On February 22, 2022, one day after the Russian Federation formally recognized the Donetsk People’s Republic (“DNR”) and Luhansk People’s Republic (“LNR”) of Ukraine as “independent states” and the Biden Administration responded by imposing a sanctions embargo against the DNR and LNR regions, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) took further action against Russia by imposing new sanctions against the Russian financial services sector, Russian oligarchs and their family members.  OFAC imposed these additional sanctions using Executive Order 14024 (“EO 14024”), which was issued on April 15, 2021 and which authorizes OFAC to sanction operators in Russia’s technology and defense sectors as well as other sectors as determined by the U.S. Secretary of the Treasury in consultation with the U.S. Secretary of State.  Simultaneous with these sanctions actions, U.S. Secretary of the Treasury Janet L. Yellen issued a Determination which officially designated the financial services sector of the Russian economy as a sector that is subject to potential sanctions under EO 14024.  The Biden Administration also issued a Fact Sheet which described these sanctions as a “first tranche of sanctions”.  The Fact Sheet also noted the Russian Parliament’s recent action to authorize the deployment of additional Russian forces into the DNR and LNR regions and  foreshadowed likely additional sanctions with a statement that “Russia will pay an even steeper price if it continues its aggression”.  Details concerning the new sanctions imposed today are set forth below.

Sanctions Against Vnesheconombank (“VEB”) And Its Subsidiaries

Since 2014, VEB has been designated on OFAC’s Sectoral Sanctions Identifications List (the “SSI List”) and subject to Directive 1 sanctions which prohibit U.S. persons from transacting in new debt or new equity issued by VEB and any subsidiary in which VEB holds an ownership interest of 50% or greater.  OFAC has now used its new authority under EO 14024 to impose comprehensive blocking sanctions on VEB and twenty-five of its subsidiaries by adding them to the Specially Designated Nationals and Blocked Persons List (the “SDN List”).  These designations will prohibit U.S. persons from transacting with VEB and its 50%-or-greater-owned subsidiaries and will also require the U.S. financial system to block any of their funds which are held in or which transit through the U.S. financial system.  However, for the avoidance of doubt, these blocking sanctions apply to all subsidiaries owned 50%-or-more by VEB, whether owned directly or indirectly and regardless of whether those subsidiaries were officially named in today’s designations.

The VEB subsidiaries which were identified in this designating action include (but are not limited to) financial services companies, electronic component producers, a coal mining company, and a sporting activities company.  In connection with these upgraded designations, OFAC issued a General License No. 3 which authorizes transactions that are ordinarily incident and necessary to the wind down of transactions involving VEB or any of its 50%-or-greater-owned subsidiaries through 12:01 a.m. eastern daylight time on March 24, 2022.

Sanctions Against Promsvyazbank Public Joint Stock Company (“PSB”) And Its Subsidiaries

In a Press Release, OFAC described PSB as “Russia’s eighth largest financial institution” and noted that “In an effort to insulate itself from U.S. sanctions, the [Russian Federation] has also tasked PSB with providing credit to entities under U.S. and partner nations’ sanctions so that other lenders, namely Sberbank and VTB Bank, can offload the risk of conducting business with sanctioned entities.”  OFAC also used authority under EO 14024 to add PSB, seventeen of its subsidiaries and five vessels owned by PSB to the SDN List.  The PSB subsidiaries which were specifically identified in this designating action include (but are not limited to) financial services companies, real estate companies, technology companies and a hospitality company.  However, as described above with VEB, the blocking sanctions imposed against PSB will apply to all of PSB’s 50%-or-greater-owned subsidiaries even if those subsidiaries are not specifically identified on the SDN List.

Notably, OFAC did not issue any General License to authorize any wind down transactions with PSB or any of its 50%-or-greater-owned subsidiaries.  OFAC also added PSB’s CEO, Petr Mikhailovich Fradkov, to the SDN List pursuant to EO 14024 due to his status as an operator in the defense and financial services sectors of the Russian Federation.

Secondary Market Sanctions Against Russian Sovereign Debt

In August of 2019, OFAC issued sanctions under the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (“CBW Act”) in order to prohibit U.S. financial institutions from participating in the primary market for non-ruble denominated bonds issued by the Russian sovereign.  Then, simultaneous with the issuance of EO 14024, OFAC issued a Directive 1 on April 15, 2021 which prohibited U.S. financial institutions from: (i) participating in the primary market for non-ruble and ruble denominated bonds issued 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 (ii) lending non-ruble and 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.

Today, OFAC has issued a new Directive 1A which expands and supersedes the previous Directive 1 by creating a new prohibition which will take effect on March 1, 2022 and will prohibit U.S. financial institutions from participating 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.  Although VEB was the target of the above-discussed SDN List designation, OFAC’s Press Release recognized that “VEB occupies a unique role in Russia’s financial system as the servicer of Russia’s sovereign debt”.  Therefore, OFAC issued a  General License No. 2 which will authorize transactions with VEB or any of its 50%-or-greater-owned subsidiaries which are ordinarily incident and necessary to the servicing of bonds issued before 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.  However, to the extent that the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation issue any bonds after March 1, 2022, VEB’s SDN List designation will prohibit U.S. persons from engaging in any transactions with VEB related to the servicing of such bonds.

Sanctions Against Oligarchs and Their Family Members

OFAC’s press release further noted that “Elites close to Putin continue to leverage their proximity to the Russian President to pillage the Russian state, enrich themselves, and elevate their family members into some of the highest positions of power in the country at the expense of the Russian people. Sanctioned oligarchs have used family members to move assets and to conceal their immense wealth.”  EO 14024 also authorizes OFAC to impose SDN List designations on any spouse or adult child of a person who has been designated as a SDN pursuant to EO 14024.  OFAC used that authority to add the following individuals to the SDN List:

• Aleksandr Vasilievich Bortnikov (Father) and Denis Aleksandrovich Bortnikov (Son) – Although OFAC had already designated the elder Bortnikov as a SDN under Executive Order 13382 due to his status as the Director of Russia’s Federal Security Service (“FSB”), OFAC updated his designation in order to also sanction him as a senior government official of the Russian Federation under EO 14024. This redesignation allowed OFAC to also use EO 14024 to impose a SDN List designation on the younger Bortnikov.
• Sergei Vladilenovich Kiriyenko (Father) and Sergei Vladilenovich Kiriyenko (Son) – The elder Kiriyenko was already designated as a SDN under Executive Order 13661 for acting as an official of the Russian government. OFAC updated his designation in order to also sanction him in that same capacity under EO 14024, which allowed OFAC to also add the younger Kiriyenko to the SDN List.

A previous section above discussed OFAC’s designation to add Petr Mikhailovich Fradkov to the SDN List due to his role as PSB’s CEO.  However, OFAC noted that Fradkov’s father Mikhail Efimovich Fradkov is also a current SDN who was first added to the SDN List as a Russian Federation government official due to his status as a former Prime Minister of Russia and former Director of the Russian Foreign Intelligence Service.

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OFAC posted the full list of individuals and entities added to the SDN List in these sanctions designations at this link.  OFAC also updated several of its existing Frequently Asked Questions (“FAQs”) in connection with these new sanctions and added a new FAQ No. 964 and a new FAQ No. 465.

As referenced above, it is possible that these sanctions may only represent a “first tranche” of sanctions which the United States could impose on Russia if it continues to pursue a potential military invasion of Ukraine.  We have previously speculated that future sanctions tranches could include further sanctions against the Russian financial system, sanctions directed at the Russian energy sector, even more aggressive targeting of Russian oligarchs and their family members and the possible imposition of a Russia-specific Foreign-Produced Direct Product Rule under the U.S. Export Administration Regulations (“EAR”) administered by the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) (similar to the very restrictive Foreign-Produced Direct Product Rule which currently applies to Chinese tech giant Huawei under the EAR).  However, the situation is obviously very fluid and subject to change.

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