This client alert summarizes the sanctions imposed by the U.S. Treasury on February 22, 2022, targeting Russia's financial services sector following Russia's recognition of the Donetsk and Luhansk People's Republics (DNR and LNR) in eastern Ukraine as "independent" states on February 21, 2022, as well as the sanctions announced by the United Kingdom and European Union. The U.S. Treasury imposed these sanctions pursuant to Executive Order 14024.
New U.S. Sanctions Against Russia
Pursuant to EO 14024, OFAC issued Directive 1A to impose sanctions on Russian sovereign debt, two major private sector banks, several wealthy individuals, and some vessels.
1. Blocking Major Russian Banks
This round of sanctions adds two major Russian banks to OFAC's list of Specially Designated Nationals (SDNs), effectively blocking them from participating in dollar-denominated markets around the world. The first is Corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank or VEB); the second is Promsvyazbank Public Joint Stock Company (PSB). SDN status was also extended to every entity controlled, directly or indirectly, by VEB or PSB; the list of such entities is long. As SDNs, the assets owned by these entities are now blocked, and U.S. persons are generally prohibited from dealing with them. Any attempts to evade or avoid such prohibitions risk violating the sanctions.
General License No. 3, however, grants U.S. persons one month to cut ties with VEB or VEB-controlled entities. Until March 24, 2022, U.S. persons may conduct transactions ordinarily incident and necessary to wind down transactions involving these entities before most—if not all—such transactions become blocked by the sanctions.
2. Other Additions to the SDN List
Three new individuals were added to OFAC's SDN list under this round of sanctions: Denis Bortnikov, Petr Fradkov, and Sergeevich Kiriyenko. Updates were also made to two separate entries for Aleksandr Bortnikov and Sergei Kiriyenko to redesignate them as SDNs under EO 14024. Each of the sanctioned individuals is a member of the Russian elite and has strong ties to the Russian government and military. Much as in the case of the banks above, the assets owned by each of these individuals are now blocked, and U.S. persons are generally prohibited from dealing with them. Again, any attempts to evade or avoid such prohibitions risk violating the sanctions.
Also added to the SDN were five maritime vessels owned by a subsidiary of PSB. These are the Baltic Leader, Linda, Peegas, Fesco Magadan, and Fesco Moneron. Each of these vessels is identified as blocked property, and no U.S. person may do business, financial or commercial, with any of these vessels.
3. Sanctions Against Russian Sovereign Debt
OFAC added the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation (collectively, the Russian Sovereign Banks or RSB) to its Non-SDN Menu-Based Sanctions List. Accordingly, U.S. financial institutions are now prohibited from engaging in certain transactions with the Russian Sovereign Banks, unless otherwise licensed or authorized by OFAC.
The types of transactions prohibited greatly serve the Biden Administration's goal of shutting down Russia's ability to finance its efforts through dollar-denominated markets. The term "U.S. financial institution" is defined broadly in Directive 1A to include every kind of institution involved in the U.S. financial services industry, including credit card operators, wholesale funds transfer systems, settlement operations, banks, lenders, other investors, etc. Under these sanctions, all U.S. financial institutions are prohibited, as of June 14, 2021, from (a) participating in primary markets for bonds issued by the Russian Sovereign Banks and (b) lending any type of funds to the Russian Sovereign Banks. Additionally, participation in the secondary market for RSB bonds—regardless of currency—issued after March 1, 2022 is prohibited as of March 1, 2022. Attempts or conspiracies to evade or avoid these prohibitions are also violations.
Alongside the sanctions mentioned above, however, OFAC also issued General License No. 2, which limits the sanctions' impact on the holders of existing Russian sovereign bonds. U.S. persons may continue to conduct transactions with VEB and entities it controls that are ordinarily incident and necessary to servicing RSB bonds issued before March 1, 2022. To be clear, however, nothing in this license authorizes participation in the primary or secondary markets for such bonds, only the servicing of existing bonds.
New Russia Sanctions by Other Countries
In addition to the sanctions imposed by the U.S. government, the United Kingdom also announced sanctions on February 22, 2022 against five Russian banks (only one of which, PSB, is also sanctioned by the United States), three Russian oligarchs (other than the U.S.-designated individuals), and the members of the Russian Duma. The UK also announced that it would expand the territorial sanctions imposed on Crimea to the DNR and LNR in the coming weeks.
The European Union also announced sanctions, although official details have not yet been released. The sanctions—including asset freezes and travel bans—are expected to target 27 individuals and entities in the DNR, LNR, and Russia. The European Union intends to target those involved in recognizing the DNR and LNR (including members of the Duma) and financing Russian military operations and to limit trade between the EU and DNR and LNR and Russia's ability to access European financial and capital markets.
The governments of Japan, Canada, and Australia have all stated that they are weighing sanctions.. In addition, Japan has announced that it will divert surplus LNG to Europe.
The Road Ahead
As the situation in Ukraine rapidly evolves, many questions remain and others will arise. The boundaries of the DNR and LNR are themselves the subject of major questions. Will they be limited to separatist-controlled territory or to the expansive areas claimed by President Putin? How will the sanctions on various Russian financial institutions imposed by different countries (currently the U.S. and UK) impact credit card operators, wholesale funds transfer systems, settlement operations, banks, lenders, other investors, etc.? U.S. financial institutions, fintechs, and other financial service industry participants need to be aware of how these sanctions, particularly those aimed at Russian banks, may impact their operations. Anyone doing business with Russia or the sanctioned region similarly should be aware of the potential for additional, and more disruptive, sanctions in the near future. OFAC will continue to update its FAQs, and we will continue to track and report on these developments. If you have any questions, please contact the authors.
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*The authors thank Connor Webb, a law clerk in Venable's Washington, DC office, for his assistance in writing this article.