United States Issues New Economic Sanctions Against Russia

In response to the Russian Federation’s recognition of certain regions of Ukraine as independent states which followed an expansion of nearly 200,000 troops on the Ukrainian border, US President Joseph Biden authorized the imposition of additional sanctions against Russia and indicated that further sanctions were under consideration. This LawFlash summarizes these newly issued sanctions.

Background

In March 2014, the United States declared a national emergency to address certain actions taken by the government of the Russian Federation in relation to Ukraine. Then-President Obama authorized sectoral and blocking sanctions against persons in Russia, as well as a comprehensive embargo on the Crimea region, cutting it off from most US trade.

Since then, US sanctions against Russia have steadily increased with the most dramatic change occurring in February 2022. The newly issued sanctions include the following:

• A prohibition on certain transactions with respect to 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 US Department of Treasury (collectively, the Covered Regions)
• Blocking sanctions on certain Russian entities and individuals
• Sovereign debt prohibitions restricting US financial institutions from participating in secondary markets for new debt issued by certain Russian banks

Each of these measures are discussed in turn below.

New Executive Order

On February 21, 2022, President Biden issued an Executive Order (EO) in response to Russia’s recognition of the DNR and LNR regions of Ukraine as independent states. The EO tracks the original sanctions against the Crimea region in all respects, and accordingly prohibits:

• new investment in the Covered Regions by a US person[1], wherever located;
• direct or indirect imports into the United States of goods, services, or technology from the Covered Regions;
• direct or indirect exports, reexports, 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 approval, financing, facilitation, or guarantee by a US person, wherever located, of a transaction by a foreign person that would be prohibited if performed by a US person.

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

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

Authorized Activity (General Licenses)

In conjunction with the issuance of the EO, OFAC also issued six General Licenses[3] that authorize certain activities by US persons that would otherwise violate the prohibitions of the EO. Currently, these General Licenses permit the following activities:

• Wind-down transactions involving the DNR or LNR regions of Ukraine, and wind-down operations, contracts, or other agreements in effect prior to February 21, 2022 involving exports to and imports from the DNR and LNR regions of Ukraine through March 23, 2022
• Exports and reexports of agricultural commodities, medicine, medical devices, replacement parts and components, and software updates for medical devices to the Covered Regions, as well as transactions necessary for the prevention, diagnosis, or treatment of COVID-19 in the Covered Regions
• Receipt or transmission of telecommunications, and receipt or transmission of mail and packages by common carriers involving the Covered Regions
• Official business of certain international organizations and entities by their employees, grantees, and contractors
• Transfers of noncommercial, personal remittances to or from the Covered Regions, or for or on behalf of an individual ordinarily resident in the Covered Regions
• Exports and reexports to the Covered Regions of services incident to the exchange of personal communications over the internet (e.g., instant messaging, chat and email, social networking, and sharing of photos and movies) and related software necessary to enable such services

OFAC Blocking Sanctions

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

Separately, OFAC designated five Russian “elites” close to Russian President Vladimir Putin, two of whom were previously on the list and redesignated under the current authority. As SDNs, these individuals 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 (“blocked” in the parlance of the EO), US persons are prohibited from doing business with them, and the US financial system cannot be used by any person to transact with them, unless authorized by OFAC. Additionally, non-US persons may risk sanctions if they engage in certain transactions with these SDNs. As is the case with most of OFAC’s sanctions programs, entities owned 50% or more by one or more SDNs will be subject to the same sanctions.

In conjunction with the new prohibitions, OFAC issued two General Licenses to authorize (1) servicing of bonds issued before March 1, 2022 by VEB or its subsidiaries, and (2) wind-down of transactions involving VEB or its subsidiaries through March 24, 2022.

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

Sovereign Debt Prohibitions

In conjunction with those designations, OFAC issued Directive 1A Under Executive Order 14024 (Directive)[4] The new Directive increases US restrictions on dealings in Russia’s sovereign debt by US financial institutions to cover participation in the secondary market for 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.

The following activities by US financial institutions continue to be prohibited:

• 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
• As of June 14, 2021, participation in the primary market for rube 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.

Unlike the blocking and sectoral sanctions, the prohibitions issued in respect of Russian sovereign debt do not apply to entities owned 50% or more by them.

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

In that light, the European Union and Australia have also announced sanctions, as well as individual countries such as Germany. The interest and engagement of US partners and allies in addressing the Russian-Ukrainian situation reflects a more multilateral approach to Russia’s behavior and indicates the potential for more impactful restrictions that could affect a broad array of business operations.

Morgan Lewis will address anticipated additional sanctions as they issue.

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CONTACTS

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

Ukraine Task Force
Giovanna M. Cinelli
Bruce Johnston
Grigory Marinichev
Michael Masling
Kenneth J. Nunnenkamp
Christina Renner
Vasilisa Strizh
Carl A. Valenstein
Alexey Chertov
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Christian Kozlowski
Eli Rymland-Kelly