LawFlash

Update: United States Expands Sanctions, Export Controls in Response to Russian Operations in Ukraine

February 28, 2022

Based on the evolving military operations of the Russian Federation in Ukraine, the United States has imposed additional sanctions on the Russian Federation, Russian leadership, and various financial institutions and companies. These sanctions, imposed in close coordination with American allies and partners, target Russian banks as well as Russian state-owned and private entities thought to be involved in funding Russia’s actions.

US President Joseph Biden also directed the imposition of blocking sanctions on Russian President Vladimir Putin, as well as other top Kremlin officials. Most recently, the Office of Foreign Assets Control (OFAC) prohibited 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.

Background

The United States’ latest tranche of sanctions builds on those first imposed in 2014 by President Barack Obama to address Russia’s annexation of the Crimea region, and later sanctions imposed by President Donald Trump pursuant to several executive orders. Over the last eight years, the sanctions against Russia have grown in scope and severity.

In response to President Putin’s recent military actions in Ukraine, the United States has imposed the following additional financial sanctions:

  • Blocking sanctions on prominent Russian financial institutions
  • Blocking sanctions on President Putin, other senior Kremlin officials, and Russian elites and their family members
  • Correspondent and payable-through account sanctions on Sberbank<
  • Debt and equity prohibitions against Russian state-owned and private entities
  • A prohibition on all transactions 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

Coupled with the latest round of Russian sanctions, the United States announced additional sanctions against Belarus that target its financial and defense sectors.

Blocking Sanctions

Russia

On February 24, 2022, OFAC imposed blocking sanctions on a number of Russian financial institutions, including VTB Bank and 20 of its subsidiaries, and Sovcombank and 22 of its subsidiaries, pursuant to Executive Order (EO) 14024, “Blocking Property With Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation.” The additional designations targeted institutions and individuals whom the United States believes have played key roles with respect to, or contributed materially to, the ongoing military operations in Ukraine. This approach aligns with other actions taken by OFAC as justification for the expansion of sanctions.

Although Russia has a broad financial institution base, OFAC also identified the following banks—Bank Otkritie and Novikombank and their respective subsidiaries—for also being owned or controlled by, or active on behalf of, the Russian Federation’s government, and for operating in the Russian Federation’s financial services sector. OFAC also sanctioned select Russian elites and their family members, and the heads of Russia's largest financial institutions, whom it holds responsible for financing the Russian Federation's military.

Based on these designations, the US sanctions do the following:

  • Freeze or “block” all assets under US jurisdiction
  • Prohibit US persons from doing business with these sanctioned parties
  • Prohibit all persons from using the US financial system to transact with sanctioned parties, unless authorized by OFAC

Additionally, non-US persons may risk sanctions if they engage in certain transactions with these Specially Designated Nationals (SDN). These sanctions apply to entities owned 50% or more by one or more SDNs.

Understanding that parties may need some time to adjust to the new restrictions, OFAC issued a number of general licenses designed to authorize activities for set periods of time or for specific purposes, such as humanitarian activities:

  • General License No. 5: “Official Business of Certain International Organizations and Entities” – indefinitely authorizes otherwise prohibited transactions that are for the conduct of certain international organizations.
  • General License No. 6: “Transactions Related to the Exportation of Agricultural Commodities, Medicine, Medical Devices, Replacement Parts and Components, or Software Updates, or the Coronavirus Disease 2019 (COVID-19) Pandemic” – indefinitely authorizes otherwise prohibited transactions that are ordinarily incident and necessary to (1) the exportation or reexportation of agricultural commodities, medicine, medical devices, and other related items; and (2) the prevention, diagnosis, or treatment of COVID-19.
  • General License No. 7: “Authorizing Overnight Payments, Emergency Landings, and Air Ambulance Services” – indefinitely authorizes otherwise prohibited transactions that are ordinarily incident and necessary to the receipt of, and payment of charges for, services rendered in connection with overflights of the Russian Federation or emergency landings.
  • General License No. 8A: “Authorizing Transactions Related to Energy” – authorizes until June 24, 2022, otherwise prohibited transactions “related to energy” that involve VEB Bank, Bank Otkritie, Sovcombank, Sberbank, VTB Bank or their subsidiaries, or the Central Bank of Russian Federation, discussed below. Among other things, “related to energy” means extraction, production, refinement, or purchase of petroleum, as well as the development, production, generation, transmission, or exchange of power.
  • General License No. 9: “Authorizing Transactions Related to Dealings in Certain Debt or Equity” – authorizes otherwise prohibited transactions that are ordinarily incident and necessary to dealings in debt or equity of VEB Bank, Bank Otkritie, Sovcombank, Sberbank, VTB Bank or their subsidiaries, provided the debt or equity was issued prior to February 24, 2022, and that any divestment is to a non-US person. General License No. 9 is valid through 12:01 am Eastern Daylight Time, May 24, 2022.
  • General License No. 10: “Authorizing Certain Transactions Related to Derivative Contracts” – authorizes otherwise prohibited transactions that are ordinarily incident and necessary to the wind-down of derivative contracts entered into prior to 4:00 pm Eastern Standard Time on February 24, 2022, that include VEB Bank, Bank Otkritie, Sovcombank, Sberbank, VTB Bank or their subsidiaries as a counterparty or that are linked to a debt or equity of any of the foregoing. General License No. 10 is valid through 12:01 am Eastern Daylight Time on May 25, 2022, provided that any payments to a “blocked” person are made into a blocked account.
  • General License No. 11: “Authorizing Wind Down of Transactions Involving Certain Blocked Persons” – authorizes otherwise prohibited transactions that are ordinarily incident and necessary to the wind-down of transactions involving Bank Otkritie, Sovcombank, VTB Bank or any of their subsidiaries. General License No. 11 is valid through 12:01 am Eastern Daylight Time on March 26, 2022.
  • General License No. 12: “Authorizing US Persons to Reject Certain Transactions” – authorizes US persons to reject, rather than block, transactions involving Bank Otkritie, Sovcombank, or VTB Bank through 12:01 am Eastern Daylight Time on March 26, 2022.

Belarus

In addition to imposing new sanctions on Russian entities and individuals, OFAC extended further sanctions against Belarus. Among the new limitations, OFAC sanctioned two Belarusian state-owned banks: Belarussian Bank of Development and Reconstruction Belinvestbank Joint Stock Company (Belinvestbank) and Bank Dabrabyt Joint-Stock Company (Bank Dabrabyt). These banks were sanctioned pursuant to EO 14038 for being controlled by or acting on behalf of Belarus’s government.

Understanding the need for companies to manage the changes in policy, OFAC simultaneously issued two general licenses. General License 6 authorizes otherwise prohibited transactions that are for the conduct of the official business of the US government by employees, grantees, and contractors thereof. General License 7 authorizes otherwise prohibited transactions that are for the conduct of the official business of certain international organizations, including the United Nations and the Red Cross.

Prohibition Related to the Central Bank of Russia

On February 28, 2022, OFAC took an unprecedented action in issuing Directive 4 Under EO 14024, immediately prohibiting all transactions 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. This prohibition covers the transfer of assets to any of the foregoing entities or any foreign exchange transaction for or on behalf of them. This action was taken in close coordination with US allies and partners in an effort to limit the ability of the Central Bank to use its over-reserves to bail out others sanctioned and thwart the impact of the sanctions imposed thus far.

In conjunction with the issuance of this Directive 4, OFAC issued General License No. 8A to replace and supersede General License No. 8, which was originally issued on February 24, 2022. The changes to General License No. 8A allow for the Central Bank of the Russian Federation to be involved in energy-related transactions until June 24, 2022, notwithstanding the prohibition on all Central Bank–related transactions.

New Directive on Correspondent and Payable-Through Accounts

OFAC also sanctioned Sberbank, Russia’s largest financial institution. Specifically, under EO 14024, OFAC issued Directive 2, “Prohibitions Related to Correspondent or Payable-Through Accounts and Processing of Transactions Involving Certain Foreign Financial Institutions” (the CAPTA Directive), which cuts Sberbank off from the US financial system without blocking its assets.

The CAPTA Directive prohibits US financial institutions from

  • ·opening or maintaining 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
  • processing transactions involving any such entities determined to be subject to the Russia-related CAPTA Directive, or their property or interests in property.

These correspondent and payable-through accounts sanctions currently apply to Sberbank and 25 Sberbank foreign financial institution subsidiaries that are 50% or more owned by Sberbank. The targeted subsidiaries include banks, trusts, insurance companies, and other financial companies located both in and outside of Russia. Entities owned 50% or more by Sberbank are subject to these restrictions even if they do not appear on OFAC’s List of Foreign Financial Institutions Subject to Correspondent Account or Payable-Through Account Sanctions (CAPTA List).

The sanctions become effective on March 26, 2022.

New Directive on Debt and Equity

OFAC also issued Directive 3 under EO 14024, which prohibits US persons from, without authorization by OFAC, transacting in, providing financing for, or otherwise dealing in new debt of longer than 14 days’ maturity, or new equity, of 13 Russian entities listed in Annex 1 to Directive 3. Additionally, entities owned 50% or more by one or more Annex 1 entities are also subject to the Directive 3 prohibition even if they do not appear on Annex 1.

The Directive 3 prohibition applies to new debt or new equity issued on or after 12:01 am Eastern Daylight Time on March 26, 2022. “Debt,” as used in Directive 3, is defined by OFAC in a separate FAQ to include bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper. “Equity” is likewise explained in the FAQ to include stocks, share issuances, depositary receipts, or any other evidence of title or ownership.

Directive 3 also separately prohibits US persons from transacting in, providing financing for, or otherwise dealing in new debt of longer than 14 days’ maturity or new equity of entities not listed in Annex 1, but subsequently determined by OFAC to be subject to Directive 3. The prohibition on dealing in new debt or new equity of such subsequently designated entities applies to debt or equity issued on or after the date that is 30 days after the date of OFAC’s determination.

New Export Controls for Russia

In addition to the economic sanctions described above, the US Department of Commerce’s Bureau of Industry and Security (BIS) announced new export controls intended to restrict Russia’s access to technologies and other items needed to support the country’s defense industrial base and military services. These actions were implemented in a final rule taken under the authority of the Export Control Reform Act of 2018 and its implementing regulations, the Export Administration Regulations (EAR), and were imposed in coordination with US allies and partners.

At a high level, the final rule imposes new license requirements for Russia on many items subject to the EAR, as well as on certain foreign-made items that are the direct product of US-origin software or technology subject to the EAR. When a license application is required, applications for such items will be subject to a general policy of denial.

Additionally, the final rule significantly restricts the use of license exceptions for Russian exports, reexports, and in-country transfers, and expands the scope of the existing “military end use” and “military end user” controls for Russia.

Exporters to Russia should review the final rule in its entirety to determine the extent to which they may be impacted by these expanded export controls. For more in-depth analysis, read our LawFlash, Update: US Department of Commerce Imposes Restrictions on Russia.

Final Takeaways

The situation remains fluid and evolving. As such, these sanctions, as well as potential future sanctions, will likely shift to address the geopolitical circumstances between Russia and Ukraine. Compliance obligations will need to be updated in tandem to those changes. Morgan Lewis will address anticipated additional sanctions as they issue.

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Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Ukraine Task Force
Giovanna M. Cinelli
Joanna Christoforou
Bruce Johnston
Grigory Marinichev
Michael Masling
Kenneth J. Nunnenkamp
Georgia M. Quenby
Christina Renner
Melanie Ryan
Vasilisa Strizh
Carl A. Valenstein
Alexey Chertov
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Nicola Kelly
Christian Kozlowski
Daniel Lopez Rus
Charles C. Rush
Eli Rymland-Kelly