US issues new economic sanctions against Russia – Publications

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LawFlash






February 23, 2022

In response to the Russian Federation’s recognition of parts of Ukraine as independent states following an expansion of nearly 200,000 troops to the Ukrainian border, US President Joseph Biden authorized the imposition of sanctions additional measures against Russia and indicated that other sanctions were under consideration. This LawFlash summarizes these new sanctions.

context

In March 2014, the United States declared a national emergency to respond to certain actions taken by the government of the Russian Federation regarding Ukraine. Then-President Obama authorized sectoral and blocking sanctions against people in Russia, as well as a full embargo on the Crimean region, cutting it off from most trade with the United States.

Since then, US sanctions against Russia have steadily increased, with the most dramatic change occurring in February 2022. The new sanctions are as follows:

  • A ban on certain transactions involving the Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR) regions of Ukraine, as well as other regions of Ukraine that may be designated by the United States Treasury Department (collectively, the regions covered)
  • Blocking sanctions against certain Russian entities and individuals
  • Sovereign debt bans preventing US financial institutions from participating in secondary markets for new debt issued by certain Russian banks

Each of these measures is discussed in turn below.

New Executive Order

On February 21, 2022, President Biden issued a Executive Decree (EO) in response to Russia’s recognition of Ukraine’s DNR and LNR regions as independent states. The EO follows in all respects the initial sanctions against the Crimean region and prohibits accordingly:

  • new investment in the regions covered by an American person[1]wherever he is;
  • direct or indirect imports into the United States of goods, services, or technology from Covered Regions;
  • direct or indirect exports, re-exports, sales or supplies of goods, services or technology from the United States or by a US Person, wherever located, to the Covered Regions; and
  • Any endorsement, financing, facilitation or guarantee by a US person, wherever located, of a transaction by a foreign person that would be prohibited if conducted by a US person.

The EO also authorizes the imposition of blocking sanctions by the Office of Foreign Assets Control (OFAC) against any specified person:

  • operate or have operated since February 21, 2022 in the Covered Regions;
  • be or have been since February 21, 2022 an officer, civil servant, senior executive or member of the board of directors of an entity operating in the Covered Regions;
  • be owned or controlled by, or have acted or purported to act for or on behalf of, directly or indirectly, any Blocked Person; Where
  • having materially assisted, sponsored or provided financial, material or technological support, or goods or services to or in support of any Blocked Person.[2]

Authorized activity (general licenses)

Along with issuing the EO, OFAC also issued six general licenses[3] that authorize certain activities by U.S. persons that would otherwise violate EO prohibitions. Currently, these general licenses authorize the following activities:

  • Liquidation transactions involving the DNR or LNR regions of Ukraine, and liquidation transactions, contracts or other agreements in place prior to February 21, 2022 involving exports to and imports from the DNR and LNR regions of Ukraine through March 23 2022
  • Exports and re-exports of agricultural products, medicines, medical devices, spare parts and components and software updates for medical devices to the regions covered, as well as transactions necessary for the prevention, diagnosis or treatment of COVID -19 in covered regions
  • Receipt or transmission of telecommunications, and receipt or transmission of mail and parcels by common carriers involving the regions covered
  • Official activities of certain international organizations and entities by their employees, beneficiaries and contractors
  • Transfers of non-commercial personal remittances to or from Covered Regions, or for or on behalf of a person ordinarily resident in Covered Regions
  • Exports and re-exports to Covered Regions of services related to the exchange of personal communications over the Internet (e.g., instant messaging, chat and email, social networking, and photo and movie sharing) and related software necessary to enable such services

OFAC blocking penalties

On February 22, 2022, OFAC also added several Russian individuals and entities to its list of Specially Designated Nationals and Blocked Persons (SDN), including the Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB) and Promsvyazbank Public Joint Stock Company (PSB), as well as 42 of their subsidiaries. OFAC also designated five vessels belonging to PSB Lizing OOO, a designated subsidiary of PSB. These designations were made pursuant to Executive Order 14024, “Blocking of Assets with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation,” which was issued in April 2021.

Separately, OFAC named five Russian “elite” close to Russian President Vladimir Putin, two of whom were previously on the list and have been renamed under the current authority. As SDNs, these people and entities can no longer do business in the United States, or with US persons, and are cut off from the US financial system. All assets under US jurisdiction are frozen (“locked” in OE jargon), US persons are prohibited from doing business with them, and the US financial system cannot be used by anyone to transact with them, unless authorized by OFAC. Additionally, non-US persons may face penalties if they engage in certain transactions with these SDNs. As with most OFAC sanctions programs, entities that are 50% or more owned by one or more SDNs will be subject to the same sanctions.

On February 23, President Biden issued a statement directing the administration to impose sanctions on Nord Stream 2 AG and its executives.

Sovereign Debt Bans

Along with these designations, OFAC issued Directive 1A under Executive Order 14024 (Directive)[4] The new directive increases US restrictions on transactions in Russian sovereign debt by US financial institutions to cover secondary market participation in bonds issued after March 1, 2022 by the Central Bank of the Russian Federation, the National Wealth of the Russian Federation or the Ministry of Finance of the Russian Federation.

The following activities of U.S. financial institutions continue to be prohibited:

  • Since 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
  • As of March 1, 2022, secondary market participation in ruble-denominated and 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

Unlike blocking and sectoral sanctions, Russian sovereign debt prohibitions do not apply to entities that are 50% or more owned by them.

Along with the new prohibitions, OFAC issued two blanket licenses to authorize (1) the servicing of bonds issued before March 1, 2022 by VEB or its subsidiaries, and (2) the phasing out of transactions involving VEB or its subsidiaries until to March 24. 2022.

The situation remains fluid and evolving. As such, these sanctions, as well as potential future sanctions, will likely be modified to take into account the geopolitical circumstances between Russia and Ukraine. Compliance measures to manage EO, SDN designations, use of blanket licenses, and financial restrictions under the directive are subject to change as the United States and allied governments determine how to proceed.

With this in mind, the European Union and Australia have also announced sanctions, as well as individual countries such as Germany. The interest and commitment of U.S. partners and allies to addressing the Russian-Ukrainian situation reflects a more multilateral approach to Russian behavior and indicates the potential for more impactful restrictions that could affect a wide range of business operations.

Morgan Lewis will address the additional penalties provided as they are issued.

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CONTACTS

If you have any questions or would like more information about the issues discussed in this LawFlash, please contact one of the following Morgan Lewis attorneys:

WashingtonCC
Giovanna M. Cinelli
Kenneth J. Nunnenkamp
Katelyn M. Hilferty
Eli Rymland-Kelly

Boston
Carl Valenstein

London
Bruce Johnson
Melanie Ryan
Robert Bolgar-Smith
Nicholas Kelly

Brussels
Christina Renner
Daniel Lopez-Rus

Frankfurt
Michael Maslin

Moscow
Vasilisa Strizh
Grigory Marinchev



[2] The legal implications of blocking sanctions are discussed in the section titled “OFAC Blocking Sanctions”.

[3] A general license authorizes the performance of certain classes of transactions that would otherwise be prohibited without the need to apply for a specific license from OFAC.

[4] This directive supersedes and supersedes a previous version published on April 15, 2021.

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