Updated as of April 12, 2022

It has now been more than 40 days since the start of Putin’s brutal invasion of Ukraine. Today, following the recent revelations of the atrocities committed in Bucha, Ukraine by Russian armed forces, the United States – in coordination with the G7 and the EU – imposed new sanctions on Russia (see here). The sweeping new sanctions seek to further restrict Russia’s access to dollars and put economic pressure on Putin to end the war. The sanctions include a ban on all new investment in Russia as well as designations of Russia’s largest financial institutions (i.e., Sberbank and Alfa Bank), critical state-owned enterprises, and Russian government officials and their family members, including Putin’s children.

Continue Reading U.S. and Allies Impose Additional Severe Costs on Russia for Atrocities in Ukraine

Updated as of March 9, 2022

Key Takeaways of OFAC (Treasury), BIS (Commerce), and State Actions

  • Major Russian Banks Blocked from the U.S. Financial System. Six major Russian banks — VEB, Promsvyazbank (PSB), VTB Bank, Otkritie, Sovcombank, and Novikombank — were named Specially Designated Nationals (SDNs), effectively cutting them off from any activity involving a U.S. person or U.S. bank, and removed from the SWIFT messaging system.

Meanwhile, Sberbank was prohibited from U.S. correspondent or payable-through accounts, severely restricting the bank’s ability to conduct U.S. Dollar transactions. Numerous subsidiaries of those banks were also sanctioned.

  • Many Exports to Russia Prohibited Without a License. On March 3, 2022, the United States will use its export control regime to prohibit numerous U.S.-origin items, as well as non-U.S. items that are the product of U.S. technology or software, from being exported to Russia without a license. This effective prohibition covers a massive list of items and may affect exports across industries including materials processing, electronics, computers, telecommunications and information security, lasers and sensors, navigation and avionics, and marine transport.
  • Oil Imports and Russia Energy Investments Prohibited. On March 8, 2022, the United States banned the import of Russian oil, liquefied natural gas, and coal to the United States and new U.S. investment in Russia’s energy sector.
  • Further Sanctions to Inhibit Russia’s Ability to Financially Sustain War. On February 28, 2022, the United States imposed further sanctions to limit Russia’s ability to use its assets for destabilizing activities. The related prohibitions included targeting the ruble and sovereign wealth funds.
  • General Licenses Provide a Brief Wind-Down Period. Many of the restrictions provide for U.S. persons to complete or wind down current transactions that would otherwise be prohibited within 30 days. Energy-sector transactions will have an authorized wind-down period of four months. Another general license authorizes payment through June 24, 2022 of taxes, fees, import duties, and registrations for day-to-day operations in Russia.

The United States has responded to Russia’s invasion of Ukraine with a slate of sanctions and export controls aimed at hobbling the finance and industry that supports the Russian military. The U.S. measures create risk for U.S. and non-U.S. entities doing business in Russia. Below we explore the nature and extent of those risks as they stand.[1]

U.S. Sanctions Against Russian Banks

SDN Designations

On February 22 and 24, 2022, President Biden and the U.S. Treasury Office of Foreign Assets Control (OFAC) announced an array of sanctions targeting Russian banks.[2] Those sanctions include SDN designations of six major Russian banks, and their subsidiaries as follows:

  • Vnesheconombank (VEB), Russia’s foreign development bank, which was previously subject to U.S. SSI designations;
  • Promsvyazbank PJGS (PSB), a major finance source for the Russian military;
  • VTB, Russia’s second-largest financial institution;
  • Otkritie, a state-owned credit institution;
  • Sovcombank, the third largest privately owned financial institution in Russia by total assets, and Russia’s ninth largest bank overall; and
  • Novikombank, a Russian state-owned bank primarily serving the military and military suppliers.

When a bank is designated as an SDN, no U.S. person, including U.S. banks, may participate in any transaction involving that SDN. Further, if non-U.S. companies provide goods or services to, or material support for, any of those SDN banks, those non-U.S. companies risk also being sanctioned by the United States.

For that reason, the SDN designation often has the effect of keeping U.S. and non-U.S. parties, particularly banks, from engaging in transaction with the sanctioned SDN entity.

Prohibitions on U.S. Accounts For Sberbank

Sberbank. In a measure one step below the complete blocking of an SDN designation, the United States imposed sanctions on Sberbank and many of its subsidiaries and affiliates. Under those sanctions, no U.S. bank may open or maintain a correspondent or payable-through account for the sanctioned banks, nor may a U.S. bank process a transaction in which a sanctioned bank has an interest.

Although this sanction does not prohibit all U.S. persons from transacting with Sberbank, it will effectively restrict U.S.-person transactions involving Sberbank because no U.S. bank may process such a transaction.

Removals from SWIFT

Moreover, the United States and several allies are working to remove these SDN banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system.

Export Restrictions to Russia

Concurrent with the sanctions discussed above, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) issued a rule requiring a license for the export of a broad array of items to Russia, both from the United States and from third countries. BIS will use the long arm of its “Foreign Direct Product Rule” to control non-U.S. items that are the direct product of certain U.S.-origin technology and software.

New Broad License Requirements

The new BIS rules add license requirements for the export of any items to Russia that fall under exports classification Categories 3-9 on the U.S. Commerce Control List (CCL). Most of those items were not previously controlled for exports to Russia. That requirement will apply even to certain low-level, commercial-off-the-shelf commodities, software, and technology in the fields of microelectronics, telecommunication, sensors, navigation equipment, avionics, marine and aircraft components. Further, the use of export license exceptions for those items will be substantially limited. However, the additional license requirements does not apply to deemed exports and deemed reexports.

Review Policy

Applications for the export, reexport, or transfer of items that require a license for Russia will be reviewed under a policy of denial.

However, applications for exports, reexport or transfer of items related to the safety of flight, maritime safety, humanitarian needs, government space cooperation, civil telecommunications infrastructure, government-to-government activities, and support of limited operations of U.S. and allied countries subsidiaries and JVs companies in Russia will be reviewed on a case-by-case basis.

Export Controls Targeting Oil Refining

On March 3, 2022, Commerce announced two additional export controls on oil and gas extraction equipment. First, Commerce prohibits the export of oil refining equipment regardless of intended end use. Second, Commerce prohibits exports where an exporter has knowledge that an item would be used for exploration or production from deepwater, Arctic offshore, or shale projects in Russia that have the potential to produce oil or gas, or just where a person was unable to determine whether the item would be used in such projects in Russia. Any license application for such activities will no longer be reviewed under a presumption of denial, but now a policy of denial, except for certain health and safety exceptions.

New Foreign Direct Product Rules

The new rule creates two new Foreign Direct Product Rules (FDPR) as follows:[3]

  • The Russia FDPR; and
  • The Russia-Military End User (MEU) FDPR.
Russia FDPR Russia-MEU FDPR
The new Russia FDPR establishes controls over foreign produced items that are:

  1. The direct product of certain U.S. origin software or technology subject to the EAR; or
  2. Produced by certain plants or major components thereof that are themselves the direct product of certain U.S. origin software or technology subject to the EAR.

Those new controls apply when exporters have knowledge that the foreign produced item is destined to Russia or will be incorporated into or used in the production or development of any parts, component, or equipment produced or destined to Russia. This FDPR does not apply to foreign-produced items that are designated EAR99.

The Russia-MEU FDPR applies to foreign produced items that are:

  1. The direct product of any software or technology subject to the EAR that is on the Commerce Control List, or
  2. Produced by certain plants or major components thereof that are themselves the direct product of any U.S.-origin software or technology on the CCL.

Such foreign produced end items will be subject to the EAR and require a license if an entity with a footnote 3 designation on the Entity List (see below) is a party to the transaction, or if there is knowledge that the item will be incorporated into or used in the production, development of any part, component or equipment produced, purchased, or ordered by such entity. Unlike the previous FDPR, this Russia-MEU FDPR applies to all items, including those designated as EAR99 subject to license authorization for footnote 3 designated Russian MEUs.

Entity List Footnote 3

The new rule will add dozens of parties to the U.S. Entity List and add a “Footnote 3” designation. Footnote 3 indicates that the Russia-MEU FDPR applies to that listed entity. For those entities, a license is required to export, reexport, or transfer all items subject to the EAR, including foreign produced items under the Russia-MEU FDPR.

Footnote 3 is also applicable for exports to the Russian Ministry of Defense, including the Armed Forces of Russia, wherever located. License applications for Footnote 3 designated entities will be reviewed under a policy of denial.

As of publication, a total of 45 entities have been transferred from the MEU List to the Entity List and are now designated under Footnote 3. BIS is also adding two new Russian Entities with a footnote designation. Additional entities may be added in the future.

New MEUs restrictions

Restrictions on Russian MEUs and military end-uses now cover all items subject to the EAR with the exception of food and medicine designated as EAR99, and items designated as ECCN 5A992.c or 5D992.c; unless those are for Russian government end-users or Russian state-owned enterprises.

Further U.S. Sanctions Against Russia

Oil Imports and Energy Investments

On March 8, 2022, the United States prohibited the import of crude oil; petroleum; petroleum fuels, oils, and products of their distillation; liquefied natural gas; coal; and coal products of Russian origin into the United States. OFAC subsequently issued a General License providing for a 45 day winddown period of such imports until April 22, 2022. In addition, the United States prohibited new investment in the energy sector in Russia by U.S. persons, as well as any approval, financing, facilitation, or guarantee by U.S. persons of such transactions by a foreign person.

Targeting the Ruble

On February 28, 2022, OFAC issued Directive 4 imposing more robust economic sanctions in response to Russia’s aggression in Ukraine. OFAC prohibited any transaction by U.S. persons 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. These sanctions aim to disrupt Russia’s attempts to prop up the ruble – which is rapidly depreciating.

Sovereign Wealth Fund Prohibitions

The United States also designated three entities and an individual key to Russia’s primary sovereign wealth fund: the Russian Direct Investment Fund (RDIF); the Joint Stock Company Management Company of the Russian Direct Investment Fund (JSC RDIF) – the management company of RDIF; the Limited Liability Company RVC Management Company (LLC RVC) – a subsidiary of JSC RDIF; and Kirill Aleksandrovich Dmitriev (Dmitriev) – the CEO of RDIF and JSC RDIF and close Putin ally. These sanctions aim to further restrict Russia’s access to cash and the U.S. financial system and international investors.

Debt and Equity Prohibitions

The United States also fired a shot at Russian capabilities for financing activity such as the Ukraine invasion. Directive 3 under E.O. 14024, prohibits U.S. persons from dealing in the debt of longer than 14 days maturity or the equity of certain Russian banks and state-owned businesses, as follows:

  • Sberbank
  • Russian Agricultural Bank
  • Gazprombank
  • Gazprom
  • Gazprom Neft
  • Transneft
  • Rostelecom
  • RusHydro
  • Alrosa
  • Sovcomflot
  • Russian Railways
  • Alfa-Bank
  • Credit Bank of Moscow

Additionally, sanctions prohibit participation in the secondary market for bonds issued after 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.

Designation of Russian Oligarchs

The United States government views the elite circle of oligarchs that surround Putin as some of the most powerful people in Russia. Many of those individuals have worked to support the regime’s illegal invasion of Ukraine and have used family members to move assets and to conceal wealth they have effectively stolen from the Russian people. For that reason, the U.S. designated many of these individuals as SDNs. In addition to those designations, on March 3, 2022, the U.S. Department of State also designated several elites and their financial networks.

Blocking of Russian Defense Entities

On March 3, 2022, the Department of State also designated 22 of Russia’s defense enterprises deemed to be “at the core of Putin’s war machine.” In addition, OFAC added those entities to the SDN List.

U.S. Sanctions on Nord Stream 2

OFAC also took aim at a massive project for the Russian government and Russian oil and gas industry, the Nord Stream 2 pipeline, a project that would run from northwestern Russia to Germany under the Baltic Sea. While Germany has effectively halted the project, the United States has added the Swiss company in charge of building Russia’s Nord Stream 2 gas pipeline, and its German chief executive officer, Matthias Warnig, to the SDN List.

Closure of U.S. Airspace to Russian Aircraft

On March 2, 2022, the White House announced that the United States would close off American air space to all Russian flights. That closure bans aircraft certified, operated, registered, or controlled by any person connected with Russia for both passenger and cargo.

We will closely monitor activity around the Russia-Ukraine war and provide ongoing updates at our blog here.

FOOTNOTES

[1]     We note that the sanctions and the concomitant risks may be subject to changes in the coming days and weeks. We will update this article or publish related articles to address those changes.

[2]     Blocking Property With Respect To Specified Harmful Foreign Activities of the Government of the Russian Federation, available at https://home.treasury.gov/system/files/126/14024.pdf.

[3]     Exports, reexports, and transfers from the following countries are not subject to these new FDPR: Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, New Zealand, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.

Updated as of March 3, 2022

Key Takeaways of EU and UK Recent Actions Against Russia and Ukraine Breakaway Regions

  • The EU adopted sanctions restrictions targeting financial institutions, other entities, and individuals, and imposing territorial restrictions on Donetsk and Luhansk. The sanctions also include broad export restrictions to Russia detailed below.
  • In the UK, Prime Minister Boris Johnson has promised and adopted a “massive package of economic sanctions” including asset freeze restrictions; potential exclusion of Russian banks from the UK financial system, including preventing access by such banks to GBP and clearing services in the UK; and dual-use export restrictions to Russia.

Continue Reading Russian Risk: Transactions with Russian Banks and Exports to Russia Create Greatest Exposure Under New EU and UK Ukraine-Related Sanctions

With Russian forces massing at the Ukrainian border, the U.S. and EU have been warning of severe economic sanctions. While we wait and watch this brinksmanship play out, it is worth considering how businesses, and particularly banks, might prepare for what comes next.

Continue Reading A Ruble Without a Cause: What Economic Sanctions on Russia May Mean for Your Business and Global Finance

In response to Russia’s military presence in the Crimean region of Ukraine, President Obama issued an Executive Order (“EO”) on March 6, 2014, authorizing the blocking of property of individuals and entities involved in the political destabilization of Ukraine. The EO provides categories of persons subject to the sanctions but leaves the U.S. Treasury and State Departments to designate the specific persons covered by the EO.

Continue Reading The Gloves are Off: U.S. Sanctions Block Aggressors in Crimea