Special Alert: Russian invasion of Ukraine triggers significant sanctions (updated)
Buckley Special Alert
Over the past few days, and following weeks of clear signals that sanctions would be imposed in response to military activity, the Biden administration issued significant new sanctions in response to the Russian Federation’s military invasion of Ukraine and its recognition of Ukraine’s separatist regions. The recent measures:
- Freeze the U.S. assets of numerous Russian banks and their subsidiaries, including Russia’s second largest bank, VTB, the company behind the Nord Stream 2 pipeline and multiple Kremlin-connected individuals
- Cut off Sberbank, Russia’s largest bank, from the U.S. financial system by prohibiting transactions involving Sberbank and imposing correspondent account-related prohibitions
- Prohibit transactions in new debt and equity of 13 large Russian enterprises
- Target secondary market dealings in Russian government debt
- Impose a near complete prohibition on dealings with the separatist regions of Ukraine
As widely reported, these U.S. sanctions are being issued in close coordination with EU and UK authorities, and institutions with cross-border business will need to take the U.S., UK and EU measures into account when conducting Russia-related business. For detailed coverage of UK and EU sanctions developments, please see updates from David Savage, Head of Financial Crime at Stewarts Law.
Asset blocking sanctions on VTB, Nord Stream 2 and many others
Over the course of the past three days, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has imposed property-blocking sanctions on significant Russian banks, state-owned and private enterprises and Russian elites. Banks include Russia’s largest bank, Sberbank, and VTB Bank, Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank, Promsvyazbank Public Joint Stock Company, Bank Otrie, Sovcom OJSC and Novikom Bank, along with over 90 of these banks’ subsidiaries. OFAC also imposed blocking sanctions on Nord Stream 2 AG, the company behind the $11.3 billion pipeline project that was intended to carry gas from Russia to Germany, and multiple Kremlin-connected individuals. OFAC issued multiple general licenses that enable limited activities related to the wind down of business with some of the targeted entities, including Nord Stream 2 AG. All entities owned 50 percent or more, directly or indirectly, by any of the blocked entities or their listed subsidiaries are also subject to blocking sanctions, even if not identified as blocked by OFAC.
Correspondent account and payable through account sanctions on Sberbank
On February 24, OFAC issued Directive 2 Under Executive Order 14024, targeting Russia’s largest bank, Sberbank. The new directive prohibits U.S. financial institutions from processing transactions for Sberbank or its subsidiaries, and from the opening or maintaining a correspondent or payable-through account for or on behalf of Sberbank or its subsidiaries. Executive Order 14024, in conjunction with the Directive 2, authorizes OFAC to designate additional foreign financial institutions as subject to the transaction- and account-related prohibitions of Directive 2. The prohibitions applicable to Sberbank take effect on March 26, 2022. Entities subject to Directive 2 can be found in OFAC’s Correspondent Account and Payable-Through Account Sanctions (CAPTA) List.
Debt and equity restrictions on Russian enterprises
OFAC also issued Directive 3 Under Executive Order 14024, which prohibits U.S. persons from engaging in all transactions in, provision of financing for, and other dealings in new debt of greater than 14 days maturity and new equity issued by 13 Russian state-owned enterprises and entities, as well as their subsidiaries, on or after March 26, 2022. The entities include Sberbank, AlfaBank, Credit Bank of Moscow, Gazprombank, Russian Agricultural Bank, Gazprom, Gazprom Neft, Transneft, Rostelecom, RusHydro, Alrosa, Sovcomflot, and Russian Railways. OFAC may determine that additional entities are subject to Directive 2. Entities subject to Directive 3 can be found in OFAC’s Non-SDN Menu-Based Sanctions List.
Sovereign debt restrictions
On February 22, OFAC imposed new restrictions on dealings in Russian debt. In April 2021, OFAC issued Directive 1 Under Executive Order 14204, which prohibited U.S. financial institutions from participating in the primary market for bonds issued after June 14, 2021 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; and from lending ruble or non-ruble denominated funds to those same institutions. Under revised Directive 1A, U.S. financial institutions will also be prohibited from conducting secondary market dealings in bond instruments issued by the same institutions on or after March 1, 2022.
Compliance with the correspondent account, debt and equity and sovereign debt restrictions discussed above could be complicated. The sanctions prohibit only particular types of transactions with the targeted entities. Thus, in addition to identifying the target’s involvement in any particular transaction, the particular facts and circumstances of the transaction may need to be closely evaluated to determine whether a transaction is permissible. Finally, OFAC issued a host of general licenses that provide for multiple exceptions, which further complicates the analysis.
Embargoes on the Donetsk People’s Republic and Luhansk People’s Republic regions
On February 21, President Biden issued an executive order barring most dealings subject to U.S. jurisdiction that involve the so-called Donetsk People’s Republic or Luhansk People’s Republic regions of Ukraine (together, the Covered Regions). The prohibitions include:
- New investments in the Covered Regions, or any other regions of Ukraine determined by the Secretary of the Treasury, in consultation with the Secretary of State
- The importation into the United States of any goods services or technology from the Covered Regions
- The exportation from the United States or by a U.S. person of any goods, services or technology to the Covered Regions
- Facilitation of any of the above by U.S. person
The executive order also authorized the Secretary of the Treasury to impose property blocking sanctions on persons determined to operate in the Covered Regions after February 21.
Because this approach has similarities to the 2014 sanctions that targeted the Crimea region of Ukraine, banks and other institutions may wish to consult OFAC’s 2014 Crimea Sanctions Advisory, which sets out OFAC’s expectations for ensuring that transaction monitoring systems include appropriate search terms corresponding to major geographic locations in the Crimea region, when implementing compliance controls intended to interdict transactions involving the Covered Regions.
Given the multiple authorities under which OFAC may impose Russia-related sanctions and the rapid evolution of the situation in Ukraine and the global response, it would be reasonable to expect rapid change in U.S. sanctions targeting Russia. Buckley will continue to provide updates in conjunction with significant developments.
If you have any questions regarding the sanctions, please visit our Bank Secrecy Act/Anti-Money Laundering & Sanctions page or contact a Buckley attorney with whom you have worked in the past.