Over the past week, the United States, European Union, United Kingdom, and other allies have imposed multi-lateral sanctions against Russia in response to its military invasion of Ukraine. First, on February 22, 2022, the U.S. imposed a full trade embargo in response to Russia’s decision to annex and recognize the Donetsk and Luhansk People’s Republics as independent states, as well as sanctions against two state-owned financial institutions. Second, on February 24, 2022, in response to Russia’s further invasion of Ukraine, the U.S. announced wide-ranging sanctions impacting the financial services sector of the Russian economy, which included new sanctions on numerous Russian financial institutions, as well as restrictions on transactions involving certain new debt or equity issuances. The U.S. also imposed sanctions against Belarus for its support of the Russian invasion of Ukraine. Third, on February 25, 2022, the U.S. imposed blocking sanctions against Vladimir Putin and certain other senior members of the Russian government. Finally, on February 28, 2022, the U.S. imposed sanctions against the Central Bank of Russia and the Russian Direct Investment Fund, among other actions.

In short, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), in implementing these new sanctions, has established a new sanctions program titled the “Russian Harmful Foreign Activities Sanctions” program. We provide additional details on the U.S.’s new sanctions below. Identifying information for those who have been sanctioned can be found on OFAC’s consolidated Sanctions List.

Donetsk and Luhansk

On February 21, 2022, President Biden issued a new Executive Order imposing a broad trade embargo on the so-called Donetsk People’s Republic (“DNR”) or Luhansk People’s Republic (“LNR”) regions of Ukraine, which OFAC implemented on February 22, 2022. The new E.O. expands the prohibitions already in place for the Crimea Region of Ukraine to include new investments in the DNR or LNR regions, the importation into the U.S. of any goods, services, or technology from the DNR or LNR, and the exportation, reexportation, sale, or supply from the U.S. or by a U.S. person of any goods, services, or technology to the DNR or LNR, among other restrictions.

OFAC also issued several general licenses relating to the DNR and LNR regions, including General License 17 authorizing the wind down of transactions, General License 18 authorizing the exportation or reexportation of agricultural commodities, medicine, and medical devices, General License 19 authorizing transactions related to telecommunications and mail, General License 20 authorizing official business of certain international organizations and entities, General License 21 authorizing noncommercial, personal remittances and the maintenance, operation or closure of personal accounts of an individual residing in or whose property or interests are in the DNR or LNR, and General License 22 authorizing the exportation of certain services and software incident to internet-based communications.

Directive 1A – Russian Sovereign Debt

On February 22, 2021, OFAC issued Directive 1A under E.O. 14024, which prohibits the following activities by U.S. financial institutions involving certain Russian sovereign debt:

• As of March 1, 2022, participation in the secondary market for ruble or non-ruble denominated bonds issued after March 1, 2022 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.

Directive 1A defines “U.S. financial institution” as:

“Any U.S. entity (including its foreign branches) that is engaged in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or credits, or purchasing or selling foreign exchange, securities, futures or options, or procuring purchasers and sellers thereof, as principal or agent.”¹

OFAC also issued guidance in the form of Frequently Asked Questions (“FAQs”). Notably, OFAC FAQ 891 confirms that OFAC’s 50% Rule does not apply to Directive 1A, meaning that issuers who are subsidiaries of Directive 1A listed entities do not necessarily come within the prohibitions of Directive 1A (although they may come within other prohibitions, depending on their status under U.S. sanctions laws).

Finally, Directive 1A supersedes prior Directive 1 under E.O. 14024, which continues to prohibit the following activities by U.S. financial institutions:

• As of June 14, 2021, participation in the primary market for ruble or non-ruble denominated bonds issued after June 14, 2021 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation; and
• As of June 14, 2021, lending ruble or non-ruble denominated 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.

Directive 2 – Correspondent Account or Payable-Through Accounts

On February 24, 2022, OFAC issued Directive 2 under E.O. 14024, which prohibits a U.S. financial institution from opening or maintaining a correspondent account or payable-through account for, or processing a transaction involving, foreign financial institutions subject to the Directive. The prohibitions go into effect at 12:01 a.m. EST on March 26, 2022 for institutions listed in the Annex to Directive 2 and 12:01 a.m. EST on the date that is 30 days after the date of determination for an institution otherwise determined to be subject to the prohibitions of Directive 2.

Directive 3 – New Debt or Equity

On February 24, 2022, OFAC issued Directive 3 under E.O. 14024. Directive 3 prohibits U.S. persons from engaging in all transactions in, provision of financing for, and other dealings in new debt of longer than 14 days maturity or new equity for entities listed in the Annex to Directive 3 or otherwise determined to be subject to the provisions. Thus, the prohibitions become effective for new issuances after 12:01 a.m. EST on March 26, 2022 for entities listed in the Annex to Directive 3 and after 12:01 a.m. EST 30 days after an entity is otherwise determined to be subject to the restrictions of Directive 3. Russian entities that are now subject to Directive 3 include Gazprombank, Alfa-Bank, Gazprom, Sberbank, and Credit Bank of Moscow, among others.

Directive 4

On February 28, 2022, OFAC issued Directive 4 under E.O. 14024, which prohibits a U.S. person from engaging in any transactions involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation. OFAC has not defined what exactly qualifies as a “transaction,” but Directive 4 notes that this transaction ban includes any transfer of assets to such entities or a foreign exchange transaction for or on behalf of such entities.

Full Blocking Sanctions

In addition to targeted sanctions against the financial services sector of the Russia economy, the U.S. has imposed full blocking sanctions against VTB Bank and 20 of its subsidiaries, among other Russian financial institutions. OFAC has also designated Vladimir Putin and Sergei Victorovich Lavrov (the Minister of Foreign Affairs of the Russian Federation and a permanent member of Russia’s Security Council), among others.

Belarus Sanctions

In addition to sanctions against Russia, the U.S. has imposed substantial new sanctions against Belarus for its assistance and support of Russia’s invasion of Ukraine. Specifically, OFAC designated certain individuals and entities under E.O. 14038, including Belinvestbank, the fourth largest financial institution in Belarus, Bank Dabrabyt Joint-Stock Company, the eleventh largest financial institution in Belarus, Limited Liability Company Belinvest-Engineering, a real estate firm, and CJSC Belbizneslizing, a financial leasing company, among others.

OFAC has issued several general licenses relating to the new Belarus sanctions, which can be found here.

General Licenses

In connection with its sanctions targeting Russia, OFAC has issued several general licenses under the Russian Harmful Foreign Activities Sanctions program allowing certain wind down transactions and other activities, including the following:

• General License 8A: Authorizes all transactions involving the following entities “related to energy” through 12:01 a.m. EST on June 24, 2022: The Central Bank of the Russian Federation; State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank; Public Joint Stock Company Bank Financial Corporation Otkritie; Sovcombank Open Joint Stock Company; Public Joint Stock Company Sberbank of Russia; VTB Bank Public Joint Stock Company; or any entity in which one or more of the aforementioned own, directly or indirectly, a 50 percent or greater interest.
• General License 9: Authorizes all transactions ordinarily incident and necessary to dealings in debt or equity issued prior to February 24, 2022, through 12:01 a.m. EST on May 25, 2022, provided that any divestment or transfer of, or facilitation of divestment or transfer of, such covered debt or equity must be to a non-US person. This general license only applies to certain debt or equity of the following entities: State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank; Public Joint Stock Company Bank Financial Corporation Otkritie; Sovcombank Open Joint Stock Company; Public Joint Stock company Sberbank of Russia; VTB Bank Public Joint Stock Company; or any entity in which one or more of the above owns a 50 percent or greater interest.
• General License 10: Authorizes transactions through 12:01 a.m. EST on May 25, 2022 that are ordinarily incident and necessary to the wind down of derivative contracts entered into prior to 4:00 p.m. EST on February 24, 2022 that include or are linked to the debt or equity of the following entities: State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank; Public Joint Stock Company Bank Financial Corporation Otkritie; Sovcombank Open Joint Stock Company; Public Joint Stock company Sberbank of Russia; VTB Bank Public Joint Stock Company; or any entity in which one or more of the aforementioned owns a 50 percent or greater interest.
• General License 11: Authorizes all transactions ordinarily incident and necessary to the wind down of transactions involving the following entities through 12:01 a.m. EST on March 26, 2022: Public Joint Stock Company Bank Financial Corporation Otkritie; Sovcombank Open Joint Stock Company; VTB Bank Public Joint Stock Company; or any entity in which one or more of the aforementioned owns a 50 percent or greater interest.
• General License 12: Authorizes U.S. persons to reject all transactions prohibited by E.O. 14024 involving one or more of the following entities through 12:01 a.m. EST on March 26, 2022: Public Joint Stock Company Bank Financial Corporation Otkritie; Sovcombank Open Joint Stock Company; VTB Bank Public Joint Stock Company; or any entity in which one or more of the aforementioned owns a 50 percent or greater interest.

A full list of general licenses under OFAC’s Russian Harmful Foreign Activities Sanctions program can be found here.

Practical Steps for Compliance

Given the breadth of the U.S.’s new sanctions, and the complexity of OFAC’s implementation, there are several key steps that clients can take to ensure compliance and mitigate risk, including the following.

First, begin by assessing your company’s business exposure to Russia, and in particular, Russia’s financial services sector (and Russia’s energy and material sectors, which likely will be the focus of new sanctions).

Second, follow new legal developments closely, particularly as the U.S.’s sanctions laws are evolving at a rapid pace.

Third, performing due diligence and screening of counterparties, investors, and clients will be important in detecting sanctions exposure and mitigating risk. For example, for private funds and investment managers, consider working with fund administrators to perform regular and updated due diligence checks on investors and counterparties, particularly if and when there are investor redemption requests.

Fourth, consider re-assessing and reviewing any contractual representations, warranties, and covenants with service providers and counterparties, including external managers, to ensure that they are complying with all applicable sanctions laws.

Conclusion

In summary, the U.S. has substantially escalated its sanctions against Russia following its invasion of Ukraine. Thus far, the U.S. has targeted the financial services sector of the Russian economy, and not the energy or raw materials sectors. That said, unless and until Russia ceases its invasion, there is a high likelihood that the U.S. and its allies will continue to ramp up sanctions against Russia, and in particular, target additional sectors of the Russian economy.

We will continue to follow these developments closely. If you have any questions about U.S. sanctions, please contact Bruce Paulsen (212-574-1533), Michael Considine (212) 574-1334, or Andrew Jacobson (212-574-1477) at Seward & Kissel’s Sanctions Practice Group.