Today, the United States imposed a significant package of sanctions and export control restrictions on Russia following the escalating hostilities in Ukraine. The European Union, United Kingdom, and allied countries have or are expected to impose similar, coordinated measures in the coming days.
This post provides an overview of the new U.S. sanctions measures. We'll cover the new U.S. export control measures in a subsequent post.
Cutting Off Sberbank From the United States
The United States imposed correspondent and payable-through account sanctions on Sberbank and 25 of its subsidiaries, severely limiting the bank's ability to conduct U.S. dollar transactions pursuant to a new Directive 2 to E.O. 14024.
Effective March 26, 2022, all U.S. financial institutions must close and are prohibited from opening or maintaining correspondent or payable-through accounts on behalf of Sberbank. In addition, U.S. financial institutions must formally reject (refuse to process) future transactions involving Sberbank or its foreign financial institution subsidiaries. The sanctions apply to Sberbank, the subsidiaries listed in Directive 2, and any entities owned 50 percent or more, directly or indirectly by Sberbank. The Office of Foreign Assets Control (OFAC) could designate additional Russian financial institutions under the Directive in the future. These measures will effectively cut off Sberbank from the U.S. financial system.
Unlike the Russian financial institutions below, Sberbank has not been added to the U.S. List of Specially Designated Nationals (SDN List), and is not subject to full U.S. blocking sanctions. As a result, U.S. companies can continue to conduct certain non-U.S. dollar business directly or indirectly involving Sberbank outside of the United States in certain instances, so long as those activities comply with the new Directive 2 and the limited sectoral sanctions described below.
SDN Bank Sanctions
In addition to the sanctions targeting Sberbank, the United States added VTB Bank (VTB), Russia's second largest bank, and three other banks to the SDN List, effectively cutting the banks off from the United States and much of the global financial system. The other banks added to the SDN List are Bank Otkritie, Sovcombank OJSC, Novikombank, and 34 of their subsidiaries. Any entities owned 50 percent or more, directly or indirectly, by these or other SDNs are also subject to full U.S. blocking sanctions, even if the entities do not formally appear on the SDN List.
The SDN sanctions mean that U.S. persons, including U.S. companies and financial institutions, U.S. citizens and permanent residents, and any persons located in the United States, are prohibited from conducting direct or indirect dealings with the banks, unless authorized by OFAC. Any SDN bank property or interests in property in the possession or control of U.S. persons must be formally blocked (frozen) and reported to OFAC within 10 days, unless a license applies. Non-U.S. persons are also prohibited from engaging in transactions or other business dealings involving the banks if those activities have a direct or indirect nexus with the United States or U.S. persons. Non-U.S. financial institutions and companies could also be subject to secondary sanctions, including potentially being added to the SDN List themselves, if they conduct a "significant" transaction with either institution following the imposition of sanctions.
OFAC issued General License No. 11 authorizing U.S. persons to engage in transactions ordinarily incident and necessary to the wind down of transactions involving Bank Otkritie, Sovcombank OJSC, and VTB, including entities owned 50 percent or more by the foregoing, until 12:01 am EST on March 26, 2022.
Financing Sanctions: State-Owned Enterprises
The United States also imposed more limited financing sanctions on certain Russian companies pursuant to a new Directive 3 to E.O. 14024. The limited sanctions prohibit U.S. persons from dealing in the new equity or new debt (with a maturity of 14 days or more) of 13 Russian companies. The restrictions only apply to equity or debt issued on or after March 26, 2022. Several of the sanctioned companies were already subject to similar U.S. financing restrictions under E.O. 13662.
The companies targeted by these measures are:
- Gazprombank Joint Stock Company
- Joint Stock Company Russian Agricultural Bank
- Public Joint Stock Company Gazprom
- Public Joint Stock Company Gazprom Neft
- Public Joint Stock Company Transneft
- Public Joint Stock Company Rostelecom
- Public Joint Stock Company RusHydro
- Public Joint Stock Company Alrosa
- Joint Stock Company Sovcomflot
- Open Joint Stock Company Russian Railways
- Joint Stock Company Alfa-Bank.
- Credit Bank of Moscow
U.S. companies can continue to do most business with these entities so long as the underlying transactions comply with these and other applicable sanctions.
The United States targeted members of Russia's elite by adding 15 individuals to the SDN List.
OFAC issued a number of general licenses authorizing limited dealings with the sanctioned parties. They include the following:
- General License No. 5: Authorizing certain transactions involving certain international organizations;
- General License No. 6: Authorizing certain transactions related to the export of food, medicine, medical devices, and COVID-19 treatments;
- General License No. 7: Authorizing certain transactions involving overflight payments, emergency landings, and air ambulance services;
- General License No. 8: Authorizing certain transactions "related to energy" involving VEB, Bank Otkritie, Sovcombank OJSC, Sberbank, VTB, and entities owned 50 percent or more by the foregoing;
- General License No. 9: Authorizing U.S. persons to engage in certain transactions to divest debt or equity holdings in VEB, Bank Otkritie, Sovcombank OJSC, Sberbank, VTB, and entities owned 50 percent or more by the foregoing to a non-U.S. person until May 25, 2022;
- General License No. 10: Authorizing the wind down of certain preexisting derivative contracts involving certain blocked parties;
- General License No. 12: Authorizing U.S. persons to reject, rather than block, transactions involving Bank Otkritie, Sovcombank OJSC, or VTB, including entities owned 50 percent or more by the foregoing, until March 26, 2022.
U.S. persons should carefully examine the terms of available general licenses to ensure that any proposed line of conduct is fully authorized. The general licenses contain a number of important limitations and restrictions.
Secondary Sanctions Considerations
As noted above, non-U.S. persons face the risk of secondary sanctions penalties if they engage in significant transactions with Russian sanctioned parties and could be subject to blocking sanctions if they materially assist, sponsor, or provide financial, material, or technological support for, or goods or services to or in support of SDNs or other parties blocked pursuant to E.O. 14024. In a new FAQ 980, OFAC indicates that non-U.S. companies generally do not risk exposure under U.S. sanctions for engaging in transactions with persons subject to the Directives (i.e., the non-SDN sanctions) issued under E.O. 14024, for engaging in transactions that would not require a specific license if engaged in by a U.S. person, or for replacing sanctioned suppliers or service providers with non-sanctioned parties.
OFAC issued a number of Frequently Asked Questions that provide important guidance on how the agency will apply the new rules and interprets key terms.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.