U.S. business leaders are concerned about the potential impact of a new set of sanctions authorized by President Barack Obama last week in response to Russia's annexation of Crimea. The new sanctions broaden those already in place under a March 17 executive order and authorize the U.S. Treasure Department’s Office of Foreign Assets Control (OFAC) to target anyone with financial connections to the Russian economy. This makes it a violation of U.S. law to deal with companies and individuals specifically marked for sanctions, as well as any company in which they have a 50% or more ownership interest.
In addition to the 20 individuals targeted, OFAC also designated Bank Rossiy — the primary bank for senior Russian officials and one of Russia's largest financial institutions — for sanctions. The impact of these sanctions were felt almost immediately when Visa and Mastercard stopped providing services for payment transactions for Bank Rossiv and several other banks, thus preventing the banks from engaging in dollar-based transactions. Russian stocks also plummeted last Friday and both Standard & Poor's and Fitch Ratings downgraded Russia's credit from stable to negative, making it more difficult for Russia to borrow money from Western banks.
While acknowledging the potential impact of these sanctions on the global economy, President Obama felt the sanctions were a necessary response to Russian President Vladimir Putin’s aggression against Ukraine. U.S. officials hope the sanctions will have a similar effect to those imposed on Iran, which forced discussion of the Islamic nation's nuclear program.
Both the U.S. and European Union (EU) have issued travel bans and frozen the assets of 20 Russian and Crimean officials and businessmen. However, the U.S. has been more willing to take stronger measures given the EU's fear of jeopardizing its energy dependency on Russia — one of the world's largest energy exporters —and its trade turnover of nearly $400 billion with Russia. Consequently, while the EU unanimously denounces Crimea's annexation, members are split over who should bear the costs of punishing Moscow.
Nonetheless, the U.S. is ready and able to enforce its sanctions with significant repercussions for violators. OFAC has the power to enforce these sanctions by freezing assets, barring access to the U.S. financial system and imposing hefty fines for non-compliance. Furthermore, OFAC has been increasingly aggressive in its scrutiny of foreign banks, leading to a number of high-priced settlements with those charged with alleged OFAC violations.
Companies should heed the current political environment and be prepared to comply with U.S. sanctions. An effective OFAC compliance program will ensure employees understand the importance of compliance and appreciate the need to monitor and review all potential transactions with Russian entities and individuals.