This alert provides an overview of U.S. sanctions imposed against Russia in response to its invasion of Ukraine up to and including the issuance of Directive 4 and General License 8A on Monday morning, February 28, 2022, and the Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR Part 587, by the Office of Foreign Assets Control (OFAC) on Monday, February 28 (effective March 1, 2022).
Each round of U.S. sanctions has been part of a coordinated effort by the U.S. and its allies. As the United Kingdom, the European Union, and other countries such as Japan, Canada and Australia impose additional (and to some extent different) sanctions, the compliance burdens on financial institutions will also increase.
In the week since Putin declared two regions of Eastern Ukraine "independent" and then invaded Ukraine, the U.S. has issued six sets of sanctions. They are based on Executive Order (EO) 14024, dated April 5, 2021. This EO delegates to the Treasury and State Department Secretaries broad authority to impose sanctions on, inter alia, any Russian or Russian entity engaging in "activities that undermine the . . . territorial integrity of the United States, its allies, or its partners." § 1(a)(2)(F)). The first set of sanctions, announced on February 21, targeted the economies of the two regions declared "independent." The second, dated February 22, sanctioned Russians and Russian entities for Russia's invasion of Ukraine. The third, on February 23, focused on winding down transactions involving Nord Stream 2 AG.
The February 24 sanctions target both Russian entities and individuals, and Belarusian entities and individuals. Directed chiefly at financial services, these target Russia's top financial institutions, state-owned enterprises, and elite families. Following the President's announcement, Treasury's Office of Foreign Asset Control (OFAC) implemented these sanctions by issuing Directives 2 & 3, imposing a number of blocking orders, and issuing several general licenses.
The round of sanctions promulgated on February 25, 2022, add President Putin and three other senior Russian officials to the Office of Foreign Assets Control's (OFAC) Specially Designated Nationals List (SDN List), meaning that the assets (direct and indirect) of these individuals are blocked if under the control of any U.S. Person and that these individuals cannot travel to the U.S. The sanctions of February 28, 2022, block any assets of the Central Bank of Russia and its affiliates held in the U.S. or by U.S. persons, wherever located.
For each section below discussing particular sanctions, please refer to the General Licenses and Frequently Asked Questions (FAQs) section for further discussion of applicable exemptions or authorizations.
1. Sanctions Prohibiting Correspondent and Payable-Through Accounts
OFAC's Directive 2 added Public Joint Stock Company Sberbank of Russia (Sberbank) and its subsidiaries to OFAC's List of Foreign Financial Institutions Subject to Correspondent Account or Payable-Through Account Sanctions (CAPTA List). Sberbank is the largest bank in Russia. OFAC identified 25 Sberbank subsidiaries, in Directive 2, including banks, trusts, insurance companies, and other financial companies across Russia and six other countries, including the U.S.
Under Directive 2, U.S. financial institutions are prohibited from: (i) opening or maintaining correspondent or payable-through accounts for or on behalf of entities named to Annex 1 of Directive 2; and (ii) processing transactions involving "Annex 1" entities or their property (thereby extending the prohibition to all 50% or more owned – directly or indirectly – entities. See FAQ 985.). Currently, only Sberbank and its 25 subsidiaries are listed on Annex 1. Directive 2's prohibitions take effect at 12:01 a.m., EDT, March 26, 2022; other entities that OFAC may name in the future will have similar 30 day grace periods.
Note, however, that this is not a blocking order as to transactions involving Sberbank. FAQ 967 states that, unless a transaction is exempt or authorized by OFAC, the U.S. financial institution involved must instead reject the transaction (presumably returning the payment to its originating bank and originator). This will require every participant in the financial system, including credit card processing companies, to employ additional compliance systems and to deploy them – at least as for Sberbank – by 12:01 a.m. EDT, March 26.
Finally, it is important to recognize that Directive 2 ("Prohibitions Related to Correspondent or Payable-Through Accounts and Processing of Transactions Involving Certain Foreign Financial Institutions") applies only to U.S. financial institutions. U.S. individuals and non-financial institution entities are not prohibited from processing transactions involving Annex 1 institutions. FAQ 973.
2. Full Blocking Sanctions on Russian Banks and Financial Institutions
On February 24, 2022, OFAC also imposed blocking sanctions on VTB Bank Public Joint Stock Company (VTB Bank), Russia's second largest bank, and three Russian other financial institutions and their corporate families. The sanctions against the public banks and their subsidiaries are subject to a wind-down period and go into effect on March 26, 2022. See General License 11. The assets of VTB Bank subsidiaries—which include banks, holding companies, and other financial institutions spread across Russian and eight other countries—are blocked as well. OFAC has set forth a list of identified VTB Bank subsidiaries, but it is important to note that these blocking sanctions apply to any entity owned 50% or more, directly or indirectly, by VTB Bank, even if the entity is not on the identified list. See FAQ 985, referenced earlier).
Three other Russian financial institutions are now also subject to full blocking sanctions. These entities are: (i) Public Joint Stock Company Bank Financial Corporation Otkritie (Otkritie), a Russian state-owned credit institution; (ii) Open Joint Stock Company Sovcombank (Sovcombank), the third largest privately owned financial institution in Russia; and (iii) Joint Stock Commercial Bank Novikombank (Novikombank), a large financial institution owned by Russian defense company Rostec. Again, OFAC has provided lists of identified subsidiaries of these three blocked entities, but the blocking sanctions can apply to subsidiaries not identified on that list.
To the extent assets of any of the blocked entities touch the U.S. financial system, they are required to be placed in a blocked account and reported to OFAC under its standard rules, unless otherwise exempted or authorized by OFAC. See, GL 5, 6,7, 8A, 9, 10, 11 & 12, discussed infra. As with the correspondent account and transaction processing prohibitions under Directive 2, the blocking orders will force additional compliance and record-keeping obligations on almost every segment of the U.S. financial system. As the Treasury announcement notes, the blocking sanctions against VTB Bank are among the most significant sanctions it has ever imposed because VTB Bank holds nearly 20% of banking assets in Russia. Additionally, its subsidiaries operate in countries around the world. U.S. financial institutions should immediately update their OFAC screening software to ensure compliance.
3. Capital Markets Sanctions Against Russian State-Owned and Private Entities
OFAC's Directive 3 limits U.S. participation in new debt or equity of 13 major firms listed in Annex 1, their subsidiaries, and any other entity that may be named at a later time by OFAC. The directive has an effective date of March 26, 2022 (the same as Directive 2). The firms currently named as Specially Designated Nationals (SDNs) are mainly Russian state-owned enterprises and entities that operate in the Russian financial services sector. Updates to the list of entities covered by this Directive should be closely monitored.
4. Sanctions Against Elite Russian Individuals and Families
The February 24, 2022 round of OFAC sanctions also targeted individuals deemed to be linked to and profiting from President Putin's regime. Many of the individuals named in the announcement were already subject to sanctions pursuant to an earlier EO but were redesignated as SDNs pursuant to EO 14024 under this round of sanctions. These individuals are now effectively cut off from dollar-denominated markets and U.S. financial institutions; any of their assets (including entities owned 50% or more) that come within the possession of a U.S. person are blocked and subject to OFAC reporting requirements. OFAC specifically designed two companies associated with Andrey Puchkov: Limited Liability Company Atlant S; and Limited Liability Company Inspira Invest A. When viewed in conjunction with the Financial Crimes Enforcement Network's beneficial ownership rules, additional pressure is placed on U.S. financial institutions to ensure that these blocking orders are met.
5. Sanctions Against Central Bank of Russia
On February 28, 2022, the U.S. issued Directive 4, prohibiting U.S. persons from engaging in transactions with the Central Bank of the Russian Federation (Central Bank of Russia), the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation. We can expect clarification of the status of each of the entities named in Directive 4 (and named to the SDN List or Non-SDN Menu based sanctions list) as OFAC fills in the regulations it issued on February 28, 2022. As of the 28th, the European Union, France, Germany, Italy, the United Kingdom, Canada and Switzerland had also taken similar actions against these Russian sovereign financial entities.
6. General Licenses & FAQs
As previously mentioned, OFAC issued eight general licenses alongside its latest rounds of sanctions. Some of the licenses are meant to provide wind-down periods as companies come into compliance, and others authorize certain transactions relating to international organizations and entities, agricultural and medical commodities the COVID-19 pandemic, overflight and emergency landings, energy, dealing in certain debt or equity, derivative contracts, and the rejection of transactions involving certain blocked persons. Below is a list of General Licenses authorizing transactions under the sanctions discussed above:
- Russia-related GL 5 authorizes the conduct of the official business of certain international organizations (incorporated into 31 CFR § 587.510) See FAQ 979 for further explanation.
- Russia-related GL 6 authorizes the export or reexport of agricultural commodities, medicine, medical devices, replacement parts and components for medical devices, or software updates for medical devices to and from Russia and transactions for the prevention, diagnosis, or treatment of COVID-19. While payment for these goods is allowed, GL 6 does not authorize the opening of any correspondent or payable-through accounts. See FAQ 979 for further explanation.
- Russia-related GL 7 authorizes payment for overflights of or emergency landings in Russia by aircraft registered in the United States or owned or controlled by, or chartered to, U.S. persons and air ambulance and related medical services, including medical evacuation, to individuals in Russia. Again, no correspondent or payable through accounts are authorized.
- Russia-related GL 8A authorizes transactions related to energy involving State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB, sanctioned in the second round), Otkritie, Sovcombank, Sberbank, VTB Bank (and any entity in which these entities own more than 50 percent), or the Central Bank of Russia, until June 24, 2022 at 12:01 a.m. E.D.T. Again, no correspondent or payable-through accounts are authorized.
NOTES: With regard to GLs 6, 7 & 8A, please see FAQ 978 & 976 for routing of permissible funds transfers. References to GL 8 should be read as references to GL 8A, which replaced and superseded GL 8 in its entirety.
- Russia-related GL 9 authorizes dealings in debt or equity of VEB, Otkritie, Sovcombank, Sberbank, and VTB Bank and (and any entity in which these entities own more than 50 percent) issued before February 24, 2022 (covered debt or equity) until 12:01 a.m. EDT, May 25, 2022, provided that any divestment or transfer of, or facilitation thereof, this debt or equity must be to a non-U.S. person. It also authorizes through the same period transactions facilitating, clearing, and settling trades of covered debt or equity placed before 4:00 p.m. EST, February 24, 2022. Finally, it authorizes debits to accounts on the books of a U.S. financial institution of these entities to effect these transactions. However, GL 9 does not authorize correspondent or payable-through accounts. See FAQ 981 & 975 for further explanation.
- Russia-related GL 10 authorizes the winding down of derivative contracts entered into before February 24, 2022 at 4:00 p.m. EST that include the same entities as GL 9 as a counterparty or are linked to debt or equity of one of these entities until May 25, 2022 at 12:01 a.m. EDT, provided that any payments to a blocked person (other than a listed entity) are made into a blocked account. Like General License 9, it authorizes debits to accounts on the books of a U.S. financial institution of these entities to effect these transactions. The 50% or greater ownership rule applies and neither correspondent nor payable through accounts are authorized.
- Russia-related GL 11 authorizes the winding down of transactions involving Otkritie, Sovcombank, and VTB Bank (and any entity in which these entities own a 50 percent or more interest) until March 26, 2022 at 12:01 a.m. EDT. No transactions involving any blocked person other than a listed entity is authorized.
- Russia-related GL authorizes U.S. persons, during the wind-down phase (through March 26, 2022), to reject transactions from the "GL 11 entities" that will be blocked thereafter by EO 14024. See FAQ 975, para. 4.
7. Belarus Sanctions
Also on February 24, 2022, the U.S. imposed sanctions against 24 Belarusian individuals and entities due to Belarus' support for and facilitation of Russia's invasion of Ukraine. These designations build upon earlier ones by the U.S. and its allies and target major financial institutions, subsidiaries of these banks, Belarusian defense and security companies (and executives thereof), and defense officials of that country.
These sanctions took effect immediately with the result that all property and interests in property in the U.S. or in the possession or control of U.S. persons are blocked and must be reported to OFAC. As with other sanctions programs, the blocking order applies to all entities owned, direction or indirectly, 50% or more by a blocked person or entity.
8. Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR Part 587
The regulations OFAC promulgated on February 28, 2022, take effect on March 1, 2022. These regulations are more than place-holders; they give structure to the recent flurry of sanctions and definitions to the terms used in the recent releases. However, as OFAC noted in its announcement: OFAC intends to supplement these regulations with a more comprehensive set of regulations, which may include additional interpretive guidance and definitions, general licenses, and other regulatory provisions."
9. Commerce Department Export Sanctions
On February 24, 2022, the Bureau of Industry and Security announced and implemented a sweeping set of restrictions on exports of (primarily) technological goods to Russia. These broad limitations—targeting primarily Russia's defense, aerospace, and maritime sectors--will impact Russia's ability to maintain and upgrade its forces. The restrictions apply to bar the export to Russia of goods produced outside of the U.S. using sensitive U.S. technologies. They also establish a presumption of license denial for most non-EAR99 items (EAR99 items are generally are low-technology consumer goods not requiring a license, however there are some exceptions). Given the broad range of items that have both commercial and military application, anyone exporting to Russia (and, probably, Belarus), should check these controls (and Venable's International Trade releases for additional analysis).
10. Sanctions from Other Jurisdictions.
At the time of this writing, a number of other countries either have, or are planning to, impose sanctions: the United Kingdom, the European Union, Japan, Canada, Australia, and Switzerland. As these and other countries impose sanctions, the complexity of the varying sanctions regimes will impose a substantial compliance burden on U.S. and multi-national financial, manufacturing and operational companies. These sanctions include cutting some Russian banks (which ones have not been determined) off from the Society for Worldwide Interbank Financial Telecommunication (S.W.I.F.T.).
S.W.I.F.T. is a Belgian organized, global member-owned society. It is a strategic international messaging service provider to the financial industry. It has approximately 3,500 shareholders (financial institutions) from around the world connecting over 11,000 banks, financial institutions, and corporations in 200 countries. In 2019, S.W.I.F.T. averaged over 22.1 million messages a day. While it has a board of 25 independent directors, it is overseen by the G-10 central banks as well as the European Central Bank. Its lead overseer is the National Bank of Belgium.
We will update this release as the sanctions regimes develop and as the U.S. and other allied governments provide more guidance. Please do not hesitate to contact the authors if you have any questions.