After less than a week of a full-scale war between Russia and Ukraine, the post-Cold War global architecture appears irrevocably shattered, as Western nations line up to offer support and military and economic aid to Ukraine and a multinational sanctions response declares, in effect, economic war against Russia in response to its violent military assault on its neighbor. The purpose of these tough economic measures is to put pressure on Russia to cease the military aggression and, ideally, to return quickly to diplomacy and peace. Global companies are now left scrambling to ensure strict compliance with the tough new sanctions and export controls being imposed against Russia from all parts of the globe or face significant legal and reputational risk.
Led by the United States, United Kingdom, and European Union, and followed by the rest of the Group of Seven (G7) countries, which ejected Russia after its last major attack on Ukraine in 2014, the Western response, along with allies such as Japan, has involved an escalating series of actions over the course of the past few days that were almost unthinkable a week ago, including:
- Freezing the assets of the Russian Central Bank that are held in G7 countries, which are expected to block around half of the overall reserves of the Russian Central Bank, as well as prohibiting most transactions with it;
- Ejecting select Russian banks from SWIFT (the Society for Worldwide Interbank Financial Telecommunication)—the Belgian-based cooperative comprised of the world's leading banks that serves as the main global messaging network by which international financial payments are communicated—to essentially disconnect such banks from the international financial system;
- Freezing the assets of some of the most sizable and significant Russian banks and cutting off still others from transacting in the U.S. Dollar and British Pound;
- Sanctioning Russian President Putin and Foreign Minister Lavrov, as well as some of the wealthiest and most powerful oligarchs who support the Kremlin and the companies they own/control;
- Freezing the assets and preventing further dealings with some of the largest and most powerful Russian companies operating in the defense, financial, and transportation sectors;
- Imposing sweeping new export controls against Russia, which will restrict its access to a broad range of equipment, software, and technology originating in the United States and its allies; and
- Closing much of European and other airspace that allows Russian commercial and passenger aircraft to fly over or land in these regions, effectively grounding most passenger and other travel and transit from Russia to these regions.
The response is growing beyond the G7 and EU. Norway, Singapore, South Korea, and Taiwan, for example, have all announced various sanctions or an intent to impose them. Switzerland, a favored destination for Russian money, set aside its long tradition of neutrality and announced that it will freeze Russian assets. Even large corporations are acting. Global transport and shipping companies already have begun suspending shipments into Russia, and more are expected to follow. Time will tell how many other nations and businesses will join in on the growing sanctions and trade controls movement.
Although the situation on the ground in Ukraine remains fluid, the unprecedented rounds of sanctions issued so far on Russia impose severe immediate and long-term costs on Russia's economy by restricting access to the global economy, global capital, and vital high-tech imports. The Russian economy is already feeling the effects of sanctions: the ruble lost nearly a quarter of its value today, the Russian Central Bank more than doubled its key interest rate, and the Moscow stock exchange was closed soon after its opening was delayed. President Biden and other world leaders noted in recent days that further sanctions are on the table and will follow any continued Russian aggression. Accordingly, we anticipate additional restrictions to be imposed in the days to come.
The actions by the United States, United Kingdom, European Union, and allied governments in recent days represent a remarkable, significant, and complex expansion of economic sanctions and export controls related to Russia that will impact financial institutions, global operating companies, and indeed, virtually every industry sector whose business dealings involve Russia or the Donetsk and Luhansk oblasts of Ukraine. Companies with business ties to Russia, however remote, will need to ensure that they have re-examined those ties in light of the new restrictions to avoid both significant legal liability as well as reputational risk from future improper dealings with Russia.
Given coordination between the United States, United Kingdom, and European Union, as well as other G7 countries, the resulting trade controls are relatively similar across jurisdictions, and these restrictions are likely to be replicated in some form by other like-minded nations. The new rules are generally effective immediately, although in a number of instances relevant authorities such as the Department of the Treasury's Office of Foreign Assets Control in the United States, for example, has issued "wind-down" authorizations to give U.S. and other companies approximately a month to fully cut their ties to sanctioned actors, although many are opting to do so sooner rather than later.
The highlights of the recent actions include the following:
U.S. Sanctions and Export Controls
- Prohibitions on any transaction with the Central Bank of Russia, Russian National Wealth Fund, or Russia Ministry of Finance, via a new Directive 4 under Executive Order (EO) 14024, including on any transfer of assets to such entities or any foreign exchange transaction for or on behalf of such entities (except for transactions authorized under certain general licenses, including matters related to energy and humanitarian aid, amongst others).
- "Blocking" sanctions—with the requirement to freeze assets and stop all future activities subject to U.S. jurisdiction—imposed on six major Russian banks, including on Russia's second-largest financial institution, VTB Bank Public Joint Stock Company (VTB), and on 20 of its subsidiaries (except for transactions authorized under certain general licenses, including matters related to energy and humanitarian aid, amongst others).
- "Correspondent account" sanctions—which prohibit U.S. financial institutions from opening or maintaining accounts for listed entities—imposed on Russia's largest bank, Public Joint Stock Company (PJSC) Sberbank of Russia (Sberbank), and 25 of its subsidiaries (except for transactions authorized under certain general licenses, including matters related to energy and humanitarian aid, amongst others).
- Blocking sanctions on President Putin and Foreign Minister Lavrov (reciprocated by the EU and UK), as well as blocking sanctions on many Russian "oligarchs" and family members who are closely aligned with President Putin and on a range of powerful Belarusian individuals and entities, including state-owned banks, vital defense-related firms, and elites close to Belarusian President Lukashenko.
- Blocking sanctions on the Russian Direct Investment Fund, a known " slush fund" for President Putin and his inner circle. This includes blocking sanctions on two of its subsidiaries and its CEO Kirill Dmitriev.
- Restrictions on financing or engaging in debt and equity transactions with 13 key Russian state-owned and private entities covering the energy, agricultural, telecommunications, financial, and transportation sectors. These entities include Sberbank (Russia's largest financial institution), PJSC Gazprom (Russia's fifth-largest financial institution and closely affiliated with the energy sector), PJSC Rostelecom (Russia's largest telecommunications company), and Joint Stock Company Sovcomflot (Russia's largest maritime shipping company).
- Designation of Nord Stream 2 AG and its CEO Matthias Warnig after Germany's indefinite pause of certifying the pipeline.
- Sweeping new export controls against the Russian Federation, including changes to the Foreign Direct Product rule for when foreign-produced items are subject to U.S. export controls, which will restrict Russia's access to a broad range of U.S.-origin items, as well as foreign-produced items incorporating or using certain U.S.-origin equipment, software, and technology. The new rule expands the scope of export license requirements for Russian "military end use" and "military end users" to include all commodities, hardware, software, and technology (collectively "items") "subject to the EAR" other than food and medicine designated as EAR99 or items under ECCNs 5A992.c or 5D992.c, unless for Russian "government end users" and Russian state-owned enterprises (SoEs), with the knowledge that the item is for a military use or purpose. Additionally, 45 Russian entities from the Military End-User (MEU) list were transferred to the Entity List with an expanded license requirement for all items subject to the EAR.
- Embargoes and controls applied to the so-called Donetsk People's Republic and Luhansk People's Republic like the ones in effect for the Crimean region.
EU Sanctions and Export Controls
- In coordinated EU/UK/U.S. action to restrict the assets of the Russian Central Bank, the EU prohibited any transaction with the Central Bank of the Russian Federation, to limit Russia's ability to access financial markets.
- The EU designated hundreds of individuals and dozens of
entities, many of which have also been designated by the U.S.
and/or UK governments, under asset freeze or sectoral sanctions.
The EU listings include:
- Four credit institutions (Alfa Bank, Bank Otkritie, Rossiya Bank, and Promsvyazbank) and eight industrial companies (Almaz-Antey, Kamaz, Novorossiysk Commercial Sea Port, Rostec (Russian Technologies State Corporation), Russian Railways, JSC PO Sevmash, Sovcomflot, and United Shipbuilding Corporation), under the EU's sectoral sanctions regime.
- Russian financial institutions such as Rossiya Bank, which has important stakes in the National Media Group, Promsvyazbank, and VEB.RF, a major financial development institution, the Internet Research Agency, a Russian company engaged in online influence operations and disinformation campaigns on behalf of Russia, and Russian Gas Industry Insurance Company SOGAZ, under the EU's asset freeze regime.
- Designation of numerous Russian and Belarussian individuals, including President Putin and Foreign Minister Lavrov, hundreds of members of the Russian parliament (the Duma), senior officials of the Russian military and secret service, several individuals involved in Russian media outlets, and a number of oligarchs with significant shareholdings or key positions in Russian companies in the oil, banking, and finance sectors (among them Rosneft, Transneft, and the Alfa Group).
- Prohibitions on: (1) listing and providing services in relation to shares of Russian state-owned entities on EU trading venues, (2) accepting deposits exceeding 100,000 EUR from and selling euro-denominated securities to Russian clients, and (3) holding Russian client accounts at the EU Central Securities Depositories.
- Prohibitions of the sale, supply, transfer, or export to Russia of all aircraft, spacecraft, and parts as well as certain goods and technologies for oil refining.
- Broad restrictions on trade in dual-use items and high-tech goods and technology.
- Prohibitions on providing any public financing or financial assistance for trade with, or investment in, Russia.
- Broad restrictions of economic relations between the EU and the so-called "specified territories," the non-Ukrainian government-controlled areas of the Donetsk and Luhansk oblasts of Ukraine, in a similar way that the EU sanctioned the Crimea region.
- Closing of the EU airspace for any Russian aircraft.
- Further measures announced by the EU and expected to be adopted soon, including the exclusion of certain Russian banks from SWIFT, designations of additional Russian oligarchs, businessmen, and individuals holding key roles in Russia's political system as disseminators of propaganda or as members of the military, and a ban of Russia Today and Sputnik from broadcasting in the EU.
- In addition, the EU has announced sanctions on key economic sectors in Belarus such as mineral fuels, tobacco, wood and timber, cement, iron, and steel, broad export restrictions on dual-use goods for Russia, and additional listings of entities and individuals.
UK Sanctions and Export Controls
- A coordinated prohibition similar to that imposed by the United States and the European Union to restrict the assets of the Russian Central Bank, Russian National Wealth Fund, and Russian Ministry of Finance, to prevent the central bank from deploying its foreign reserves to undermine the impact of sanctions and to undercut its ability to engage in foreign exchange transactions to support the Russian ruble.
- Five banks and nine entities designated under the United Kingdom's new Russia Sanctions Regime; the banks include IS Bank, Rossiya Bank, PJSC Promsvyazbank, JSC Genbank, and JSC Black Sea Bank Development and Reconstruction, while the other entities are VTB, UralVagonZavod, United Aircraft Corporation, PJSC United Shipbuilding Corporation, Rostec, and JSC Tactical Missiles Corporation Joint Stock Company.
- Sanctioning multiple individuals including President Putin and Foreign Minister Lavrov and previously U.S.-designated Russian oligarchs Gennady Timchenko, Boris Rotenberg, and Igor Rotenberg.
- The UK Prime Minister also announced the following imminent
- An asset freeze on all major Russian banks, which excludes these banks from the UK financial system.
- A prohibition on major Russian state and private companies from raising financing on the UK markets (legislation to be laid on March 1).
- A ban on Aeroflot landing in the United Kingdom.
- Further asset freezes on 100 new individuals/entities.
- Immediate suspension of all dual-use export licenses to Russia and new legislation prohibiting the export of dual-use items to Russia.
Japan Sanctions and Export Controls
At the G7 Foreign Ministers' videoconference on February 27, Japan confirmed that it will join in excluding certain Russian banks from SWIFT and freezing the assets of President Putin and other individuals associated with the Russian government. In addition, Prime Minister Kishida and Foreign Minister Hayashi stated in the Diet on February 28 that sanctions are being considered against Belarus. These steps come on top of previously announced sanctions by Japan, including freezing of the assets of Bank Rossiya and certain individuals associated with the breakaway regions; restrictions on issuance of new securities by the Russian government, the Russian Central Bank, and other major Russian banks; and restrictions on exports to and imports from the breakaway regions.
The Russian (and Belarusian) invasion of Ukraine remains fluid and dynamic. While the United States, European Union, and United Kingdom have implemented the most stringent sanctions regimes seen since the Cold War, additional measures remain and could be implemented in the coming days. Companies globally must revisit their corporate sanctions compliance programs and controls, or introduce new compliance programs and controls, to immediately comply with the complex set of restrictions and to mitigate enforcement risks. Morrison & Foerster's National Security Practice Group continues to stand ready to offer counsel on the scope and sufficiency of the measures your company implements, and, where compliance efforts may have failed, best practices in resolving potential enforcement matters.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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