate U.S. sanctions.

FAQ 1051

This FAQ asks whether the export to or import from the Russian Federation of goods, services, or technology considered to be “new investment” under the Investment E.O.s.

OFAC responds that while other U.S. sanctions authorities may restrict such transactions, the Investment E.O.s do not prohibit such exports or imports, “or related sales and purchases . . . provided that such transaction is made pursuant to ordinary commercial sales terms (e.g., a payment of an invoice for goods made within the contracted time period, where such payment does not involve ongoing participation in royalties or ongoing profits).”

Moreover, U.S. persons are not prohibited by the Investment E.O.s from “entering into new contracts or agreements for such transactions.”

FAQ 1052

This FAQ asks whether U.S. persons may continue to fund their subsidiaries and affiliates with projects or operations located in the Russian Federation prior to the effective dates of the Investment E.O.s.

OFAC responds that this is permitted, “provided that the use of the funds by the subsidiary or affiliate is consistent with maintenance, as described in FAQ 1050.”

U.S. persons are not permitted to “fund new or expanded projects or operations undertaken by their subsidiaries and affiliates located in the Russian Federation” after the effective dates of the Investment E.O.s.

FAQ 1053

This FAQ asks whether transactions related to divestment are permissible under the Investment E.O.s.

OFAC responds that transactions “related to the divestment or the facilitation of divestment” of a pre-existing investment are not prohibited, “provided such facilitation is on behalf of the selling party only.”  (emphasis added).  This restriction is required for consistency with the prohibition on U.S. persons approving, financing, facilitating, or guaranteeing a transaction by a foreign person where the transaction would be prohibited if performed by a U.S. person or within the United States.  Since a U.S. person is prohibited from acquiring an interest in an entity located in the Russian Federation (see FAQs 1049, 1054), U.S. persons and financial institutions are prohibited from advising or facilitating such a transaction on behalf of the buyer.

FAQ 1054

This FAQ asks whether the prohibitions on “new investment” in the Investment E.O.s prohibit U.S. persons from purchasing debt or equity securities issued by an entity in the Russian Federation.

OFAC responds that the Investment E.O.s do prohibit U.S. persons from purchasing new and/or existing debt and equity securities that are “issued by and entity in the Russian Federation.”  However, as noted in FAQ 1053, U.S. persons are not prohibited from selling or divesting, or facilitating the sale or divestment of debt or equity securities issued by an entity in the Russian Federation.

In addition, OFAC clarifies that U.S. persons are not required to divest; they may continue to hold previously acquired securities.  OFAC provides the following guidance regarding specific financial instruments:

• The conversion of pre-existing depositary receipts to local shares in a non-sanctioned Russian issuer is not a “new investment,” despite the new acquisition of local shares.
• The purchase of shares in a U.S. fund containing debt or equity securities issued by Russian entities is “generally” not considered a prohibited “new investment,” provided that “these holdings represent less than a predominant share by value of debt or equity securities issued by entities in the Russian Federation.”

It is not clear how OFAC will assess whether holdings in Russian entities represent a “predominant share by value . . . issued by entities in the Russian Federation.”

FAQ 1055

This FAQ asks whether the Investment E.O.s prohibit U.S. persons from lending funds to, or purchasing an equity interest in, entities located outside of the Russian Federation.

OFAC responds that such transactions are not prohibited, provided that:

• such funds are not specifically intended for new projects or operations in the Russian Federation and
• the revenues of the entity located outside the Russian Federation are not predominantly derived from its investments in the Russian Federation.

OFAC also states that U.S. persons and financial institutions may rely upon information “available to them in the ordinary course of business” to assess the above points.

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