New Russia-Related Sanctions: Considerations for Companies Doing Business in and with Russia

International Trade & Compliance Alert

Building on the “first tranche” of sanctions announced on February 22, 2022 described in our prior alert, the United States, the EU, the UK, and their allies have imposed (or announced the imposition of) additional far-reaching Russia-related economic sanctions and stringent export controls. In combination, the restrictions include territorial embargoes by the United States, blocking sanctions, and restrictions targeting several major Russian banks, including a commitment to impose SWIFT-related restrictions. Authorities in the United States, Europe and elsewhere have indicated their intention to impose additional sanctions if the Russian military continues its incursion in Ukraine.

Here, we outline key aspects of the new U.S., EU, and UK economic sanctions and export controls promulgated February 22-28, 2022 and provide some practical recommendations for businesses in light of the new restrictions. We will continue monitoring actions by the U.S., EU, and UK governments and will provide further updates as appropriate.

U.S. Sanctions and Export Controls

I. Sanctions Measures

a. New Embargo Prohibitions

On February 21, 2022, in response to Russia recognizing the self-proclaimed Donetsk and Luhansk People’s Republics of Ukraine (“DNR” and “LNR”) as “independent,” President Biden issued Executive Order 14,065 imposing a comprehensive embargo on those regions. As with Crimea, these embargo restrictions generally prohibit transactions involving U.S. persons and/or items subject to U.S. export controls in or with DNR and LNR, including new investment, imports of goods and services from and exports of goods, services, or technology to these regions, as well as facilitation by U.S. persons of such transactions. The Secretary of the Treasury can expand these comprehensive sanctions to additional territories should circumstances warrant.

The U.S. Office of Foreign Assets Control (“OFAC”) authorized certain transactions ordinarily incident and necessary to the wind down of transactions involving DNR and LNR through March 23, 2022. Authorized transactions include, among others, winding down of operations and contracts in effect prior to February 21, 2022, as well as divestiture or transfer to non-U.S. persons (other than certain sanctioned persons) of U.S. persons’ ownership in any pre-February 21, 2022 investment located in these regions. OFAC also authorized certain humanitarian activities.

b. Blocking Sanctions Prohibitions on Major Russian Banks, Russian Sovereign Wealth Fund, Russian Leaders, and Other Parties

OFAC imposed blocking sanctions on, and added to OFAC’s Specially Designated Nationals and Blocked Persons List, several major Russian financial institutions (Vnesheconombank (“VEB”), VTB, Promsvyazbank, Bank Otkritie, Sovcombank, and Novikombank) and their affiliates, a key Russian sovereign wealth fund (the Russian Direct Investment Fund) along with its Chief Executive Officer, management company, and one of the managing company’s subsidiaries, Nord Stream 2 AG (a Swiss company engaged in construction of the Nord Stream 2 pipeline) and its Chief Executive Officer, Russian President Vladimir Putin, two Russian ministers and a senior Russian official, and other parties (including certain Belarussian parties).

All property of “blocked” persons that comes within the possession of a U.S. person or within the United States must be frozen. U.S. persons are generally prohibited from engaging in any dealings, direct or indirect, with such persons. U.S. persons are also generally forbidden to transact with any entities in which blocked persons, individually or collectively, own a 50% or greater interest. Prohibited activities include, among other things, terminating contracts and processing refunds.

To a limited extent and for a limited time, OFAC authorized transactions ordinarily incident and necessary to the wind down of transactions involving the following entities and their 50%-or-more owned affiliates: VEB (through March 24, 2022), Bank Otkritie, Sovcombank, and VTB (through March 26, 2022), and Nord Stream 2 AG (through March 2, 2022). OFAC clarified that—with respect to the VEB, Bank Otkritie, Sovcombank, and VTB wind-down authorizations—only new or continued business activities ordinarily incident and necessary to wind-down activities are authorized. The wind-down activities do not include the continued processing of funds transfers, securities trades, or other transactions involving a blocked person that were part of ongoing business activities prior to the imposition of sanctions.

In addition, OFAC authorized:

  • until June 24, 2022, certain transactions involving VEB, Bank Otkritie, Sovcombank, or VTB “related to energy”—a concept which includes, among other things, extraction, production, processing, purchase, or transfer of petroleum, other energy-producing products, or transmission of power, including through renewable energy sources;
  • until May 25, 2022, dealings in debt or equity of these banks issued prior to February 24, 2022, provided that any divestment or transfer of such debt or equity must be to a non-U.S. person and cannot be to a blocked party;
  • until May 25, 2022, the wind down of derivative contracts entered into prior to February 24, 2022 involving the above-referenced banks and linked to their debt or equity, provided any such payments to a blocked person are made into a blocked account, and
  • until March 26, 2022, rejection, rather than blocking, of transactions involving Bank Otkritie, Sovcombank, and VTB.

c. Prohibitions on U.S. Correspondent and Payable-Through Account Access for Sberbank

OFAC imposed non-blocking sanctions on Russia’s largest financial institution, Sberbank, and its affiliates. Starting March 26, 2022, U.S. financial institutions (including their foreign branches) and branches of foreign financial institutions located in the United States will generally be prohibited from opening or maintaining any correspondent or payable-through accounts for or on behalf of Sberbank and from processing any transactions involving Sberbank or its listed affiliates. Accordingly, all U.S. dollar transactions involving Sberbank will be prohibited as of March 26, 2022. OFAC is also authorized to similarly sanction additional Russian financial institutions, in which case the prohibitions will apply thirty days after such determination. The OFAC authorizations described above concerning energy-related transactions, dealings in debt or equity, and derivative contracts pre-dating February 24, 2022 also apply to Sberbank.

d. Debt and Equity Prohibitions Concerning Certain Russian Entities

OFAC imposed sanctions on certain Russian financial services sector participants (Credit Bank of Moscow, Gazprombank, Alfa-Bank, Agricultural Bank, and Sberbank) and state-owned entities (Sovcomflot, Russian Railways, Alrosa, Gazprom, Gazprom Neft, Rostelecom, Rushydro, and Transneft). U.S. persons are now generally prohibited from dealing in new (issued on or after March 26, 2022) debt of longer than fourteen days’ maturity or equity of these entities and their 50%-or-more owned affiliates.[1] This restricts these parties’ ability to raise money through the U.S. market. OFAC is also authorized to similarly sanction additional entities, in which case the prohibitions will apply thirty days after such determination.

e. Imposition of Restrictive Measures on the Russian Central Bank and Commitment to Remove Selected Russian Banks from SWIFT

On February 26, 2022, President Biden announced the commitment of the United States and its allies to impose further restrictive economic measures in the coming days. Among other measures, the allies committed to ensure removal of selected Russian banks from the SWIFT messaging system, disconnecting the targeted banks from the international financial system. On February 28, 2022, the United States prohibited U.S. persons from engaging in transactions involving the Russian Central Bank, the Russian National Wealth Fund, and the Russian Ministry of Finance, effectively immobilizing any assets of the Russian Central Bank held in the United States or by U.S. persons. The OFAC authorization described above concerning energy-related transactions also applies to the Russian Central Bank.

f. Sovereign Debt Restrictions

OFAC expanded restrictions on dealings in Russia’s sovereign debt, prohibiting participation in the secondary market for ruble and non-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 after March 1, 2022. These restrictions are in addition to current prohibitions on participation in the primary market for bonds issued by, and lending of funds to, these organizations (covered in our prior alert). OFAC authorized transactions involving VEB related to the servicing of bonds issued by such entities before March 1, 2022.

g. Russian Financial Sector Determination

The Treasury Secretary issued a determination that authorizes sanctions against persons that operate or have operated in the financial services sector of the Russian economy. While the determination exposes persons operating in the Russian financial sector to sanctions risk, only parties specifically designated by the U.S. government are blocked. As covered in our prior alert, the Treasury Secretary previously authorized blocking sanctions on persons determined to operate in the Russian technology and defense and related material sectors.

II. Export Controls

The U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) imposed extensive export control-related measures on Russia by amending the Export Administration Regulations (“EAR”). BIS also imposed comprehensive export, reexport, and in-country transfer restrictions for DNR and LNR. These enhanced controls generally became effective on February 24, 2022 and implicate U.S. and non-U.S. persons throughout the world doing business with Russia and Russian entities.

  • BIS implemented a new export license requirement for exports, reexports, and in-country transfers to or within Russia of many items subject to the EAR,[2] with limited exceptions. BIS intends to apply a policy of denial to such license applications, effectively shutting off a high proportion of exports, reexports and in-country transfers of items to Russia.[3]
  • BIS implemented two new “foreign direct product rules” that extensively broaden the coverage of U.S. export controls when foreign-made items are destined for Russia and, particularly, for Russian military end users, except where such foreign-made items are exported, reexported or transferred from or within Canada, the European Union, the UK, Australia, Japan, or New Zealand:

    • New Russia Foreign Direct Product Rule. Any foreign-made item that is either (i) known to be destined to Russia, or (ii) known to be incorporated into or used in the production or development of a part, component, or equipment classified other than “EAR99” under the EAR and produced in or destined to Russia, is subject to the EAR if the foreign-made item is classified other than “EAR99” and is either (a) the direct product of U.S.-origin software or technology falling within any export control classification number (“ECCN”) in Categories 3 through 9 of the Commerce Control List (“CCL”), or (b) produced by production equipment that itself is the direct product of U.S.-origin software or technology falling within any ECCN in Categories 3 through 9 of the CCL.
    • New Russia Military End User Foreign Direct Product Rule. If a foreign-made item is either (i) known to be incorporated into or used in the production or development of a part, component or equipment produced, purchased or ordered by a Russian military end user added to BIS’s Entity List (as discussed below), or (ii) intended to be involved in a transaction to which a Russian military end user on the Entity List will be a party, then the foreign-made item will be subject to the EAR if the item is either (a) the direct product of software or technology subject to the EAR and classified other than “EAR99,” or (b) produced using production equipment that itself is the direct product of software or technology subject to the EAR and classified other than “EAR99.”
  • BIS added all forty-five Russian entities that previously appeared on the Military End-User List and two additional Russian entities to the Entity List, expanding specific license requirements for the export, reexport, and in-country transfer of items subject to the EAR to such entities.
  • BIS expanded the scope of controls associated with Russian “military end users” and “military end uses” within Russia to cover all items subject to the EAR other than food and medicine designated as “EAR99” and certain mass market encryption hardware and software destined to private entities.

EU Sanctions

The EU imposed certain sanctions, including expanding pre-existing sanctions against Russia, and announced further sanctions measures that are likely to be imposed within the next several days.

  • On February 23, 2022, the EU prohibited numerous trading activities involving DNR and LNR. The measures cover an import ban into the EU of goods originating from DNR and LNR. Further, the regulation prohibits exports of certain goods to DNR and LNR, including technology designed for transport, telecommunication, energy, and the prospecting, exploration, and production of oil, gas, and mineral resources. Certain exemptions apply for contracts executed before February 23, 2022.
  • In addition, the EU added 22 additional individuals and four entities (financial institutions VEB, Promsvyazbank, and Bank Rossiya, and the Internet Research Agency) to the list of persons to whom the freezing of funds and economic resources applies. All such persons are also blocked persons under the U.S. regulations.
  • The EU imposed asset freezing sanctions on 351 members of the Russian Duma.
  • The EU imposed additional financial sanctions measures with respect to money-market instruments, transferable securities and new loans or credits as follows:

    • As of February 23, 2022, the EU prohibited direct or indirect purchases, sales, provision of investment services for or assistance in the issuance of, or other dealings with transferable securities and money-market instruments issued after March 9, 2022 by (i) the Russian government, or (ii) the Central Bank of Russia, or (iii) an entity acting on behalf or at the direction of the Central Bank of Russia.
    • Further, the EU prohibited EU persons (with limited exceptions) to directly or indirectly make or be a part of any arrangement to make any new loans or credit to any entity of (i) the Russian government, or (ii) the Central Bank of Russia, or (iii) any entity acting on behalf or at the direction of the Central Bank of Russia.
    • Supply of certain goods, including dual use goods, to additional entities in Russia will now require approval by the competent authorities in the EU, which is unlikely to be granted.
  • On February 25, 2022, the EU further expanded asset freezing on individuals and entities, including “individuals responsible for acts or policies that undermine or threaten the territorial integrity, sovereignty, and independence of Ukraine or stability or security in Ukraine, or who support or implement such acts or policies, or who obstruct the work of international organizations in Ukraine,” including the Russian President Putin and Foreign Minister Lavrov.
  • On February 25, 2022, the EU decided to suspend several provisions regarding the facilitation of the issuance of visas for, among others, members of the Russian official delegations, businessmen and representatives of business organizations, members of Russian national and regional governments, parliaments, and courts.
  • Several EU Member States banned Russian aircraft from entering their airspace, although they may grant exemptions for emergency landings and humanitarian flights.

On February 27, 2022, the EU announced it will impose further sanctions. In alliance with the United States and the UK, the EU agreed on the exclusion of certain Russian banks from SWIFT, as noted above in section I.e.

Further, the EU announced that it will ban Russian state-owned media Russia Today and Sputnik, impose a new package of sanctions on Belarus, ban transactions and freeze assets of the Russian Central Bank, and further sanction assets of Russian oligarchs.

UK Sanctions

The UK took immediate steps to add additional individuals and entities to the existing asset freeze list, including the Russian President, Bank Rossiya, IS Bank, Genbank, Promsvyazbank, and the Black Sea Bank for Development and Reconstruction, and five Russian companies operating in the defense sector, with immediate effect.

As of the date of this alert, further designations are expected (with talk of adding over a hundred new names). The “wind-down” notice issued on February 25, 2022 with respect to VTB (and giving until March 27 to complete wind-down actions) makes clear that previously largely immune subsidiaries in the UK (such as VTB Capital plc), which have previously traded as FCA registered institutions in the UK, will also be covered.

The UK has also announced a series of measures for which specific additional secondary legislation will be required (expected this week). This includes:

  • Measures to exclude a range of Russian banks from the UK financial system, blocking access to sterling for exchange purposes and impacting clearing payments (a step which will obviously be coordinated with the announced measures to remove at least some Russian banks’ access to the SWIFT system, as described in section I.e above);
  • Banning any UK individuals and entities from undertaking financial transactions involving the Russian Central Bank, the Russian National Wealth Fund, and the Ministry of Finance of the Russian Federation.
  • A stop to major Russian companies raising finance in the UK. Individual Russians will face limits on how much they can deposit in UK banks;
  • Banning Aeroflot, Russia’s national airline, from landing in the UK;
  • Suspension of export licenses for dual use items and bans on certain “high-tech items” and technology for use in oil-refining equipment, and
  • Imposition of equivalent sanctions against Belarus (given its active role in supporting the Russian military).

As the crisis deepens, the UK expects to continue to introduce new relevant measures.

Russia’s Counter-Sanctions

In response to the recent developments, according to news reports, Russia is in the process of implementing certain counter-sanctions. In addition, it started banning British flights to and over its territory in retaliation for the UK de-facto ban on Aeroflot flights.

Considerations for Persons Doing Business in or with Russia and Ukraine

  • Ensure Robust Screening Practices Are in Place. All companies engaged in international transactions should ensure that they have in place robust procedures to regularly screen their Russian and Ukrainian counterparties against U.S., EU and UK governments’ prohibited parties lists to ensure compliance with the new sanctions. Companies should review and update their transaction monitoring and filtering programs to account for the newly sanctioned parties and their majority-owned subsidiaries.
  • Cease DNR/LNR-Related Activities. U.S. companies should immediately start winding down their activities in or with the newly embargoed DNR and LNR and stop any such operations by March 23, 2022. U.S. companies should be careful not to engage in new investments, contracts, or other arrangements in these regions as they wind down their activities. Companies with a UK or EU presence will need to watch developments closely and take measures to flag activities which may quickly become impossible to continue.
  • Take Inventory of Russian Banks Used and Adjust Payment Structures Accordingly. Companies should take inventory of the Russian banks with which they routinely engage to ensure that no such banks are now targets of blocking sanctions. Except as generally or specifically authorized, companies should not engage or continue working with the blocked banks (even terminating contracts or repaying debt is generally prohibited). Companies that utilize any wind-down authorizations should closely examine the particular facts and circumstances of any proposed activities to determine whether the authorization would cover the activities or specific persons (for example, OFAC general licenses authorize only certain transactions). In addition, the U.S. determination authorizing sanctions against persons that operate or have operated in the financial services sector of the Russian economy, described in section I.g above, significantly increases the risk for U.S. persons of doing business with any Russian financial institutions. Similar considerations apply to an increasing number of banks from a UK and EU perspective. While Sberbank is not subject to blocking sanctions, U.S. companies must not attempt to engage in any U.S. dollar transactions with Sberbank after March 26, 2022.
  • Account for the New U.S. Debt and Equity Restrictions. U.S. companies should review any credit outstanding to and contractual payment terms with the entities designated under debt and equity sanctions described in section I.d above (Credit Bank of Moscow, Gazprombank, Alfa-Bank, Agricultural Bank, Sberbank, Sovcomflot, Russian Railways, Alrosa, Gazprom, Gazprom Neft, Rostelecom, Rushydro, and Transneft). U.S. companies should ensure that no repayment, maturity, or payment terms run afoul of the new restrictions (for example, extend beyond fourteen days in case of U.S. companies). U.S. companies should review their internal accounts receivable controls to ensure prompt invoice payment from any such designated entities within the relevant time limit.
  • Review Engagement of Russian Employees, Consultants, Agents, or Suppliers. Companies are generally not prohibited from hiring Russia- and Ukraine-based employees, consultants, agents, or suppliers (except, for U.S. companies, in Crimea, DNR or LNR). However, to the extent companies process payroll and other payments through Russian banks, they must ensure that such banks are not blocked or otherwise sanctioned and are not among selected banks disconnected from SWIFT (the list to be provided by the U.S., EU, and the UK governments).
  • Review Export-Related Practices in Connection with Russia and Ukraine. All U.S. and non-U.S. companies that export, reexport, or transfer (in-country) to or within Russia any items, including foreign-made items, are advised to consider the new export control rules described above and adjust their shipments to or within Russia accordingly.
  • Ensure Robust Policies and Procedures Are in Place, Including for Virtual Currency Transactions. Companies should update their sanctions compliance policies and procedures on a continuous basis to incorporate these sanctions and any new sanctions. With the new sanctions, the risk of sanctions evasion through virtual currency transfers rises, including through transmission of virtual currency to or from users located in comprehensively sanctioned jurisdictions. Accordingly, all entities engaging in virtual currency business activities should have tailored policies, procedures, and processes to protect against the unique risks that virtual currency presents.
  • Continue Closely Monitoring Sanctions-Related Developments. The United States, UK and EU are reportedly considering additional sanctions. Accordingly, companies and financial institutions with exposure to Russia and Ukraine should continue closely monitoring developments from applicable government agencies to ensure their systems, programs, and processes remain in compliance with all requirements and restrictions imposed.

[1] “Debt” includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper and “equity” includes, share issuances, depositary receipts, or any other evidence of title or ownership. Notably, OFAC treats receivables for sale as “debt.”

[2] All items (hardware, software, materials or technical data) falling within an export control classification number in any of Categories 3 through 9 of the CCL are covered by the new licensing requirement.  Items classified “EAR99” are not covered by the new licensing requirement.

[3] License Exception “ENC” may be used to send encryption items to Russia without a license, and certain other license exceptions also are available.