Ukraine Crisis: New US Sanctions on Russia and Belarus

US FINANCIAL AND ECONOMIC RESTRICTIONS AGAINST RUSSIA

As outlined in our prior alert, the US government’s first rounds of sanctions included restrictions on secondary market transactions involving Russian sovereign debt, blocking sanctions on large Russian banks and sanctions on Russia’s Nord Stream 2 pipeline. Since then, the United States, along with its partners and allies, has announced a variety of new sanctions targeted at the Russian financial sector, Russian oligarchs with close ties to the Russian government and stringent export controls on technology, as well as sanctions against Belarus.

Recent Broad-Based Sanctions Against Russia and Belarus

On February 24, 2022, OFAC announced new financial and blocking sanctions “specifically designed to impose immediate costs and disrupt and degrade future economic activity, isolate Russia from international finance and commerce, and degrade the Kremlin’s future ability to project power.” Along with new additions to the Specially Designated Nationals and Blocked Persons (SDN) list and new frequently asked questions (FAQs), OFAC issued two directives under Executive Order (EO) 14024[2]:

• Russia Directive 2 prohibits US financial institutions from (1) processing any transaction involving any foreign financial institution named on the Correspondent Account and Payable-Through Account (CAPTA) sanctions list, and (2) opening or maintaining correspondent accounts or payable-through accounts involving or on behalf of certain foreign financial institutions designated on the CAPTA list. Currently, the list is comprised of Sberbank and 25 Sberbank subsidiaries and/or affiliates. The directive applies to foreign financial institutions that are 50% or more owned, directly or indirectly, individually or in the aggregate, by one or more foreign financial institutions determined to be subject to the directive. The effective date of Directive 2 will be March 26, 2022.
• Russia Directive 3 prohibits transactions by US persons in, provision of financing for, and other dealings involving new debt with longer than a 14 days maturity, or new equity, by 14 entities designated in Annex 1 to the directive. This directive will come into effect on March 26, 2022. These sanctions also apply to any subsidiaries in which a named entity holds an ownership interest of 50% or more, even if those subsidiaries are not identified in Directive 3.

On February 28, 2022, OFAC issued a new directive under EO 14024 aimed at further curtailing transactions with the Russian Central Bank, and it added new entities to the SDN list.

• Russia Directive 4 prohibits US persons from engaging in any transaction involving the Central Bank of the Russian Federation, the Russian Ministry of Finance and the Russian National Wealth Fund, including any transfer of assets to such entities and any foreign exchange transaction for or on behalf of such entities. The 50% rule does not apply to Directive 4.

The four directives issued so far under EO 14024 should not be confused with Directives 1–4 issued in past years under EO 13662, which were issued in response to Russia’s invasion and occupation of Crimea in 2014. Those earlier directives are still in force.

On March 2, 2022, the Federal Aviation Administration (FAA) banned all Russian air carriers and commercial operators, all Russian-registered aircraft, all Russian state aircraft, and all Russian-owned, controlled, leased or operated aircraft from operating to, from or within US territorial airspace (with an exception for emergencies and certain authorized humanitarian/rescue and diplomatic operations).

On March 3, 2022, OFAC designated as SDNs 33 individuals and seven entities associated with Russia’s global disinformation campaign, particularly those backed by Russian intelligence services. The US also imposed sanctions on 22 defense-related firms that develop and produce, for Russia’s military, fighter aircraft, infantry fighting vehicles, electronic warfare systems, missiles and unmanned aerial vehicles. Along with its EU allies, the US imposed new export controls on oil and gas extraction equipment that supports Russia’s refining capacity and introduced visa restrictions for certain Russian oligarchs and their families.

On March 8, 2022, President Biden announced a ban on importing Russian oil and gas into the United States as part of an effort to isolate Russia’s energy-heavy economy and President Putin. This action has been imposed under a new Executive Order that also includes a ban on investments by US persons in Russia’s energy sector.

OFAC General Licenses

At the same time as it issued new sanctions measures, OFAC issued a number of general licenses, described below, allowing the continuation of certain activities that would otherwise be prohibited under the new sanctions. A number of these general licenses are time-limited.

• Russia-General License 5 authorizes transactions for the official business of various international organizations including, but not limited to, the International Centre for Settlement of Investment Disputes (ICSID), the Inter-American Development Bank Group (IDB Group) and the International Committee of the Red Cross. EO 14024 already exempts transactions that are for the conduct of the official business of the United Nations by employees, grantees or contractors.
• Russia-General License 6 authorizes transactions that are ordinarily incident and necessary to (1) the exportation or re-exportation of agricultural commodities, medicine, medical devices, replacement parts and components for medical devices or software updates for medical devices to, from or transiting Russia, or (2) the prevention, diagnosis or treatment of COVID-19 (including research or clinical studies).
• Russia-General License 7 authorizes transactions that are ordinarily incident and necessary to (1) the receipt of, and payment of charges for, services rendered in connection with overflights of Russia or emergency landings in Russia by aircraft registered in the United States or owned or controlled by, or chartered to, US persons, and (2) air ambulance and related medical services, including medical evacuation, to individuals in Russia.
• Russia-General License 8 authorizes transactions involving specific entities that are related to energy, including State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank, Bank Otkritie, Sovcombank, Sberbank, VTB Bank, and any subsidiary with 50% or greater interest as long as the transactions do not involve the opening or maintaining of a correspondent account or payable-through account for or on behalf of the entities subject to Directive 2 or involve any other persons blocked pursuant to EO 14024. General License 8 is currently effective through June 24, 2022.
  • On February 28, 2022, OFAC issued General License 8A, which modified General License 8 to add the Central Bank of the Russian Federation to the list of entities with which otherwise-prohibited transactions “related to energy” may be conducted.
• Russia-General License 9 authorizes, through May 25, 2022, transactions ordinarily incident and necessary to dealings in debt or equity, including facilitating, clearing and settling trades of covered debt or equity, of VEB Bank, Bank Otkritie, Sovcombank, Sberbank, VTB Bank or their majority-owned subsidiaries issued prior to February 24, 2022, provided that any divestment or transfer of, or facilitation of divestment or transfer of, such debt or equity must be to a non-US person. This general license does not authorize the opening or maintaining of a correspondent account or payable-through account or transactions involving any other persons blocked pursuant to EO 14024.
  • General License 9A modified General License 9 by adding the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation to the list of entities with which otherwise-prohibited transactions may be conducted, provided that any divestment or transfer of, or facilitation of divestment or transfer of, such debt or equity must be to a non-US person. GL 9A also replaced EO 14024 with the newly issued Russian Harmful Foreign Activities Sanctions Regulations (RuHSR) as the controlling directive for purposes of General License 9. This general license does not authorize the opening or maintaining of a correspondent account or payable-through account or transactions involving any other persons blocked pursuant to the RuHSR.
• Russia-General License 10 authorizes, through May 25, 2022, transactions ordinarily incident and necessary to the wind down of derivative contracts linked to debt or equity entered into prior to 4:00 PM EST on February 24, 2022, that include VEB Bank, Bank Otkritie, Sovcombank, Sberbank, VTB Bank or any subsidiaries with 50% or greater interest as a counterparty. This general license does not authorize the opening or maintaining of a correspondent account or payable-through account or transactions involving any other persons blocked pursuant to EO 14024.
  • General License 10A modified General License 10 to also authorize transactions involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation, that are ordinarily incident and necessary to the wind down of derivative contracts, repurchase agreements or reverse repurchase agreements entered into prior to March 1, 2022.
• Russia-General License 11 authorizes, through March 26, 2022, transactions ordinarily incident and necessary to the wind down of transactions involving Bank Otkritie, Sovcombank, VTB Bank or any subsidiary with a 50% or greater interest. This general license does not authorize any transaction involving any persons blocked (other than those mentioned above) pursuant to EO 14024.
• Russia-General License 12 authorizes, through March 26, 2022, US persons to reject (as opposed to blocking) transactions involving Bank Otkritie, Sovcombank, VTB Bank or any subsidiary with a 50% or greater interest. This general license does not authorize any transaction involving any persons blocked (other than those mentioned above) pursuant to EO 14024.
• Russia-General License 13 authorizes, through June 24, 2022, US persons to pay taxes, fees or import duties, and purchase or receive permits, licenses, registrations or certifications, to the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation, provided such transactions are ordinarily incident and necessary to such persons’ day-to-day operations in the Russian Federation and they do not involve a debit to an account on the books of a US financial.
• Russia-General License 14 authorizes transactions related to the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation, where the function in the transaction is to act as an operator of a clearing and settlement system, provided that (1) there is no transfer of assets (to or from), unless separately authorized, and (2) no entity is either a counterparty or a beneficiary to the transaction, unless separately authorized. This general license does not authorize any debit to an account on the books of a US financial institution.
• Russia-General License 15 authorizes transactions and unblocking all property of any entity owned 50% or more, directly or indirectly, by Alisher Burhanovich Usmanov, that does not appear on OFAC’s SDN list. This license does not authorize transactions involving any person blocked or otherwise sanctioned pursuant to the RuHSR, including Usmanov, or his property or interests in other properties.
• Russia-General License 16 authorizes transactions related to certain imports prohibited by the Executive Order of March 8, 2022, prohibiting certain imports and new investments with respect to continued Russian actions in Ukraine.

In addition, OFAC issued Belarus General License 6 and General License 7 to authorize certain transactions related to official business of the US government and international organizations and entities, respectively.

• Belarus-General License 6 authorizes transactions prohibited by the Belarus Sanctions Regulations, 31 CFR 548, that are for the conduct of the official business of the United States government by employees, grantees or contractors thereof.
• Belarus-General License 7 authorizes transactions prohibited by the Belarus Sanctions Regulations, 31 CFR 548, or Executive Order 14038 that are for the conduct of the official business of several humanitarian entities such as the United Nations and its affiliates and the International Red Cross.

Targeted US Sanctions

Since the beginning of the Russian invasion in Ukraine, the United States has been regularly updating its SDN list covering specified entities and individuals. US persons are prohibited from dealing with SDNs and assets of SDNs in the United States, and assets of SDNs that come within the possession of a US person must be blocked. Targeted entities include major financial institutions (such as VTB Bank, Russian Direct Investment Fund (RDIF) and two RDIF-affiliated entities), companies in key Russian sectors (such as Gazprom, Rostelecom and RusHydro) and key Russian government officials and oligarchs with close ties to the government (such as President Putin, Russian Minster of Foreign Affairs Sergei Viktorovich Lavrov and senior executive of Sberbank Alexander Vedyakhin).

US blocking requirements apply to funds and economic resources owned, held or controlled by a sanctioned person as well as entities owned or controlled directly or indirectly by sanctioned persons or the government of the Russian Federation. Thus, even if not expressly included on the SDN list, an entity will be considered as being an SDN if it is owned at least 50% by one or more SDNs (individually or in the aggregate).

OFAC also expanded on its past SDN designations[3] related to the Belarusian defense industry and violation of democratic principles, by imposing blocking sanctions on Belarusian state-owned financial institutions (Belarussian Bank of Development and Reconstruction Belinvestbank JSC (Belinvestbank)), Bank Dabrabyt JSC (one of the largest financial institutions in Belarus), and two entities closely associated with the Belarussian government (real estate firm LLC Belinvest-Engineering and financial leasing company CJSC Belbizneslizing), among other individuals related to the military and defense industry in Belarus.[4]

Export Restrictions Imposed by the US Commerce Department, Bureau of Industry and Security (BIS)

In response to Russia’s actions in Ukraine and Belarus’s support of Russia’s actions, BIS has imposed a series of new restrictions on US exports of certain items to Russia or Belarus, under which covered items may not be exported to these countries without specific export license authorization. These restrictions also extend to the Donetsk and Luhansk regions of Ukraine the same export embargo as already applies to the Crimean region of Ukraine. The new export restrictions are primarily contained in Sections 746.5, 746.6 and 746.8 of the BIS Export Administration Regulations (EAR).[5]

The new export restrictions apply to a wide range of goods, software and technology, and only limited license exceptions are available. These restrictions also apply to reexports to Russia or Belarus from third countries of US items, exports to Russia and Belarus of foreign-made items containing more than de minimis levels of US content, and exports to Russia or Belarus of certain foreign-made items that are the “direct product” of US technology.

In addition, BIS has added a large number of Russian entities to the BIS entity list. Exports or reexports to these entities are subject to significantly broader restrictions than apply under the more generally applicable export rules. As a general rule, it should be assumed that all exports and reexports that are subject to the EAR to these entities will be prohibited.

Even if an export or reexport is permissible under the new rules, parties are advised to consider how the US sanctions rules on Russian banks will affect the ability of an exporter to get paid for the exported items.

The new restrictions are complex and cannot be summarized briefly. The facts of each transaction, including the items being exported or reexported, the identity (or identities) of the end user (or users), and the end uses of the items will need to be considered.

IMPACT FOR BUSINESSES

As the scope and variety of US sanctions against Russia continues to increase, businesses will need to take swift action to limit their exposure.

• If you or your company have business relationships with Russian entities, consider whether it is viable or legal to continue such relationships, and if not, review relevant contractual agreements and take steps to terminate such relationships.
• If you or your business have a bank account with a subsidiary of a Russian sanctioned bank, consider whether you are covered by an OFAC general license to transfer funds out of the accounts.
• Implement robust sanctions screening provisions and monitor new developments.
• Seek legal advice if you are concerned about potential exposure.