First Round of US Sanctions on Russia in Response to Russian Invasion of Ukraine Expand on Prior Programs and Create a Framework for Further Sanctions

What Happened:

On February 21, 2022, President Biden issued an Executive Order (the “Executive Order”)¹ prohibiting certain transactions related to Russian military activity in Eastern Ukraine.  On February 22, 2022, the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) issued new Directive 1A (the “Russia-related Sovereign Debt Directive”)² expanding the scope of prohibitions related to Russia’s sovereign debt and placed two major Russian banks on OFAC’s Specially Designated Nationals (“SDN”) list.  On February 23, 2022, Russia began a full-scale invasion of Ukraine, making it likely that the United States will impose additional sanctions in the coming days.

The Bottom Line:

US sanctions on Russia are expanding significantly in response to the rapidly evolving situation in Ukraine with implications for US and foreign persons.  The first round of sanctions include broad prohibitions on doing business in key contested regions in Eastern Ukraine; prohibitions on participating in certain transactions involving bonds issued by Russia’s Central Bank, National Wealth Fund, and Ministry of Finance; and blocking sanctions on two major Russian financial institutions: the State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (“VEB”) and Promsvyazbank Public Joint Stock Company (“PSB”).

The Full Story: 

On February 21, 2022, Russia recognized two breakaway regions in Eastern Ukraine as independent nations – designated by Ukrainian separatists as the Donetsk People’s Republic (“DNR”) and Luhansk People’s Republic (“LNR”), respectively – and moved Russian military forces into Eastern Ukraine.  The United States immediately responded with economic sanctions expanding the two existing sanctions regimes targeting Russia: the Ukraine/Russia-Related Sanctions Program and the Russian Harmful Foreign Activities Sanctions Program. 

Ukraine/Russia-Related Sanctions Program Expansion Under the Executive Order:

The existing Ukraine/Russia-Related Sanctions Program was established in response to the Russian annexation of the Crimea region in 2014 and is generally comprised of: (1) sanctions that block transactions with SDNs; (2) a general embargo that prohibits investment and the exportation or importation of goods, technology, or services to or from the Crimea region of Ukraine; and (3) sectoral sanctions that prohibit certain types of transactions with entities operating in particular sectors of the Russian economy and listed on OFAC’s Sectoral Sanctions Identification list (“SSI List”).³  The Executive Order expands blocking and embargo sanctions under the Ukraine/Russia-Related Sanctions Program.  In particular, the Executive Order expands the embargo to encompass the DNR and LNR regions, as well as any other region designated by OFAC, each a “Covered Region” of Ukraine, and prohibits US persons from participating in:

• any new investment in a Covered Region;
• any importation, directly or indirectly, of any goods, services or technology from a Covered Region to the United States;
• any exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a US person, wherever located, of any goods, services, or technology into a Covered Region; and
• any approval, financing, facilitation or guarantee of a transaction by a foreign person, if that foreign person would be prohibited by any of the foregoing prohibitions when treated as a US person or as though performing the prohibited act in the United States.

In addition, the Executive Order expands blocking sanctions under the Ukraine/Russia-Related Sanctions Program to effectively prohibit US persons from all economic dealings with persons determined by OFAC to:

• operate or have operated in a Covered Region after February 21, 2022;
• be or have been a leader, official, senior executive officer, or member of the board of directors of an entity operating in a Covered Region;
• be owned, controlled by, or to have acted on behalf of a person determined by OFAC to have engaged in the foregoing; or
• have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to, a person determined by OFAC to have engaged in the foregoing.

The blocking sanctions under the Executive Order have the effect of authorizing OFAC to designate persons as SDNs, thereby cutting such persons off from any US business dealings. 

The Executive Order establishes a framework for further sanctions.  The White House has indicated that sweeping SDN designations of Russian individuals and businesses, in addition to those described below under the Russian Harmful Foreign Activities Sanctions Program, may be forthcoming under the Executive Order.⁴  In addition, the Executive Order gives OFAC the authority to expand “Covered Regions” as the situation in Ukraine evolves.

The expansion of the Ukraine/Russia-Related Sanctions Program may have implications for foreign persons under Section 228 of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”).  Section 228 of CAATSA requires OFAC to sanction foreign persons (e.g., companies located outside the United States) for certain conduct if such conduct would be prohibited for US persons in certain circumstances.  Specifically, the relevant part of Section 228 directs OFAC to sanction foreign persons that it determines to have (1) materially violated a prohibition pursuant to any “covered Executive order”;⁵ or (2) knowingly facilitated a “significant transaction”⁶ for or on behalf of any person subject to sanctions imposed by the United States with respect to Russia.

On February 21, 2022, OFAC issued a number of General Licenses under the Executive Order providing limited authorization for US persons to engage in certain transactions.  Among other things, these General Licenses authorize US persons to wind down transactions involving the DNR or LNR regions of Ukraine by March 23, 2022;⁷ export or reexport certain agricultural commodities, certain medical devices, and certain supplies related to mitigation of the global COVID-19 pandemic;⁸ and participate in certain transactions related to communications and remittances.⁹  OFAC has also authorized a number of international organizations to operate in Covered Regions.¹⁰

Russian Harmful Foreign Activities Sanctions Program Expansion Under Directive 1A:

The existing Russian Harmful Foreign Activities Sanctions Program was established pursuant to Executive Order 14024 (“EO 14024”) on April 15, 2021 following US claims of Russian election interference, cyberattacks, and other actions abroad.¹¹  Under EO 14024, OFAC issued Directive 1, which prohibited US financial institutions from participating in the primary market for 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, and further prohibits US financial institutions from lending to these three institutions.  This prohibition did not limit US financial institutions from dealing in the primary market for such bonds issued prior to July 14, 2021, and did not target the activity of foreign banks or financial firms.

On February 22, 2022, OFAC expanded sanctions under EO 14024 with the issuance of the Russia-related Sovereign Debt Directive, which replaces and supersedes Directive 1.  The Russia-related Sovereign Debt Directive expands upon the existing prohibitions of Directive 1 and also prohibits participation in the secondary market for 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 after March 1, 2022.  The Russia-related Sovereign Debt Directive also includes technical revisions to the applicable definition of “US financial institution.”  The stated goal of these sanctions is to deprive the Russian government of a key mechanism by which it raises capital, increases financing costs, and denies access to key US markets and investors.

Blocking Sanctions Under the Russian Harmful Foreign Activities Sanctions Program:

Simultaneous with issuance of the Russia-related Sovereign Debt Directive, OFAC issued a number of SDN designations targeting, among others, two major Russian financial institutions: VEB and PSB, along with a number of PSB’s subsidiaries.¹² As noted by the White House, the blocking sanctions on these two banks are intended to “freeze their assets in the United States, prohibit US individuals and businesses from doing any transactions with them, shut them out of the global financial system, and foreclose access to the United States dollar.”¹³  Simultaneous with VEB’s designation, OFAC issued General Licenses authorizing US persons to wind down transactions with VEB by March 24, 2022 and to engage in transactions with VEB necessary to service bonds issued prior to 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.¹⁴

OFAC also designated a number of individuals and families associated with Russian president Vladimir Putin as SDNs. 

Like the prohibitions of the Executive Order described above, the Russia-related Sovereign Debt Directive and blocking sanctions under EO 14024 may have additional implications for foreign persons under Section 228 of CAATSA as “sanctions imposed by the United States with respect to Russia.”

Additional Sanctions Are Forthcoming:

The Executive Order’s broad authorization of OFAC to define “Covered Regions” leaves open the possibility that the embargoed areas of Ukraine will expand in response to future Russian military actions as the situation there unfolds.  After Russia invaded Ukraine on February 23, 2022, the United States announced its intention to impose further sanctions on Russia.  The White House has already signaled that sanctions against additional Russian banks and other institutions in Russia’s financial services sector may be forthcoming.  Based on indications from senior administration officials, additional sanctions might involve banning Russia from the SWIFT financial transaction system, cutting Russian access to correspondent banking relationships, or imposing export controls on Russia.  

In addition to the sanctions imposed by the United States, other authorities, including the European Union and the United Kingdom, have also issued broad sanctions against Russia in recent days.  Individuals and companies engaged directly or indirectly in any business in Ukraine should take note and seek to limit potential sanctions exposure in this region.  In addition, as it relates to blocking sanctions, OFAC’s recent designations of SDNs under the Russian Harmful Foreign Activities Sanctions Program underscore the critical importance of diligence procedures to identify the true ownership of counterparties in order to limit sanctions compliance risk.

¹ Executive Order Blocking Property Of Certain Persons And Prohibiting Certain Transactions With Respect To Continued Russian Efforts To Undermine The Sovereignty And Territorial Integrity Of Ukraine (February 21, 2022), https://home.treasury.gov/system/files/126/20220221_eo_ukraine.pdf.

² OFAC, Directive 1A Under Executive Order 14024, https://home.treasury.gov/system/files/126/russia_directive_1a.pdf.

³ See OFAC, Ukraine/Russia-Related Sanctions Program (June 16, 2016), https://home.treasury.gov/system/files/126/ukraine_overview_of_sanctions.pdf.

⁴ See Press Briefing by Press Secretary Jen Psaki and Deputy National Security Advisor for International Economics and Deputy NEC Director Daleep Singh, February 22, 2022, https://www.whitehouse.gov/briefing-room/press-briefings/2022/02/22/press-briefing-by-press-secretary-jen-psaki-and-deputy-national-security-advisor-for-international-economics-and-deputy-nec-director-daleep-singh-february-22-2022/.

5 “Covered Executive order” is defined in CAATSA to encompass the list of executive orders that established the Ukraine/Russia-Related Sanctions Program.  That list does not presently include the Executive Order and OFAC has not issued guidance on its view of whether the Executive Order can be considered a “covered Executive order” for the purposes of CAATSA.  Nonetheless, the Executive Order would appear to qualify as “sanctions imposed by the United States with respect to Russia” as required by Section 228’s second prong.

⁶ OFAC has issued general guidance describing what it may consider a “significant transaction,” but will make such determination on a case-by-case basis.  See OFAC, FAQ #545.

⁷ OFAC, Ukraine General License Number 17, https://home.treasury.gov/system/files/126/ukraine_gl17.pdf.

⁸ OFAC, Ukraine General License Number 18, https://home.treasury.gov/system/files/126/ukraine_gl18.pdf.

⁹ OFAC, Ukraine General License Number 19, https://home.treasury.gov/system/files/126/ukraine_gl19.pdf; OFAC, General License Number 21, https://home.treasury.gov/system/files/126/ukraine_gl21.pdf; OFAC, Ukraine General License Number 22, https://home.treasury.gov/system/files/126/ukraine_gl22.pdf.

¹⁰ OFAC, Ukraine General License Number 20, https://home.treasury.gov/system/files/126/ukraine_gl20.pdf.

¹¹ New US Sanctions on Russia Target Certain Cyber Actors and Sovereign Debt, April 26, 2021, https://www.huntonak.com/en/insights/new-us-sanctions-on-russia-target-certain-cyber-actors-and-sovereign-debt.html.  The Program also includes blocking sanctions issued with respect to certain Russian energy export pipelines under Executive Order 14039.

¹² OFAC Press Release, U.S. Treasury Imposes Immediate Economic Costs in Response to Actions in the Donetsk and Luhansk Regions (Feb. 22, 2022), https://home.treasury.gov/news/press-releases/jy0602.  Under OFAC’s 50 percent rule, the blocking sanctions are applied not only to the subsidiaries of PSB directly designated as SDNs by OFAC, but also to all entities owning 50 percent or more, directly or indirectly, by PSB, even if such entities are not identified on OFAC’s SDN List.

¹³ White House Fact Sheet: United States Imposes First Tranche of Swift and Severe Costs on Russia (Feb. 22, 2022), https://www.whitehouse.gov/briefing-room/statements-releases/2022/02/22/fact-sheet-united-states-imposes-first-tranche-of-swift-and-severe-costs-on-russia/.

¹⁴ OFAC, Russian Harmful Foreign Activities General License 2, https://home.treasury.gov/system/files/126/russia_gl2.pdf; OFAC, Russian Harmful Foreign Activities General License 3, https://home.treasury.gov/system/files/126/russia_gl3.pdf.