This is part of a series of advisory alerts from Venable in response to the ongoing situation in Ukraine. Earlier alerts on Russia and Ukraine sanctions are available here and here.
The United States, in coordination with global allies, continues to introduce sanctions and trade restrictions targeting the Russian government and its allies for their aggression in Ukraine. With these new measures and related guidance, the U.S. government is expanding its efforts to isolate Russia from the global financial system, cut off its defense and technology capabilities, and penalize President Putin and his inner circle.
The latest moves by the U.S. government include the following:
- Cutting Off the Central Bank of Russia, the National Wealth Fund of Russia, and the Ministry of Finance. Directive 4 Under EO 14024 (Russia-related Sovereign Transactions Directive), effective February 28, 2022, prohibits U.S. persons from all direct or indirect transactions involving the Central Bank of Russia, the National Wealth Fund of Russia, and the Ministry of Finance.1 In accompanying FAQ guidance, the Department of Treasury (Treasury), Office of Foreign Assets Control (OFAC), makes clear that U.S. persons or entities must reject transactions involving these entities unless they are exempt or authorized by OFAC. OFAC has also issued General Licenses Nos. 8A, 9A, 10A, 13, and 14, which authorize certain limited transactions with these entities, including energy transactions, as discussed further below. The entities in Directive 4 are not subject to full asset blocking sanctions, but rather have been added to the Non-SDN Menu-Based Sanctions List.
- Providing Carve-Outs for Energy Transactions. With General License No. 8A and in accompanying guidance, Treasury has emphasized that U.S. sanctions will not block energy payments to certain otherwise sanctioned Russian institutions. Specifically, General License No. 8A authorizes energy-related transactions with the (1) State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB); (2) Public Joint Stock Company Bank Financial Corporation Otkritie (Bank Otkritie) ; (3) Sovcombank Open Joint Stock Company (Sovcombank); (4) Public Joint Stock Company Sberbank of Russia; (5) VTB Bank Public Joint Stock Company (VTB), and any entity owned 50 percent or more by entities (1) – (5), and (6) the Central Bank of Russia, until June 24, 2022. In particular, Treasury noted that “General License 8A permits what are commonly known as ‘U-turn transactions,’ where payments related to energy are processed through non-sanctioned, third-country financial institutions, enabling the continuation of transactions that support the flow of energy to the market.”
- Coordinating with European Union Leaders on Removal of Russian Banks from SWIFT. The Biden administration has worked closely with the EU to craft a regulation removing several Russian banks from SWIFT, an international messaging system based in Belgium that is used by financial institutions for secure and rapid cross-border payments. On March 2, 2022, the EU announced an initial list of seven Russian banks that are required to wind down SWIFT operations by March 12, 2022: VTB, Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank, and VEB. More additions to the list of “de-SWIFTed” banks should be expected.
- Cracking Down on Sanctions with a New Department of Justice Task Force. On Wednesday, March 2, the U.S. Department of Justice (DOJ) introduced a new task force, Task Force KleptoCapture, to begin enforcing the range of new sanctions and export controls. In particular, this task force is expected to target and seize the high-value physical assets of sanctioned Russian companies and oligarchs, including jets, yachts, and luxury homes. Relatedly, OFAC, in coordination with the State Department, continues to add powerful Russian oligarchs, government officials, military entities, and financial institutions to its Specially Designated Nationals List (SDN List), which U.S. businesses should monitor frequently for updates.
- Expanding Export Controls to Target Belarus and Russia.
- Effective March 2, 2022, the Department of Commerce, Bureau of Industry and Security (BIS), amended the Export Administration Regulations (EAR) to subject Belarus to a menu of new export control restrictions similar to that introduced against Russia last week. As with the new Russia rules, the new Belarus rule imposes new Commerce Control List (CCL)-based license requirements for items destined for Belarus; revises BIS’s foreign direct product (FDP) regulations to cover Belarus and Belarusian “military end users”; and expands the scope of “military end use” and “military end user” controls to include Belarus for nearly all items subject to the EAR. This rule also significantly narrows the availability of License Exceptions to persons in Belarus and Russia.
- Effective March 4, 2022, BIS issued another new rule expanding export controls against Russia’s oil refining sector. The final rule expands the scope of the general prohibitions in Section 746.5(a) of the EAR (Russian industry sector sanctions), which were imposed in 2014. The existing controls restricted the export, reexport, or transfer of certain items subject to the EAR where a person had “knowledge” that the item would be used directly or indirectly for various purposes in the Russian energy sector; among other changes, the new rule removes the “knowledge” requirement, and imposes additional license requirements for exports, reexports, or transfers of certain energy-related items subject to the EAR.
Furthermore, U.S. businesses should be aware of a new wave of Russian economic countermeasures adopted in response to the new sanctions on Russia. For example, President Putin recently enacted two decrees to stabilize the Russian economy, which, among other detailed measures:
- Restrict Russian residents from providing loan agreements in foreign currency to non-residents (Decree of February 28, 2022)
- Prohibit Russian residents from transferring funds in foreign currency to bank accounts opened in foreign banks (Decree of February 28, 2022)
- Require Russian residents to sell to the government 80% of proceeds received in foreign currency under foreign contracts within 3 business days of the proceeds being credited in their accounts (Decree of February 28, 2022)
- Require Russian residents to obtain prior government approval before providing loans to or entering into new property, real estate, or securities-related transactions with any “Foreign Persons of Unfriendly Countries,” which is presumed to refer to U.S. persons and persons of other countries that have recently sanctioned Russia (Decree of March 1, 2022)
As the situation evolves and the measures and countermeasures discussed above continue to expand, individuals and entities should exercise extreme caution when considering transactions involving Russia or Belarus, and avoid business altogether in the embargoed Donetsk, Luhansk, and Crimea regions of Ukraine, unless authorized.
Venable's International Trade and Logistics Group is carefully monitoring the situation and will continue to provide updates as information becomes available. If you have any questions, please reach out to our team for guidance.
1Please note that under the restrictions expanded upon in Directive 1A Under Executive Order 14024 (February 22, 2021), OFAC had already prohibited the purchasing of bonds, in both primary and secondary markets, issued by, as well as the lending of funds to, the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.