On February 24, 2022, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued additional expansive sanctions on Russia in response to Russia’s further invasion of Ukraine (these sanctions are in addition to the significant export controls on Russia implemented by the US Commerce Department’s Bureau of Industry & Security on February 24, 2022, which are discussed in a separate blog post, here). A press release (“Russia-Related Press Release”) from the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) provided that these sanctions are intended to have both immediate and long-term effects on the Russian economy. The new US sanctions measures build on the comprehensive region-wide sanctions imposed on the two territories of DNR and LNR on February 21, 2022, as described in our prior blog here, the additional finance-sector-related sanctions on February 22, 2022, as described here, as well as the comprehensive sanctions on Nord Stream 2 AG on February 23, 2022 described here. OFAC also sanctioned certain Belarussian parties as a result of Belarus’ support for and facilitation of Russia’s invasion, as described in a concurrent press release (“Belarus-related Press Release”), A White House Fact Sheet emphasized the multilateral nature of these efforts, indicating that sanctions by the US Government and its allies are intended to have a “profound impact on Russia’s economy, financial system, and access to cutting-edge technology” and will “further isolate Russia from the global financial system.”
The latest measures include with respect to Russia:
- the issuance of two new Directives pursuant to Executive Order 14024 (“EO 14024”), as well as corresponding sanctions on certain parties i.e.,:
- Directive 2 prohibiting access to correspondent and payable-through accounts (“CAPTAs”) for certain specified entities (“D2 – CAPTA”), as well as the inclusion of entities associated with PJSC Sberbank (“Sberbank”) to the Non-SDN Menu-Based Sanctions List (“NS-List”) as subject to D2 – CAPTA restrictions;
- Directive 3, restricting new debt and equity of certain specified entities in the energy sector (“D3 – Debt/Equity”), as well as the inclusion of 13 Russian parties to the NS-List as subject to D3 – Debt/Equity restrictions;
(We note for clarity that the above-outlined Directives are different than the four Directives issued pursuant to Executive Order 13662, (“EO 13622 Directives”) all of which are available here and target those parties included on the Sectoral Sanctions Identifications List (“SSI List”).)
- also pursuant also to EO 14024, the blocking and addition of numerous Russian parties to the Specially Designated Nationals and Blocked Persons List (“SDN List”) maintained by the US Treasury Department’s Office of Foreign Assets Control (“OFAC”);
- the blocking and addition of several Belarussian parties to the SDN List;
- the issuance of several general licenses corresponding with the above-outlined developments; and
- the addition of new Frequently Asked Questions (“FAQs“) and updates to previously published FAQs.
D2 – CAPTA and Additions to the NS-List under EO 14024
D2 – CAPTA aims to cut off designated Russian financial institutions from the US financial system by prohibiting “US financial institutions” from:
- the opening or maintaining of a CAPTA for or on behalf of any entity determined to be subject to the prohibitions of Directive (“D2 Targeted Entities”), or their property or interests in property; and
- the processing of transactions involving any D2 Targeted Entities, or their property or interests in property.
US financial institutions must reject such transactions unless exempt or authorized (i.e., via a specific or general license) by OFAC.
The entities immediately identified in Annex 1 to D2 – CAPTA as subject to its restrictions are Sberbank and 25 of its affiliates, all of which have been added to the NS-List. Restrictions on Sberbank and its affiliates extend to those entities owned 50% or more by Sberbank (collectively, “Sberbank Entities”). Restrictions on the Sberbank Entities take effect on March 26, 2022.
For any future foreign financial institution identified by OFAC as a D2 Targeted Entity, the restrictions will take effect 30 days after the date that of such identification. Future D2 Targeted Entities will also be added to the NS-List.
As with the recently amended Directive 1A (also issued pursuant to EO 14024), “US financial institution” is broadly defined to include, among other things, securities brokers and dealers, foreign exchange merchants, clearing corporations, investment companies and employee benefit plans, amongst others, including their US holding, affiliate or subsidiary companies.
D3 – Debt/Equity and Additions to the NS-List under EO 14024
D3 – Debt/Equity prohibits US Persons from engaging in all transactions in, provisions of financing for, and other dealings in new debt of longer than 14 days maturity or new equity of entities subject to D3 – Debt/Equity restrictions (“D3 Targeted Entities”).
The entities immediately identified in Annex 1 as D3 Targeted Entities are 13 Russian parties, which have been added to the NS-List. Restrictions on the these financial institutions extend to those entities owned 50% or more by such institutions and take effect on March 26, 2022.
For any future parties identified by OFAC as a D3 Targeted Entities, the restrictions will take effect 30 days after the date that of such identification. Future D3 Targeted Entities will also be added to the NS-List.
Additions to the SDN List
- Additions to SDN List under EO 14024 of Russian Parties
OFAC also added a number of individuals and entities to the SDN List pursuant to EO 14024, a full list of which is available here. Of most note is the addition of VTB Bank Public Joint Stock Company (“VTB Bank”) to the SDN List, which has been sanctioned given its ownership by the Government of Russia. Though 20 of VTB Bank’s subsidiaries have likewise been added to the SDN List, as with all SDNs, the restrictions on VTB Bank extend to all entities owned 50% or more, directly or indirectly, by VTB Bank.
OFAC has also added the following Russian financial institutions to the SDN List:
- PJSC Bank Financial Corporation Otkritie (“Otkritie”), along with 12 of its subsidiaries, designated for being owned/controlled by the Government of Russia and operating in the Russian financial services sector;
- OJSC Sovcombank (“Sovcombank”), as well as 22 of its subsidiaries, designated also for operating in the Russian financial services sector; and
- JSC Bank Novikombank (“Novikombank”). Novikombank was previously subject to more limited financing restrictions by virtue of its inclusion on the SSI List, but is now subject to comprehensive blocking given its addition to the SDN List. According to OFAC, Novikombank was designated because of its role as the core financial institution for the Russian defense company, Rostec. (We note Rostec remains on the SSI List and is subject to those restrictions applicable to Directive 3 issued pursuant to Executive Order 13662. To date, it has not been sanctioned pursuant to Executive Order 14024.)
Related to the above-outlined designations, OFAC issued two general licenses, as follows:
- General License No. 11 authorizes the wind down of all transactions ordinarily incident and necessary to wind down transactions involving (i) Otkritie, (ii) Sovcombank, and (iii) VTB Bank, as well as any entities owned 50% or more by the foregoing by March 26, 2022 .
- General License No. 12 authorizes US Persons to reject all transactions prohibited by EO 14024 involving (i) Otkritie, (ii) Sovcombank, (iii) VTB Bank, as well as any entities owned 50% or more by the foregoing that are not authorized by March 26, 2022.
Lastly, OFAC added a number of Russian individuals who, according to the Russia-Related Press Release, were sanctioned for their ties to Vladimir Putin and/or connections to the financial sector. Certain of these individuals were previously included on the SDN List, but re-designated pursuant to EO 14024 given such ties, while others are new additions.
- Additions of Belarussian Parties to the SDN List
As outlined in the Belarussian Press Release, OFAC also added numerous Belarussian individuals and entities to the SDN List, including Belarussian state-owned banks, entities operating in the defense and security industries, and several senior Government of Belarus security apparatus officials.
- Consequences of Designations
As a result of these designations, US Persons (i.e., entities incorporated under US laws and their non-US branches; parties physically located in the United States; US citizens and permanent resident aliens wherever located or employed) are generally prohibited from dealing directly or indirectly with SDNs, entities that are owned 50% or more by one or more SDNs, and their property or property interests. Non-US persons can be held liable for causing violations by US Persons involving SDNs and can also be subject to secondary sanctions risks (which would include, in particular, the risk of designation as an SDN themselves) for providing “material support” to SDNs.
Other Newly Issued General Licenses
Concurrent with the above-outlined developments, OFAC issued eight Russia-related general licenses and two Belarus-related general licenses, as further described below. We note that the descriptions below are not intended to be comprehensive, and each general license described below and above should be reviewed in detail as to whether it is applicable to a given scenario or transaction.
- The following general licenses authorize activities that would otherwise be prohibited under EO 14024 (i.e., related to various sanctions measures targeting Russian parties) as described above:
- General License No. 5 authorizes the official business of certain international organizations and entities.
- General License No. 6 authorizes certain transactions related to the export/reexport of agricultural commodities, medicine, medical devices, replacement parts and components or software updates, or items needed for the response to the COVID-19.
- General License No. 7 authorizes certain transactions related to authorizing overflight payments, emergency landings, and air ambulance services.
- General License No. 8 authorizes all transactions related to (i) the below five entities, as well as entities that any of those own 50% or more, (ii) related to energy through June 24, 2022.
- We note in this regard that “related to energy” is broadly defined to include, extraction, production, refinement, liquefaction, gasification, regasification, conversion, enrichment, fabrication, transport, or purchase of petroleum, including crude oil, lease, condensates, unfinished oils, natural gas liquids, petroleum products, natural gas, or other products capable of producing energy, such as coal, wood, or agricultural products used to manufacture biofuels, or uranium in any form, as well as the development, production, generation, transmission, or exchange of power, through any means, including nuclear, thermal, and renewable energy sources.
- The five entities are as follows: (i) State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (i.e., “VEB Bank”) (which was previously sanctioned on February 22, 2022, as outlined here); (ii) Otkritie; (iii) Sovcombank; (iv) Sberbank; and (v) VTB Bank (collectively with those entities each owns 50% or more, “Covered Entities”).
- General License No. 9 authorizes all transactions ordinarily incident and necessary to (i) dealings in debt or equity (ii) involving a Covered Entity that (iii) was issued prior to February 24, 2022, by May 25, 2022.
- General License No. 10 authorizes all transactions ordinarily incident and necessary to (i) the wind down of derivative contracts entered into prior to February 24, 2022 (ii) involving a Covered Entity, and (iii) are linked to debt or equity of a Covered Entity, by May 25, 2022, provided that any payments to an SDN are made into a blocked account. Debits to accounts on the books of US financial institutions of Covered Entities are likewise authorized to the extent ordinarily incident and necessary to effect the foregoing.
- The following general licenses authorize activities that would otherwise be prohibited under the Belarus Sanctions Regulations (31 CFR Part 548) EO 14024:
- General License No. 6 authorizes all transactions that are for the conduct of the official business of the US Government.
- General License No. 7 authorizes the official business of certain international organizations and entities.
Newly Issued and Updated FAQs
Lastly, OFAC published 25 new FAQs, available here, which expand upon and clarify the above-outlined developments. OFAC also updated seven FAQs, available here, to conform with the above-outlined developments.
We anticipate further developments in the coming days and will continue our reports.