OFAC Issues Expansive Sanctions on Russia Targeting Financial Sector and Key Industries

What Happened:

On February 24, 2022, the US government launched a second, escalated round of sanctions against Russia in response to Russia’s full-scale invasion of Ukraine.¹  The Department of Treasury’s Office of Foreign Assets Control (“OFAC”) issued Directive 2 (the “Russia-related CAPTA Directive”)² and Directive 3 (the “Russia-related Entities Directive”),³ as well as sweeping blocking sanctions on individuals and entities.

The Bottom Line:

Within days of the Russian invasion, US sanctions on Russia have expanded to target Russia’s financial, defense, aerospace, and maritime sectors with sanctions on two more major Russian banks—Sberbank of Russia (“Sberbank”) and VTB Bank—as well as a growing list of key banking and industrial entities.  The stated purpose of OFAC’s February 24 sanctions is to cut off major parts of the Russian financial system and economy from access to the US financial system, and the US dollar more broadly, as well as disrupt the ability of Russian banks and businesses to raise capital from US and global financial markets by targeting nearly 80% of all banking assets in Russia.⁴  Those sanctions include prohibitions on correspondent banking relationships with Sberbank, dealing in new debt or equity from major Russian firms, and full blocking sanctions on VTB Bank and others.

The Full Story:

Late in the evening on February 23, 2022, Russia launched a full-scale invasion of Ukraine following Russia’s initial incursions into Eastern regions of Ukraine.  OFAC responded on February 24, 2022 with economic sanctions under the Russian Harmful Foreign Activities Sanctions and Belarus Sanctions Programs, which build upon sanctions issued only days earlier in response to the rapidly changing situation in Ukraine.

OFAC’s Russia-related CAPTA Directive:

On February 24, 2022, OFAC issued the Russia-related Correspondent Account or Payable-Through Account (“CAPTA”) Directive 2 pursuant to its authority under Executive Order 14024, as part of the Russian Harmful Foreign Activities Sanctions Program.  Under the Russia-related CAPTA Directive, US financial institutions (including foreign branches of US financial institutions, but not foreign subsidiaries) are broadly prohibited from opening or maintaining a correspondent account or payable-through account for Sberbank or 25 of its subsidiaries on or after March 26, 2022.  The prohibition extends to the processing by US financial institutions of any transaction involving these entities.  The Russia-related CAPTA Directive effectively prevents Sberbank and its subsidiaries from establishing accounts with US banks to receive deposits, make payments, or handle other financial transactions.  The new Directive leaves open the possibility that OFAC will determine that additional foreign financial institutions are subject to its prohibitions, in which case such institutions would also be prevented from establishing or maintaining correspondent banking relationships with US financial institutions starting 30 days after such determination.

OFAC’s Russia-related Entities Directive:

Also on February 24, 2022, and pursuant to its authority under Executive Order 14024, OFAC issued the Russia-related Entities Directive.  Under the  Russia-related Entities Directive, US persons are prohibited from all transactions in, financing for, or dealings in new debt of longer than 14 days maturity or new equity issued on or after March 26, 2022 of key Russian financial institutions and businesses named in the Directive, including: Gazprombank, Alfa-Bank, Russian Agricultural Bank, Sovcomflot, Russian Railways, Alrosa, Gazprom, Rostelecom, Rushydro, Sberbank, and Transneft.  The Directive effectively prevents these entities and their subsidiaries⁵ from raising new capital from US persons after March 26, 2022.⁶  The Directive leaves open the possibility that OFAC will determine that additional entities are subject to its prohibitions, in which case such entities would also be prevented from raising new capital from US persons starting 30 days after such determination.

Blocking Sanctions Under OFAC’s Russian Harmful Foreign Activities Sanctions and Belarus Sanctions Programs:

Simultaneous with issuance of the two Directives described above, OFAC issued lengthy Specially Designated National (“SDN”) designations (i.e., blocking sanctions) under the Russian Harmful Foreign Activities Sanctions Program including, among others, VTB Bank – Russia’s second-largest financial institution.  In addition, OFAC designated Bank Financial Corporation Otkitie (“Otkitie”), Novikombank, and Sovcombank as SDNs along with a number of these institutions’ subsidiaries.  The stated purpose of these designations is to diminish the ability of critical Russian economic sectors from accessing global markets, attracting investment, and utilizing the US dollar.⁷  OFAC also designated a number of individuals and their families with close ties to Russian president Vladimir Putin, as well as senior executives at state-owned banks and companies, as SDNs.

In addition to the blocking sanctions on Russian entities and individuals, OFAC issued SDN designations on two Belarusian banks—Belarussian Bank of Development and Reconstruction Belinvestbank and Bank Dabrabyt—as well as a number of entities and individuals in the Belarusian defense and security industries under the Belarus Sanctions Program, due to Belarus’s support for, and facilitation of, Russia’s invasion of Ukraine. 

The blocking sanctions under these programs freeze any assets held by the SDNs within the US and effectively prohibit US persons from any dealing with these SDNs and subsidiaries of SDNs.  All property and interests in property of the SDNs in the United States or in the possession or control of US persons must now be reported to OFAC.

OFAC issued a number of General Licenses simultaneous with its new Directives and SDN designations, including authorizing US persons to engage in transactions related to Russia’s energy sector with certain sanctioned banks until June 24, 2022,⁸ divest from the debt, equity, and derivatives of certain sanctioned banks by May 25, 2022,⁹ wind down transactions with certain banks by March 26, 2022,¹⁰ and reject (rather than block) attempted fund transfers from sanctioned banks.¹¹ The rules with respect to transactions authorized by these licenses are nuanced and OFAC has issued guidance regarding the scope and structure of permitted transactions.¹²

OFAC Sanctions Risks to Non-US Persons Under the Russian Harmful Foreign Activities Sanctions Program

The new blocking sanctions and Directives issued under the Russian Harmful Foreign Activities Sanctions Program pose sanctions risks to non-US persons in certain circumstances. Simultaneous with the issuance of these sanctions, OFAC issued guidance stating that “non-US persons may be designated if they have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, certain activities, a person whose property and interests in property are blocked” under Executive Order 14024.¹³

In addition, the blocking sanctions established under the Russian Harmful Foreign Activities Sanctions Program may have implications for non-US 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., individuals and entities located outside the US) 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 knowingly facilitated a significant transaction for or on behalf of any person subject to sanctions imposed by the United States with respect to Russia.¹⁴  To date, OFAC has not issued guidance on whether it considers sanctions issued under the Russian Harmful Foreign Activities Sanctions Program to fall within the scope of “sanctions imposed by the United States with respect to Russia” in Section 228 of CAATSA.¹⁵

Additional Sanctions May be Forthcoming:

The White House has signaled that further sanctions against Russia will be forthcoming should the situation in Ukraine continue to deteriorate.  Such additional sanctions may entail the implementation of full blocking sanctions against additional Russian banks, designation of additional individuals, to include President Putin, as SDNs, or coordination for the removal of Russia from the SWIFT banking communication network. The White House announced on February 25, 2022, sanctions on Russian president Vladimir Putin and Russian Prime Minister Sergei Lavrov, along with senior officials on Russia’s national security team

In addition to the sanctions imposed by the United States, other authorities, including the European Union, the United Kingdom, and Japan, have announced or plan to impose further sanctions on Russia.  Individuals and companies doing business, directly or indirectly, in Russia, Belarus, or Ukraine should review sanctions exposure carefully and deploy sufficient compliance controls to limit sanctions risk.

Hunton Andrews Kurth LLP will continue to monitor closely the development of this and other US sanctions matters. Please contact us if you have any questions or would like further information regarding these new developments or other questions related to US sanctions programs.

¹ For a description of the first round of US sanctions on Russia in response to its invasion of Ukraine, see 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 (Feb. 24, 2022), https://www.huntonak.com/en/insights/first-round-of-us-sanctions-on-russia-in-response-to-invasion-of-ukraine-expand-on-prior-programs-create-a-framework-for-further-sanctions.html.

² Directive 2, Prohibitions Related to Correspondent or Payable-Through Accounts and Processing of Transactions Involving Certain Foreign Financial Institutions (Feb. 24, 2022), https://home.treasury.gov/system/files/126/correspondent_accounts_directive_2.pdf.

³ Directive 3, Prohibitions Related to New Debt and Equity of Certain Russia-related Entities (Feb. 24, 2022), https://home.treasury.gov/system/files/126/new_debt_and_equity_directive_3.pdf.

⁴ US Dept. of Treasury, Press Release, US Treasury Announces Unprecedented & Expansive Sanctions Against Russia, Imposing Swift and Severe Economic Costs (Feb. 24, 2022), https://home.treasury.gov/news/press-releases/jy0608.

⁵ OFAC, FAQ #985.

⁶ OFAC has clarified that a US fund that contains such blocked debt or equity holdings generally will not be considered a blocked entity as long as the blocked holdings represent less than a predominant share by value of debt or equity of sanctioned entities.  See OFAC, FAQ #982.

⁷ US Dept. of Treasury, Press Release, US Treasury Announces Unprecedented & Expansive Sanctions Against Russia, Imposing Swift and Severe Economic Costs (Feb. 24, 2022), https://home.treasury.gov/news/press-releases/jy0608.

⁸ Russia-related General License 8, Authorizing Transactions Related to Energy (Feb. 24, 2022), https://home.treasury.gov/system/files/126/russia_gl8.pdf.

⁹ Russia-related General License 9, Authorizing Transactions Related to Dealings in Certain Debt or Equity (Feb. 24, 2022), https://home.treasury.gov/system/files/126/russia_gl9.pdf; Russia-related General License 10, Authorizing Certain Transactions Related to Derivative Contracts (Feb. 24, 2022), https://home.treasury.gov/system/files/126/russia_gl10.pdf.

¹⁰ Russia-related General License 11, Authorizing the Wind Down of Transactions Involving Certain Blocked Persons (Feb. 24, 2022), https://home.treasury.gov/system/files/126/russia_gl11.pdf.

¹¹ Russia-related General License 12, Authorizing US Persons to Reject Certain Transactions (Feb. 24, 2022), https://home.treasury.gov/system/files/126/russia_gl12.pdf.  

¹² See, e.g., OFAC, FAQs #974, #976-#978.

¹³ OFAC, FAQ #980.

¹⁴ 22 U.S.C. §8909(a)(2) (2018).

¹⁵ Section 228 of CAATSA generally refers to a separate program targeting Russia, the Ukraine-/Russia-related Sanctions Program, but does not define “sanctions imposed by the United States with respect to Russia” to exclude other sanctions programs targeting Russia.