Since Russia’s recent recognition of the self-proclaimed independence of two separatist regions of Ukraine and subsequent invasion of the country, the United States and a number of its key allies have sequentially imposed significant sanctions against Russia. As discussed below, separate from dramatically heightened export controls that the U.S. government is enacting against Russia (which will be addressed in a forthcoming Alert after the implementing regulations are published March 3), these new sanctions prohibit U.S. and non-U.S. companies from engaging in a wide range of activities with numerous government-related and private entities and individuals in Russia, Belarus and parts of Ukraine.
Prohibitions on Trade and Investment in Certain Regions of Ukraine
Initially, President Joe Biden issued Executive Order 14065 on February 21, 2022, in response to Russian President Vladimir Putin’s recognition of the self-proclaimed independence of two separatist regions of Ukraine, the Donetsk People's Republic (DNR) and the Luhansk People’s Republic (LNR). Pursuant to EO 14065, the following activities are prohibited:
- New investment in the DNR or LNR regions of Ukraine by a U.S. person, wherever located;
- The importation into the United States, directly or indirectly, of any goods, services or technology from the DNR or LNR;
- The export, reexport, sale or supply, directly or indirectly, from the United States or by a U.S. person, wherever located, of any goods, services or technology to the DNR or LNR; and
- Any approval, financing, facilitation or guarantee by a U.S. person, wherever located, of a transaction by a foreign person where the transaction would be prohibited by the executive order if performed by a U.S. person or within the United States.
For purposes of EO 14065 and other sanctions administered by the U.S. Department of the Treasury, the term “U.S. person” means any United States citizen, lawful permanent resident, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.
The executive order permits the Secretary of the Treasury, in consultation with the Secretary of State, to block all property within U.S. jurisdiction of any person that continues to operate in the DNR or LNR regions as of February 21, 2022, by means of placing such persons on the Treasury’s List of Specially Designated Nationals and Blocked Persons (SDN list). Officials of entities within the DNR or LNR regions and any person who acts on behalf of or assists any person on the SDN list may also be determined to have their property subject to U.S. jurisdiction blocked. Significantly, EO 14065 also permits the Treasury, in consultation with the State Department, to expand the executive order to other regions of Ukraine.
On the same date that EO 14065 was issued, the Treasury established six general licenses that allow for the winding down of certain activities in and permit the export of humanitarian aid (e.g., food and medicine) to the DNR or LNR regions.
First Tranche of Sanctions: SDN Designations and New Sovereign Debt Restrictions
Subsequently, on February 22, 2022, the Biden administration announced a “first tranche” of sanctions against Russia. These sanctions involved the Treasury’s Office of Foreign Assets Control (OFAC) designating certain Russian entities and persons as specially designated nationals (SDNs), which effectively serves to cut them off from the U.S. market and financial system. U.S. persons are now generally prohibited from dealing with them and their property. Interests in property, when subject to U.S. jurisdiction, must be blocked and reported to OFAC, and new restrictions have been imposed on secondary market transactions involving Russian sovereign debt.
Pursuant to Executive Order 14024 of April 15, 2021, OFAC designated as SDNs the following two Russian banks: (1) Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB), which formerly was only subject to more limited restrictions; and (2) Promsvyazbank Public Joint Stock Company (PSB). Additionally, 42 subsidiaries of VEB and PSB, along with five PSB-owned vessels, were designated as SDNs by OFAC.
In connection with these SDN designations, OFAC established two general licenses relating to VEB and its designated subsidiaries. Pursuant to General License 3, U.S. persons are permitted to engage in transactions necessary to wind down business with VEB or any entity 50 percent owned by VEB; this authorization expires on March 24, 2022. In accordance with General License 2, VEB and its subsidiaries are allowed to service bonds issued before March 1, 2022, by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation or the Ministry of Finance of the Russian Federation, provided the transactions are otherwise consistent with the U.S. restrictions on Russian sovereign debt and do not involve other blocked persons. OFAC did not issue parallel general licenses for PSB or its affiliates―and significantly, no general licenses were established relating to PSB.
OFAC also designated five individuals close to Putin as SDNs under EO 14024: Aleksandr Bortnikov, Denis Bortnikov, Petr Mikhailovich Fradkov, Vladimir Sergeevich Kiriyenko and Sergei Vladilenovich Kiriyenko. As stated in a press release issued by OFAC, these individuals were designated as SDNs due to the U.S. government’s view that they are elites who leverage their proximity to Putin to pillage the Russian state, enrich themselves and elevate their family members into some of the highest positions of power in the country at the expense of the Russian people.
OFAC also increased restrictions on dealings in Russia’s sovereign debt by replacing Directive 1 under EO 14024, issued on April 15, 2021, with Directive 1A. By way of background, since August 26, 2019, U.S. banks have been prohibited from participating in the primary market for non-Russian ruble denominated bonds issued by the Russian sovereign, as well as lending non-Russian ruble denominated funds to the Russian sovereign, under OFAC’s separate CBW Act Directive. Separately, Directive 1 under EO 14024 prohibited U.S. financial institutions from participating in the primary market for ruble or non-ruble denominated bonds issued after June 14, 2021, by, or the lending of ruble or non-ruble denominated funds to, the Central Bank, the National Wealth Fund or the Ministry of Finance of the Russian Federation. Directive 1A under EO 14024 expands upon the existing prohibitions to also prohibit, as of March 1, 2022, participation in the secondary market for ruble or non-ruble denominated bonds issued by these entities after March 1, 2022. Importantly, the prohibitions apply only to the three identified entities, as OFAC’s “50 percent rule” does not apply to Directive 1A.
Nord Stream 2 Sanctions
On February 23, 2022, following consultations with Germany, the Biden administration designated as an SDN Nord Stream 2 AG, which is responsible for planning, constructing and operating the Nord Stream 2 pipeline. Additionally, OFAC designated Matthias Warnig, Nord Stream AG’s managing director, as an SDN.
In conjunction with these designations, OFAC published General License 4, which authorizes the winding down of transactions involving Nord Stream 2 AG and any entity that is owned 50 percent or more by Nord Stream 2 AG through March 1, 2022.
Wide-Ranging Sanctions of February 24
In response to Russia’s increasingly bellicose actions against Ukraine, the Biden administration issued a slew of new sanctions against Russia on February 24. These sanctions included new SDN designations and new directives limiting the kinds of interactions that U.S. entities can have with certain Russian financial institutions.
To begin with, OFAC designated the following four Russian financial institutions as SDNs pursuant to EO 14024:
- VTB Bank PJSC (VTB Bank). Russia’s second-largest financial institution that is majority-owned by the government of Russia. OFAC also designated 20 VTB Bank subsidiaries, and all entities owned 50 percent or more, directly or indirectly, by VTB Bank as subject to blocking.
- PJSC Bank Financial Corporation Otkritie (Otkritie). OFAC also designated 12 Otkritie subsidiaries, and all entities owned 50 percent or more, directly or indirectly, by Otkritie as subject to blocking.
- JSC Bank Novikombank (Novikombank). OFAC designated the Russian defense sector bank that is wholly owned by Rostec, a Russian state-owned defense company, as an SDN.
- OJSC Sovcombank (Sovcombank). OFAC also designated 22 Sovcombank subsidiaries, and all entities owned 50 percent or more, directly or indirectly, by Sovcombank as subject to blocking.
These blocking sanctions took effect immediately and require that U.S. financial institutions freeze any funds belonging to VTB Bank, Otkritie, Novikombank and Sovcombank.
Concurrently, OFAC issued a number of general licenses related to the designated entities described above, including 30-day wind-down periods for most of the above banks. OFAC also issued general licenses allowing certain energy transactions payments, through June 24, 2022, with VEB, VTB and Otkritie, as well as general licenses related to specific bonds and debt and for transactions related to agricultural commodities, medicine and medical equipment exported to Russia.
Separately, OFAC issued Directive 2 under EO 14024, “Prohibitions Related to Correspondent or Payable-Through Accounts and Processing of Transactions Involving Certain Foreign Financial Institutions” (Russia-related CAPTA directive). This directive takes effect March 26, 2022, and prohibits U.S. financial institutions from: (i) the opening or maintaining of a correspondent account or payable-through account for or on behalf of any entity determined to be subject to the prohibitions of the Russia-related CAPTA directive, or their property or interests in property; and (ii) processing of transactions involving any such entities determined to be subject to the Russia-related CAPTA directive, or their property or interests in property. As of the date of this Alert, Public Joint Stock Company Sberbank of Russia (Sberbank) and its 50 percent owned subsidiaries are the only Russian financial institutions that are subject to the Russia-related CAPTA directive.
OFAC also expanded its existing Russia-related debt and equity restrictions and issued Directive 3 under EO 14024. This directive prohibits transactions and dealings by U.S. persons or within the United States in new debt of longer than 14 days maturity, including payment/credit terms longer than this tenor period, and new equity of Russian state-owned enterprises, entities that operate in the financial services sector of the Russian economy and other entities determined to be subject to the directive’s prohibitions that is issued on or after March 26, 2022. Annex 1 to the Russia-related entities directive identifies 11 state-owned enterprises and two private entities that are subject to the prohibitions.
In an effort to minimize unintended consequences on third parties, OFAC concurrently issued eight general licenses authorizing certain kinds of transactions. They relate to:
- International organizations and entities (General License 5);
- Agricultural and medical commodities and the COVID-19 pandemic (General License 6);
- Overflight payments, emergency landings and air ambulance services (General License 7);
- Energy-related transactions involving certain sanctioned banks and their 50 percent owned subsidiaries (General License 8);
- Dealings in certain debt or equity (General License 9);
- Derivative contracts (General License 10);
- The winding down of transactions involving Otkritie, Sovcombank, VTB Bank and their 50 percent owned subsidiaries (General License 11, expires March 26, 2022); and
- The rejection (rather than blocking) of unauthorized transactions involving the above-referenced banks and related entities (General License 12, expires March 26, 2022).
In addition, under EO 14024, OFAC also designated as SDNs certain people in Putin’s inner circle and in elite positions of power within the Russian state, whom the U.S. government believes enrich themselves from their positions of power and government access. Certain of these individuals were previously designated as SDNs, and thus, already subject to U.S. sanctions. These people include:
- Sergei Sergeevich Ivanov, current CEO of Russian state-owned diamond mining company Alrosa and a board member of Gazprombank, and his father Sergei Borisovich Ivanov, special presidential representative for Environmental Protection, Ecology and Transport, and reportedly one of Putin’s closest allies;
- Andrey Patrushev, who served in leadership roles at Gazprom Neft and is employed in Russia’s energy sector, and his father Nikolai Platonovich Patrushev, secretary of the Russian Federation Security Council and a longtime close associate of Putin;
- Ivan Igorevich Sechin, reportedly a deputy head of a department at Rosneft, and his father Igor Ivanovich Sechin, CEO, chairman of the management board and deputy chairman of the board of directors of Rosneft;
- Alexander Aleksandrovich Vedyakhin, first deputy chairman of the executive board of Sberbank;
- Andrey Sergeyevich Puchkov, a high-ranking VTB Bank executive with interests beyond VTB, including Moscow-based real estate companies LLC Atlant S and LLC Inspira Invest A, which have been designated for their ties to Puchkov; and
- Yuriy Alekseyevich Soloviev, a high-ranking VTB Bank executive, and his wife Galina Olegovna Ulyutina, who was designated for being the spouse of Soloviev.
In addition to the Russian related sanctions announced February 24, OFAC also imposed additional sanctions on certain Belarusian entities for their role in supporting Russia’s invasion of Ukraine. These entities included Belinvestbank and Bank Dabrabyt, two Belarusian state-owned banks that were added to the SDN list. Additionally, 10 Belarusian defense companies, five defense company executives and three Belarusian defense officials have been placed on the SDN list.
Concurrent with these designations of certain Belarusian entities, OFAC established two general licenses of potential applicability. General License 6 authorizes transactions conducted for official business of the U.S. government by employees, grantees or contractors. General License 7 authorizes transactions conducted by certain international organizations.
Sanctions Imposed on President Putin and Certain Other High-Level Russian Officials
On February 25, 2022, the United States, European Union and United Kingdom added Russian President Vladimir Putin and Russian Foreign Minister Sergei Victorovich Lavrov to their respective asset freeze lists. The United States also added Valery Gerasimov, the chief of the general staff of the armed forces of Russia, as well as Sergei Shoigu, the Russian Minister of Defense, to the SDN list.
All property and interests in property of persons on the SDN list that are located in the United States or within the possession or control of a U.S. person, wherever located, are blocked and may not be dealt in. Any entity in which one or more blocked persons owns in the aggregate, directly or indirectly, a 50 percent or greater ownership interest is itself blocked. U.S. persons may not engage in any dealings, directly or indirectly, with blocked persons or with any property in which blocked persons have any interest, absent an applicable license.
Additional Sanctions to Cut Russia Further Off from the Global Economy
On February 26, 2022, the Biden administration, along with the European Commission, France, Germany, Italy, the United Kingdom and Canada, announced its commitment to ensuring that selected Russian banks are removed from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system and are disconnected from the international financial system and no longer able to operate globally. As of the date of this Alert, the following seven Russian banks have been identified as ones that will be removed from the SWIFT system: VTB Bank, Otkritie, Novikombank, PSB, Sovcombank, VEB and Bank Rossiya.
On February 28, 2022, OFAC implemented new restrictions with respect to the Russian central bank and published Directive 4 under EO 14024, which generally prohibits any transaction involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation or the Ministry of Finance of the Russian Federation, including any transfer of assets to such entities or any foreign exchange transaction for or on behalf of such entities.