Sanctions Against Gazprom Neft and Surgutneftegaz
Biden's parting blow at Russia on the way out
This should have come a lot earlier.
That was my reaction to Treasury’s designations aimed at Russia’s energy sector last week. OFAC finally targeted Russia’s most significant revenue source by leveling sanctions against Russia’s oil producers, Gazprom Neft and Surgutneftegas, more than 180 vessels that carry Russian oil in violation of the $60 per-barrel price cap imposed on Russian maritime oil shipments in 2022, and dozens of oil traders, oilfield service providers, insurance companies, and energy officials.
This was a significant step in limiting Russia’s resources that allow it to continue waging its savage war against Ukraine that in about a month will be entering its fourth year.
Fourth year of incessant attacks on first responders, civilian infrastructure, children, hospitals, and other Ukrainian targets that leveled entire cities and regions.
Fourth year of torture and murder.
Fourth year of genocide that included the looting of historical and cultural artefacts and kidnapping and “russification” of Ukrainian children.
The Biden administration, because of a pathetic melange of cowardice, apathy, and pressure from certain allies has been hesitant to escalate. But now that Biden is on his way out the door, he’s trying to paint his administration as Ukraine’s savior.
A Major Blow
Whatever the reason, the new designations issued on January 10, 2025 were a dramatic escalation of sanctions against Russia. More than 400 individuals, entities, and vessels have been designated by the Treasury Department. The UK, in coordination with the United States, also slapped Gazpromneft and Surgutneftegaz with blocking sanctions.
The Russians weren’t happy. Their energy revenues are sure to be impacted, especially since Indian and Chinese buyers are already curtailing their purchases of Russian crude. China’s Shandong Port Group supposedly has banned US-designated tankers from calling into its ports in the province, which is home to many independent refiners that are the biggest importers of oil from Russia, Iran, and Venezuela (although, a newly sanctioned Russian tanker did discharge its cargo at one of the ports belonging to the group this week).
In addition Gazprom is mulling a massive cut to its headquarters staff after posting its first loss in 24 years, according to a letter from one of its board members to the firm's CEO.
Russia, as always, claimed that the new designations will hurt the West and the global economy more than they will hurt Russia. Kremlin spokesman Dimitry Peskov grumbled something about Russia taking steps to mitigate the effects of these new designations, claiming that alternative supply options will inevitably emerge.
What this means for financial institutions and firms operating in the energy space is increased due diligence, because these options will invariably include additional sanctions evasion strategies.
There will be layers of ship-to-ship transfers to obfuscate the origins of Russian oil.
There will be layers of shell and front companies used to ship and receive payments for sanctioned Russian energy.
There will be a race to buy more ageing, unsafe, old vessels to replenish those sanctioned by the West to ship Russia’s energy and a rush to rename and re-register those that have been blocked to hide their sanctioned status.
These evasion methodologies are nothing new, but enhanced due diligence and an increase in resources to conduct it will be a must.
That said, conducting additional research to ensure compliance will be less expensive than paying massive fines for these violations. I point you to last year’s $7.5 million settlement agreement with State Street bank for violations of Ukraine-and Russia-Related Sanctions Regulations that occurred even before Russia’s full-scale invasion of Ukraine.
Do you think that the increased enforcement focus resulting from the full-scale attack will result in less severe penalties for violations committed after the war began in earnest nearly three years ago? I doubt it.
A good follow-up
The Biden administration followed up this major slap against Russia’s energy sector with an additional package of sanctions earlier this week. I get the feeling that everyone thought the sanctions against Russia’s energy sector would be the last blow, but I think OFAC’s sanctions this week are an appropriate and significant next step.
OFAC this week added 168 more individuals and entities to the SDN list pursuant to the Russian Harmful Foreign Activities EO 14024, making them a secondary sanctions risk. This designations targeted a sanctions evasion scheme established between actors in Russia and China to facilitate cross-border payments for sensitive goods. The entities are located in multiple jurisdictions, including Hong Kong, the UAE, Russia, China, Türkiye, and others.
And speaking of evasion schemes, OFAC targeted a Kyrgyz Republic-based financial institution—Keremet Bank—that coordinated with Russia and a US-designated bank—Promsvyazbank—to implement a sanctions evasion scheme. Treasury noted that in 2024, the Kyrgyz Finance Ministry sold a controlling stake in Keremet Bank to a firm with strong links to a Russian oligarch who, in turn, had ties to the Russian government. The bank apparently helped create a sanctions evasion hub for Russia to pay for imports and receive payment for exports.
Interestingly, Keremet Bank last August claimed (link in Russian) to have suspended money transfers via mobile apps of Sberbank, MTS Bank, Tinkoff, and the operator of the Russian national payment system NSPK “indefinitely.” Notice that Promsvyazbank wasn’t listed as one of the banks.
Keremet plans to appeal the designation. "Keremet Bank continues to operate in normal mode, fulfilling its obligations to clients and partners with an unwavering commitment to the principles of transparency, reliability and responsibility," the bank said in a statement.
Sure.
Based on my experience at the US Treasury, sanctions are not imposed easily. Evidence is examined, including sources and corroboration, coordination between government stakeholders is conducted, and there are multiple levels of review. Mistakes are rare, and Keremet is going to have to submit some serious evidence in its appeal if it expects OFAC’s designation decision to be reversed.
Oh, but there’s more!
New sanctions aren’t the only action the Biden administration took this week. In an effort to ensure that sanctions against Russia aren't easy to rescind, Treasury redesignated almost 100 entities that were initially sanctioned pursuant to EO 14024 under EO 13662 - Blocking Property of Additional Persons Contributing to the Situation in Ukraine. As a result of this action, foreign persons, including foreign financial institutions, that knowingly facilitate significant transactions for or on behalf of any of these nearly 100 entities could be subject to mandatory secondary sanctions under the Ukraine/Russia-related sanctions program. That’s right. MANDATORY. This means, if you’re caught, you’ll be cut off from the US dollar and the global financial system. (Here’s looking at you, Raiffeisen!) The only thing that may save you is the definition of “significant,” but I don’t expect leniency in that sphere, especially since Trump’s nominee to run the Treasury Department, Scott Bessent, seems to be a fan of ratcheting up sanctions against Russia to end its savagery in Ukraine.
“If any officials in the Russian Federation are watching this confirmation hearing, they should know that if I’m confirmed, and if President Trump requests as part of his strategy to end the Ukraine war, that I will be 100% on board from taking sanctions up, especially on the Russian oil majors to levels that would bring the Russian Federation to the table.”
Of course, the key languate here is “if President Trump requests,” but I suspect that Trump, who values strength and power above all, will be mighty upset if Russia doesn’t bow to his will, and could very well authorize additional sanctions. Given the unpredictability of the President-elect, we’ll have to see, but if I were Putin, I wouldn’t count too much on sanctions relief without major concessions, such as the Russians unassing the AO, returning the territories they illegallly annexed to Ukraine, keeping their probosces out of Ukraine’s national security decisions (such as joining the EU and NATO), and possibly paying massive reparations for the damage they caused.
But back to the redesignations.
There’s another reason why they’re significant.
Designations under EO 13662 cannot be revoked without consent from both houses of Congress, required under Countering America’s Adversaries Through Sanctions Act (CAATSA), which passed in 2017, making sanctions under this EO more difficult to rescind. The EO, among other things, authorizes asset freezes and a visa bans against any person determined by the Secretary of the Treasury, in consultation with the Secretary of State to operate in sectors such as financial services, energy, metals and mining, engineering, and defense.
Now that Biden has nothing to lose, he’s getting tough with Russia, and that’s a good thing.
Let’s hope no more waivers are issued to countries that are at this point little more than Russian handpuppets.
Let’s also hope that this final blow not a case of “too little, too late.”