U.S. economic sanctions against Russian interests have been building in response to the developing situation between the Russian Federation and Ukraine.

On Monday, February 21, 2022, President Biden issued Executive Order No. 14065 (E.O. 14065), “Blocking Property of Certain Persons and Prohibiting Certain Transactions With Respect to Continued Russian Efforts to Undermine the Sovereignty and Territorial Integrity of Ukraine.” E.O. 14065 builds upon the sanctions President Biden authorized against Russia under E.O. 14024, “Blocking Property With Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation,” which he issued on April 25, 2021.

Donetsk and Luhansk Regions

Among other restrictions, E.O. 14065 bars U.S. persons from importing any goods, services or technology from, or exporting them to, the two breakaway regions of Ukraine: the Donetsk People’s Republic and the Luhansk People’s Republic (the “Covered Regions”). E.O. 14065 also blocks the property and interests of persons operating in the Covered Regions, and of those persons (including officers and directors) leading business entities operating there. These restrictions in effect mirror the existing set of sectoral sanctions put in place in 2014, prohibiting U.S. persons from doing business in the former Crimea region of Ukraine, and therefore should be familiar to compliance professionals in modifying their screening protocols.

To ease the discontinuation of business that U.S. persons may have in the Covered Regions, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued General License No. 17 authorizing U.S. persons to wind down existing transactions and business relationships there by March 23, 2022. Other general licenses authorize continued limited transactions with the Covered Regions, including the exportation of certain agricultural commodities, medicines and medical devices, among other goods, personal remittances, telecommunications and mail, certain services and software incident to Internet-based communications, and the transactions of specific international organizations.  

Designation of VEB and PSB

U.S. restrictions on Russia’s ability to raise funds tightened following President Biden’s public announcement on Tuesday, February 22, 2022, with the sanctioning of two of Russia’s largest banks, Vnesheconombank (VEB) and Promsvyazbank (PSB), along with 42 of their subsidiaries. The designation of VEB and PSB as Specially Designated Nationals (SDNs) under E.O. 14024 effectively cuts them off from the U.S. financial system and freezes (blocks) their assets within U.S. jurisdiction. No U.S. person can, therefore, transact business with these designated institutions, and with respect to any pending business with VEB—which services Russia’s sovereign debt—U.S. persons must wind down transactions by March 24, 2022.

Designation of Individuals

In addition to the designations of VEB and PSB, the Biden administration added several Russian officials and their immediate relatives to the SDN list pursuant to E.O. 14024. The administration alleges that these individuals have close ties to Russian President Vladimir Putin and participate in what the Administration claims is government corruption. As the Ukrainian situation deepens, we expect the number of Russian officials and their family members added to the SDN list to grow.

Further Restrictions on Dealings in Russian Sovereign Debt

On February 22, OFAC also increased existing restrictions on dealings in Russian sovereign debt, further limiting Russia’s ability to raise revenue. Directive 1A under E.O. 14024 extends such prohibitions to cover 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.

As the conflict in Ukraine continued to escalate in the following days, OFAC took further action on Monday, February 28, 2022, to issue Directive 4 under E.O. 14024, which now prohibits U.S. persons from transacting business with the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation and the Ministry of Finance of the Russian Federation (collectively, the "Directive 4 entities”), except as permitted by general or specific license. This action effectively immobilizes any assets of the Directive 4 entities held in the United States, although not imposing blocking sanctions on them.  Rather than blocking, Directive 4 requires U.S. persons to reject such transactions, unless otherwise authorized or exempted by OFAC.

Over the last several days, OFAC has issued a number of general licenses authorizing some limited transactions involving the Directive 4 entities. Among several others, General License 8A authorizes U.S. persons (through non-U.S. financial institution intermediaries) to continue to conduct transactions “related to energy” with the Central Bank of the Russian Federation and certain other Russian banks until June 24, 2022. Issued on March 2, 2022, General License 9A authorizes U.S. persons to receive interest, dividend, or maturity payments in connection with debt or equity of the Directive 4 entities until May 25, 2022.

Designation of More Financial Institutions and Individuals, and Export Controls

On February 24, 2022, President Biden announced another wave of U.S. economic sanctions against Russian enterprises and individuals in response to the escalating situation in Ukraine. He announced that the U.S. was adding four more Russian banks to the SDN list, including VTB Bank, which is one of the largest financial institutions in Russia holding more than $250 billion in assets. As with VEB and PSB, VTB’s assets within U.S. jurisdiction will be blocked, and U.S. persons will be prohibited from doing business with VTB except as permitted by OFAC license. Other Russian banks added to the SDN list as of February 24th include Bank Otkritie, Sovcombank, Novikombank, and many of their subsidiaries. Per General License 11, OFAC authorized U.S. persons until March 26, 2022 to wind down transactions with VTB, Bank Otkritie, Sovcombank, and their subsidiaries. U.S. persons are also authorized to reject, as opposed to block, unauthorized transactions with these entities until March 26, 2022, under General License 12.

As noted above, President Biden announced that more Russian nationals who serve in the Putin administration or who are identified as having close ties to the Russian leader will likely be added to the SDN list, along with their close relatives. On Friday, February 25, 2022, the Treasury Department added Russian President Vladimir Putin and Foreign Minister Sergey Lavrov, among other Russian government security officials, to the SDN list, blocking their property and prohibiting their ability to personally transact business in the U.S. financial system.

President Biden also announced that he expected to restrict the investment by U.S. persons in Russian state-owned businesses and impose stricter export controls on the sale of sensitive U.S. technologies to Russia that have potential military uses.

On Thursday, March 3, 2022, the Treasury Department announced that it was designating a host of Russian individuals and entities, and blocking their property within U.S. jurisdiction. These persons are alleged to have profited from their association with Russian President Vladimir Putin, or alleged to have engaged in state-sponsored disinformation against Ukraine or election interference against the United States. 

Restricting U.S. Bank Transactions with Certain Large Financial Institutions and Investments in Certain Major State-Owned Enterprises

On February 24, 2022, OFAC issued two new directives pertaining to Russian financial institutions and state-owned enterprises under E.O. 14024. Directive 2 prohibits U.S. financial institutions from opening or maintaining correspondent accounts or payable-through accounts for or on behalf of several Russian financial institutions listed in Annex 1 of the directive, which notably includes another large Russian bank, Sberbank. U.S. financial institutions must close any correspondent or payable-through accounts with the listed banks by March 26, 2022. For any banks added to this list in the future, U.S. financial institutions will have 30 days after the date of such determination to close their correspondent or payable-through accounts.

Directive 2 also prohibits U.S. financial institutions from processing transactions involving any of the listed Russian financial institutions, unless authorized or exempted by OFAC. Directive 3, in turn, prohibits U.S. persons from investing in new debt or equity in a number of Russian state-owned enterprises including, among others, Sberbank, energy giant Gazprom and telecommunications giant Rostelecom.

An exception to the sweeping prohibitions noted above, on Monday, February 28, 2022, OFAC issued General License No. 8A, which permits U.S. persons until June 24, 2022, to conduct transactions “related to energy” with sanctioned Russian financial institutions including VEB, Otkritie, Sovcombank, Sberbank, and VTB, as well as the Central Bank of the Russian Federation. However, in order for a U.S. financial institution to engage in transactions authorized under General License No. 8A, all funds transfers must be processed indirectly through a non-sanctioned, non-U.S. financial institution so as not to violate Directive 2.

Executive Order of March 8, 2022, “Prohibiting Certain Imports and New Investments With Respect to Continued Russian Federation Efforts to Undermine the Sovereignty and Territorial Integrity of Ukraine”

In response to the ongoing Russian military action in Ukraine, on March 8, 2022, President Biden issued a new Executive Order prohibiting the importation of Russian crude oil, refined petroleum, liquified natural gas, and coal.

The Executive Order also prohibits U.S. persons from making new investments in the Russian energy sector, or approving, financing, facilitating or guaranteeing transactions with a foreign person that would otherwise be prohibited if performed by a U.S. person. In conjunction with the E.O., OFAC issued General License 16, which authorizes U.S. persons until April 22, 2022, to complete transactions to import Russian oil and gas pursuant to written agreements entered prior to March 8, 2022, but does not authorize entry into new contracts.

Notably, General License 8A remains in effect, which authorizes U.S. persons to engage in certain transactions “related to energy” involving specified Russian financial institutions until June 24, 2022, unless renewed. General License 8A does not, however, authorize any transactions that would be otherwise prohibited by the E.O. of March 8, 2022.

SWIFT

During the February 24 press conference, President Biden was asked whether the United States and its European allies would restrict Russian financial institutions from accessing the Society for Worldwide Interbank Financial Telecommunication (SWIFT) financial messaging network. He answered that, although there was no agreement to do so at that time, it remained an option should circumstances warrant it.

On Saturday, February 26, 2022, as the conflict in Ukraine escalated, the White House issued a joint statement with the leaders of the EU, France, Germany, Italy, the UK and Canada, committing to remove “selected Russian banks” from the SWIFT global messaging system.This unprecedented action would effectively disconnect the affected Russian banks from the international financial system and cripple their ability to transact business globally. 

On March 2, 2022, the EU announced that it was excluding seven Russian banks from the SWIFT messaging system. The seven banks are Bank Oktritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank, and VEB. Each bank will have 10 days to wind down their SWIFT operations, after which they will be cut off. 

Notably, two of Russia’s largest banks, Sberbank and Gazprombank, were not among those banks excluded from SWIFT because they remain primary channels of payment for Russian oil and natural gas to Europe. 

VISA and Mastercard

On March 5, 2022, VISA and Mastercard announced that they had decided to suspend network services in Russia and would cease supporting all transactions in the coming days. Cardholders of VISA and Mastercard cards issued by Russian banks may, however, still use their cards for transactions within Russia, but not outside of Russia or for international online payments, and only until those cards expire. Cardholders with cards issued by non-Russian banks also will not be able to use their VISA and Mastercard cards within Russia. Several Russian banks now cut off from using the VISA and Mastercard networks have announced that they intend to start issuing cards using the Chinese-owned UnionPay system, coupled with Russia’s Mir payment network, to avoid impacts to their customers.

Task Force KleptoCapture

In a related development, on March 2, 2022, Attorney General Merrick Garland announced the creation of a new interagency task force called “Task Force KleptoCapture,” which will be dedicated to enforcing U.S. economic sanctions, export controls and other economic countermeasures directed against Russia. The Task Force’s mission will include investigating and prosecuting violations of U.S. sanctions pertaining to Russia, combating attempts to undermine or circumvent sanctions against Russian financial institutions, targeting the use of cryptocurrency to evade sanctions and using enforcement powers including civil and criminal asset forfeiture against seized assets. The Task Force will be managed out of the Office of the Deputy Attorney General and will include personnel from numerous law enforcement agencies including the FBI, the U.S. Marshals Service, the U.S. Secret Service, the Department of Homeland Security, the Internal Revenue Service, and the U.S. Postal Inspection Service.

FinCEN Alert

In a related development, on March 7, 2022, the Financial Crimes Enforcement Network (FinCEN) issued a ten-page alert to the U.S. financial services industry to be vigilant against efforts to evade U.S. economic sanctions against Russia. The alert provides select red flags to identify potential sanctions evasion activity and reminds financial institutions and other financial services businesses of their obligations to report suspicious activity under the Bank Secrecy Act. In particular, FinCEN warns of suspicious transactions tied to the use of convertible virtual currencies, or CVCs, by blocked persons through unsanctioned Russian or Belarusian banks.

Take-Aways

Compliance professionals at U.S. companies and their foreign subsidiaries and affiliates should continue to monitor closely the unfolding events in Ukraine and the widening sets of sanctions being rolled out by the U.S. Treasury and Commerce Departments, among other federal government agencies charged with implementing U.S. economic sanctions. While many of the new sanctions programs have a short grace period built in for winding down business and financial transactions, U.S. companies and their subsidiaries doing business with Russian or Ukrainian interests should move swiftly to rescreen their client, customer, vendor and contractor databases; ensure that their compliance frameworks are updated; and verify that their payment processes with those parties are compliant and viable, among other risk mitigation measures.

The array of economic sanctions imposed by the United States and our European allies is nothing short of a sea change in the world economy. Unfortunately, as these sanctions multiply and create further separation between Russia and the rest of the international business community and the U.S. financial system in particular, we can expect to see significant business disruption to U.S. companies operating in the global economy.

This is a very fluid situation and Manatt is closely monitoring developments and will continue to provide information and insights as they become available.