Yesterday the United States imposed additional sanctions and export controls on Russia in response to Russia’s invasion of Ukraine. The new U.S. sanctions measures imposed by the Office of Foreign Asset Control (OFAC), which target Russia’s access to the global financial system, are summarized below. The new export control restrictions imposed by the Commerce Department’s Bureau of Industry and Security (BIS) are discussed here.
Sanctions on Sberbank and Its Subsidiaries
As part of its sanctions package, the United States issued Directive 2 under Executive Order (E.O) 14024. These sanctions prohibit U.S. financial institutions from:
- opening or maintaining correspondent accounts or payable-through accounts (CAPTA) for or on behalf of foreign financial institutions determined to be subject to Directive 2, or their property or interests in property; and
- processing transactions involving foreign financial institutions determined to be subject to Directive 2, or their property or interests in property.
So far, Directive 2 lists Russia’s Sberbank and 25 of its subsidiaries as foreign financial institutions subject to these prohibitions, which take effect beginning at 12:01 a.m. EST on March 26, 2022. Prohibitions against other foreign financial institutions later determined to be subject to the prohibitions of Directive 2 shall take effect beginning at 12:01 a.m. EST 30 days after the date of such determination. The specificity of this provision may indicate OFAC’s expected expansion of entities covered by Directive 2.
These restrictions effectively cut off Sberbank from the U.S. financial system, and, coupled with Sberbank’s designation under Directive 3 (as discussed below), restrictions applicable to Sberbank are expansive. Nonetheless, unlike other Russian financial institutions listed below, Sberbank has not been added to OFAC’s Specially Designated Nationals List (SDN List), and therefore is not subject to full blocking sanctions.
The winding down of transactions ordinarily incident and necessary to dealings in the debt or equity of Sberbank is contemplated by General License 9, discussed below. U.S. companies (and others subject to OFAC jurisdiction) should review any current or planned transactions involving Sberbank and confirm compliance with these applicable restrictions.
Sectoral Sanctions Related to Financing Russian State-Owned and Private Entities
The United States also issued Directive 3 under E.O. 14024, which imposes sectoral sanctions related to the issuance of new debt or equity to certain Russian state-owned and private entities. Specifically, Directive 3 prohibits U.S. persons or persons within the United States from dealing in new equity or new debt (with a maturity of 14 days or more) of the 13 Russian companies listed in Annex 1 to Directive 3 on or after 12:01 a.m. EST on March 26, 2022. These companies, which are critical to the Russian economy with estimated assets of nearly $1.4 trillion, will be unable to raise money through the U.S. market, thus limiting the Kremlin’s ability to raise money for its activity. These companies include:
- Credit Bank of Moscow Public Joint Stock Company
- Gazprombank Joint Stock Company
- Joint Stock Company Alfa-Bank
- Joint Stock Company Russian Agricultural Bank
- Joint Stock Company Sovcomflot
- Open Joint Stock Company Russian Railways
- Public Joint Stock Company Alrosa
- Public Joint Stock Company Gazprom
- Public Joint Stock Company Gazprom Neft
- Public Joint Stock Company Rostelecom
- Public Joint Stock Company Rushydro
- Public Joint Stock Company Sberbank of Russia
- Public Joint Stock Company Transneft
Similar prohibitions related to Russian companies later added to this list would take effect on or after 12:01 a.m. EST 30 days after the date of such determination.
Russian Banks and Other Entities Added to Restrictive SDN List
The United States added several Russian banks to the SDN List, including VTB Bank (VTB), the second largest financial institution in Russia, as well as 20 of its subsidiaries. Other banks added to the SDN List include Bank Otkritie, Sovcombank OJSC, and Novikombank, and 34 of its subsidiaries. These measures effectively cut off these banks from the United States and much of the global financial system. Additionally, any entities owned 50 percent or more, directly or indirectly, by these banks (in addition to those subsidiaries already designated) or other entities on the SDN List are also subject to full U.S. blocking sanctions.
U.S. persons, including U.S. companies, financial institutions, U.S. citizens wherever located, permanent residents, and any other persons located in the United States are prohibited from conducting transactions with these listed banks, unless otherwise authorized by OFAC. Furthermore, any property or interests in property of these banks that are in the possession or control of U.S. persons must be formally blocked, i.e., frozen, and reported to OFAC within 10 days (from the date of their addition to the SDN List), unless a license applies.
Certain transactions with VTB, Bank Otkritie, and Sovcombank related to energy are still permitted until June 24, 2022, as per General License 8A, as described below. Additionally, OFAC issued General License No. 11 to authorize all transactions ordinarily incident and necessary to the wind down of transactions involving VTB, Bank Otkritie, or Sovcombank, as well as any entities owned 50 percent or more by these banks, through 12:01 a.m. EST, March 26, 2022.
Additionally, OFAC added several targeted members of Russia’s elite to the SDN List, subjecting them to full blocking sanctions. The full list of individuals and companies added to the SDN List can be found here. In alignment with our European allies, this was followed on February 25, 2022 with the addition of Russian President Vladimir Putin to the SDN list, along with Russian Foreign Minister Sergei Lavrov and members of the Russian national security team.
Russia-Related General Licenses
OFAC issued several general licenses authorizing certain limited dealings with individuals and companies subject to Russia-related sanctions. These include:
- General License 5 – Authorizes certain transactions for the conduct of official business of certain international organizations.
- General License 6 – Authorizes certain transactions related to the export or reexport of agricultural commodities, medicine, medical devices, and COVID-19 treatments.
- General License 7 – Authorizes certain transactions related to overflight payments, emergency landings, and air ambulance services.
- General License 8A – Authorizes certain transactions “related to energy” involving VEB, Bank Otkritie, Sovcombank, Sberbank, VTB, any entity owned 50 percent or more by one of the foregoing banks, or the Central Bank of Russia through 12:01 a.m. EST, June 24, 2022. For purposes of General License 8A, the term “related to energy” means the extraction, production, refinement, liquefaction, gasification, regasification, conversion, enrichment, fabrication, transport, or purchase of petroleum, including crude oil, lease condensates, unfinished oils, natural gas liquids, petroleum products, natural gas, or other products capable of producing energy, such as coal, wood, or agricultural products used to manufacture biofuels, or uranium in any form, as well as the development, production, generation, transmission, or exchange of power, through any means, including nuclear, thermal, and renewable energy sources. (General License 8A was issued on February 28, 2022, and supersedes the previously-issued General License 8.)
- General License 9 – Authorizes U.S. persons to engage in transactions ordinarily incident and necessary to dealings in debt or equity of VEB, Bank Otkritie, Sovcombank, Sberbank, VTB, or any entity owned 50 percent or more by one of the foregoing, through 12:01 a.m. EST, May 25, 2022, provided that any divestment or transfer of covered debt or equity must be to a non-U.S. person. The authorized transactions include facilitating, clearing, and settling transactions to divest covered debt or equity to a non-U.S. person, including on behalf of U.S. persons.
- General License 10 – Authorizes certain transactions ordinarily incident and necessary to the wind down of derivative contracts entered prior to 4:00 p.m. EST, February 24, 2022, that include certain “Covered Entities” as a counterparty or are linked to debt or equity of a Covered Entity, through 12:01 a.m. EST, May 25, 2022.
- General License 12 – Authorizes U.S. persons to reject, rather than block, transactions involving Bank Otkritie, Sovcombank, VTB, or any entity owned 50 percent or more by one of the foregoing, through 12:01 a.m. EST, March 26, 2022.
U.S. individuals and companies should carefully review the requirements, limitations, and restrictions of these general licenses to ensure proper compliance.
Sanctions on Belarusian Individuals and Entities
OFAC also imposed blocking sanctions on 24 Belarusian individuals and entities for supporting or otherwise facilitating Russia’s actions in Ukraine, including two large Belarusian banks, several defense companies, and government officials.
These entities were added to OFAC’s SDN List, which as discussed above, means that U.S. persons are prohibited from engaging in transactions with these listed entities, or entities owned 50 percent or more by them. Additionally, U.S. persons must formally block, i.e., freeze and report to OFAC, property or interest in property of these SDNs that are in the possession or control of U.S. persons. The full list of Belarusian entities added to the SDN List can be found here.
OFAC also issued two general licenses authorizing certain limited dealings related to sanctioned Belarusian entities.
- General License 6 – Authorizes transactions for the conduct of official business of the United States Government by employees, grantees, or contractors.
- General License 7 – Authorizes transactions for the conduct of official business of certain international organizations.
Sanctions on Nord Stream 2 AG
On February 23, 2022, President Biden announced new sanctions on Nord Stream 2 AG and its corporate officers, including its German CEO, Matthias Warnig, by adding them to OFAC’s SDN List pursuant to E.O. 14039 of August 20, 2021. E.O. 14039 implemented sanctions under the Protecting Europe’s Energy Security Act (“PEESA”) of 2019, which requires the imposition of sanctions with respect to the development of certain Russian energy export pipelines, including Nord Stream 2.
Nord Stream 2 AG is a Switzerland-based subsidiary of Gazprom, the Russian gas giant, and is responsible for the construction and operation of a 1,230-kilometer-long natural gas pipeline running from Russia to Germany. The addition of Nord Stream 2 AG to the SDN List prohibits U.S. individuals and companies from conducting business or transacting with Nord Stream 2 AG and its officers, directly or indirectly. This prohibition also applies to entities owned 50 percent or more by Nord Stream 2 AG.
In addition, OFAC issued General License 4, “Authorizing the Wind Down of Transactions Involving Nord Stream 2 AG,” pursuant to E.O. 14039. General License 4 authorizes U.S. persons to engage in transactions ordinarily incident and necessary to the wind down of transactions involving Nord Stream 2 AG, or any entity in which Nord Stream 2 AG owns, directly or indirectly, a 50 percent or greater interest, until 12:01 a.m. EST, March 2, 2022.
U.S. companies should carefully review any current or future dealings in Russia, Ukraine, and Belarus or with any of the above-listed individuals or entities to determine if they are engaged in or plan to be engaged in any transactions covered by these or other applicable sanctions programs.
U.S. sanctions with respect to Russia/Ukraine/Belarus are expected to continue changing in the coming days and weeks. Contact us if you have questions about these developments or their potential impact on your business.
This post updated Feb. 28.