OFAC clarifies definition on ‘new investment’ into Russia under EOs

The US Treasury Department’s Office of Foreign Assets Control (‘OFAC’) has issued new FAQs, clarifying the meaning of ‘new investment’ into Russia under recent executive orders.

FAQ 1049 explains that, for the purposes of Russia-related Executive Order (E.O.) 14066, E.O. 14068, or E.O. 14071,

‘OFAC views “investment” as the commitment of capital or other assets for the purpose of generating returns or appreciation. OFAC interprets “new” investment as such a commitment made on or after the effective date of the respective E.O. prohibitions.’

It says: ‘As a general matter, new investment includes such commitments that are pursuant to an agreement entered on or after the effective dates of the respective E.O. prohibitions [and] 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.’ But, it notes, it ‘does not include the maintenance of an investment made prior to the applicable effective dates of the respective E.O. prohibitions.’

Examples of ‘new investment’ include:

• The purchase or acquisition of real estate in the Russian Federation, other than for non-commercial, 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; and
• The purchase or acquisition of rights to natural resources or exploitation thereof in the Russian Federation.

Examples of transactions that OFAC does not consider to be ‘new investment’ include:

• 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
• 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.

OFAC says, ‘Even if a transaction is not a prohibited form of “new investment” pursuant to the respective E.O.s, U.S. persons engaging in the transaction must comply with all other relevant sanctions prohibitions, including those pursuant to Ukraine-/Russia-Related Sanctions Regulations and Russian Harmful Foreign Activities Sanctions Regulations. For example, the respective E.O.s include provisions prohibiting any approval, financing, facilitation, or guarantee by a United States person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited if performed by a United States person or within the United States.’

For the full suite of the recent FAQs see: https://home.treasury.gov/policy-issues/financial-sanctions/faqs/added/2022-06-06