The United States, the European Union (EU), the United Kingdom (UK), and other allies and partners are implementing wide-ranging, novel sanctions and sweeping export controls against Russia in response to its invasion of Ukraine. These measures targeting breakaway regions of Ukraine, Russian sovereign debt, a major Russian-German pipeline, leading Russian financial institutions and Russian leaders such as Vladimir Putin present extraordinary new compliance challenges for companies around the world.
Although the sanction measures have been relatively coordinated and complementary, the precise scope and timeline for final implementation differ by jurisdiction. Companies with a footprint in Russia or Eastern Europe, or that may be otherwise doing business directly or indirectly with Russia, should closely monitor these developments and develop a compliance strategy that is responsive to each jurisdiction's applicable requirements. The categories of measures and summaries of how key jurisdictions have implemented them are discussed below.
Embargo on Luhansk and Donetsk regions
The US, the EU, Australia and Canada have issued measures imposing trade and economic embargoes on the Donetsk and Luhansk regions of Ukraine. These embargoes appear to be similar to those that have been in place against the Ukrainian region of Crimea since 2014, following Russia's purported annexation of the peninsula. As with the Crimea embargo, this subnational territorial embargo presents compliance challenges, especially in light of the US Treasury Department's recent emphasis on the importance of IP address monitoring and geoblocking.
United States:
President Biden issued Executive Order (EO)14065, Blocking Property of Certain Persons and
Prohibiting Certain Transactions With Respect to Continued Russian
Efforts to Undermine the Sovereignty and Territorial Integrity of
Ukraine. EO 14065 immediately establishes a trade
and economic embargo on the Donetsk and Luhansk regions "or
such other regions of Ukraine as may be determined by the Secretary
of the Treasury ('Covered Regions')." Specifically, US
persons are now prohibited from making new investments in the
Covered Regions; importing goods, services or technology from the
Covered Regions; and exporting, selling or supplying goods,
services or technology to the Covered Regions. US persons are also
prohibited from facilitating such activity by a foreign person. The
new order also authorizes the US Treasury Department to impose new
blocking sanctions against individuals and entities that operate in
the Covered Regions. The Treasury Department also issued a general license authorizing the wind-down
of transactions in the Covered Regions through March 23,
2022.
European Union:
On Wednesday, February 23, the EU extended to Donetsk and Luhansk
trade bans that it had previously placed on Crimea. In
particular, Council Regulation (EU)
2022/263 (Regulation) introduced an import ban on goods
originating in these regions as well as on the provision of related
financing and insurance/reinsurance activities.
The Regulation provides for an export ban on certain goods and technologies suited for use in the key sectors of transport, telecommunications and energy as well as the prospecting, exploration and production of oil, gas and mineral resources. This prohibition extends to, among other activities, the provision of technical assistance or brokering, construction or engineering services directly relating to infrastructure in these sectors in Donetsk and Luhansk, independent of the origin of the goods and technology.
The Regulation also includes restrictions on trade and investments related to certain economic sectors; among others, the acquisition of any new, or the extension of any existing participation in ownership or control of, entities or real estate in Donetsk and Luhansk is prohibited. The prohibition covers the financing of entities and the creation of joint ventures in these regions as well as the provision of investment services directly related to the activities mentioned in this paragraph.
United Kingdom:
The UK has existing trade bans on Crimea, and the Foreign Office
has announced that it will extend these to
the regions of Luhansk and Donetsk.
Blocking sanctions
The US, the UK, the EU, Canada and Japan have implemented or announced an intention to implement blocking sanctions against Russian individuals and entities, including Russia's head of state and Security Council members. Such sanctions freeze the assets of designated persons and generally prohibit those subject to the implementing country's jurisdiction from commercial or financial dealings with them. In many cases, travel restrictions also apply to sanctioned individuals.
The current lists of sanctioned parties reveal some coordination between the United States and its partners. For example, the US, the UK and the EU each introduced blocking sanctions against Promsvyazbank PJSC (PSB), a Russian bank alleged to provide significant financial support to the Russian military. Further, with some of the new designations, such as against Bank Rossiya and certain so-called oligarchs, the UK and the EU align their sanctions with those of the United States. But companies whose operations touch one or more of the sanctioning jurisdictions should take extra care to screen against all jurisdictions' lists of designated parties, as the lists do not overlap completely.
United States:
The United States has issued sanctions against six Russian banks,
including prominent banks VTB Bank, PSB and Vnesheconombank (VEB).
The latter, which the Biden Administration described as "a
glorified piggy bank for the Kremlin," has already been
subject to so-called sectoral sanctions that have restricted its
access to US capital markets since 2014 under an EO issued in
response to Russia's annexation of Crimea. The blocking
sanctions immediately prohibit nearly all commercial and financial
dealings by US persons with these financial institutions, and they
block these institutions' property interests under US
jurisdiction. However, the US Treasury Department issued several
general licenses authorizing certain transactions, including
related to the wind-down of transactions involving
sanctioned banks, servicing of sovereign debt, certain dealings in debt or equity, energy-related transactions and derivatives transactions.
Notably, the designations are not limited to the banks themselves; corresponding designations also extend to dozens of the banks' specifically listed subsidiaries. Under Office of Foreign Assets Control (OFAC) rules, entities owned 50 percent or more by a designated entity are subject to the same blocking sanctions as their parent, but companies are often left to assess such ownership on their own. We expect that the designations of the bank subsidiaries, which include not only financial institutions but also electronics manufacturers, a coal mining company, and others in Europe and Asia, will substantially aid in companies' sanctions compliance.
The designations of these financial institutions required US Secretary of the Treasury Janet Yellen to first make a determination pursuant to Executive Order 14024 to apply its sanctions authority to the financial sector of the Russian economy. Rather than rely on existing sanctions authorities—including the post–Crimea annexation EO under which VEB and other state-owned Russian banks have already been subject to sectoral sanctions—the Biden Administration has chosen to distinguish these new designations and place them on relatively independent legal footing.
The US Department of the Treasury on Friday sanctioned Russia's top leaders, including President Vladimir Putin, Minister of Foreign Affairs Sergei Lavrov and 11 members of the Russian Security Council. This follows US sanctioning of individuals within a category it described as "elites and families." The United States already maintains blocking sanctions against numerous so-called oligarchs and senior Russian government officials. The Treasury Department has redesignated several such elites and also designated several of their children.
European Union:
The EU extended sanctions that it had originally imposed
in 2014, following Russia's purported annexation of Crimea, to
cover a) all 351 members of the Russian State Duma, who voted on
February 15 in favor of the appeal to Vladimir Putin to recognize
the independence of the so-called Donetsk and Luhansk People's
Republics; and b) 27 high-profile individuals and entities that
have played a role in undermining or threatening the territorial
integrity, sovereignty and independence of Ukraine. These include
decision makers, such as government members who were involved in
the illegal decisions; banks and businesspersons/oligarchs
supporting financially or materially or benefiting from Russian
operations in the Donetsk and Luhansk regions; and senior military
officers and other individuals who played a role in the invasion
and destabilization actions or led a disinformation war against
Ukraine. Among the parties sanctioned are Russian Defense Minister
Sergei Shoigu; Vladimir Putin's chief of staff, Anton Vaino;
and PSB.
Pursuant to the amendments provided by Council Implementing Regulations (EU) 2022/260 and 2022/26, the restrictive measures now apply to the above individuals and entities, too. These restrictive measures include a) a freeze on all funds and economic resources belonging to or controlled by the listed persons or any associated entities; as well as b) a prohibition on making funds or economic resources available to or for the benefit of the listed persons or any associated entities. In addition, the listed persons are subject to a travel ban, preventing them from entering or transiting through EU territory, as provided in the amended Council Decision 2014/145/CFSP.
United Kingdom:
The UK amended its existing Russia sanctions regulations
(The Russia (Sanctions) (EU Exit) Regulations 2019) on February 10,
2022, to widen the scope of persons who could be designated to
include those who have been involved in a) destabilizing Ukraine or
undermining or threatening the territorial integrity, sovereignty
or independence of Ukraine, or b) obtaining a benefit from or
supporting the government of Russia. The UK has since designated
six Russian banks (Rossiya, IS Bank, General Bank, PSB, the Black
Sea Bank and VTB Bank), five further companies (Rostec, United
Aircraft Corporation, Tactical Missiles Armament Corporation,
UralVagonZavod and PJSC United Shipbuilding Corporation) and eight
individuals, including Gennady Timchenko, Boris Rotenberg and Igor
Rotenberg, who, along with Bank Rossiya, had long been subject to
US blocking sanctions.
Additional designations are expected. The Foreign, Commonwealth & Development Office's (FCDO) announcement on February 24 indicated that 120 businesses and oligarchs as well as the 571 members of the Duma and the Federation Council eventually would be sanctioned.
The announcement also indicated that the UK will limit to £50,000 the amount of money Russian citizens can deposit in UK accounts. Further legislation will be required to bring this measure into effect. The government also intends to introduce new powers to prevent designated banks from accessing pound sterling and clearing payments through the UK, matching current restrictions in the United States.
Corespondent and payable-through account (CAPTA) sanctions on Sberbank
The US Treasury Department issued Directive 2 under Executive Order 14024, "Prohibitions Related to Correspondent or Payable-Through Accounts and Processing of Transactions Involving Certain Foreign Financial Institutions," to effectively sever Sberbank from the US financial system. Sberbank is Russia's largest financial institution, accounting for about a third of Russia's banking assets. As of March 26, 2022, US financial institutions will be prohibited from:
" the opening or maintaining of a CAPTA for or on
behalf of Sberbank; and
" the processing of transactions involving Sberbank.
The prohibitions extend to all foreign financial institutions owned 50 percent or more by Sberbank, 25 of which are listed in an annex to the directive. The prohibitions also apply with respect to any currency, which is notable given that they also apply to the activities of foreign branches of US financial institutions. The Treasury Department also issued a general license for certain debt and equity transactions involving Sberbank, as noted above.
Sovereign debt
The US, the EU, Canada and Japan have also announced new restrictions on transactions involving Russian sovereign debt. These measures are intended to limit the ability of the Russian state and government to access foreign capital and financial markets. For most jurisdictions, restrictions on Russian sovereign debt will be novel, but the United States has had more limited restrictions in place since 2019.
United States:
Previous US sanctions already imposed some restrictions on dealings
in Russian sovereign debt. Specifically, sanctions established in
August 2019 pursuant to the Chemical and Biological Weapons and
Warfare Elimination Act of 1991 have prohibited US banks from
participating in the primary market for non-ruble denominated bonds
issued by the Russian sovereign and lending non-ruble denominated
funds to the Russian sovereign. Sanctions established in April 2021
pursuant to EO 14024 have prohibited US financial institutions from
participating in the primary market for ruble or non-ruble
denominated bonds issued by the Russian Central Bank, its National
Wealth Fund or its Ministry of Finance and lending ruble or
non-ruble denominated funds to those instrumentalities of the
Russian government.
OFAC has now expanded these sanctions by issuing Directive 1A under EO 14024 (which supersedes Directive 1 of April 2021). Sovereign debt prohibitions will now cover participation in the secondary market for ruble and non-ruble denominated bonds issued after March 1, 2022, by the Russian Central Bank, its National Wealth Fund or its Ministry of Finance. Directive 1A also expands the definition of "US financial institution" to include, among others, money services businesses, operators of credit card systems and insurance companies.
European Union:
The EU introduced new sectoral prohibitions on financing
the Russian government and the Central Bank. Pursuant to the
amendments of Council Regulation (EU) 2022/262, the
restrictive measures of Council Regulation (EU) No 833/2014 now
prohibit the purchase, sale, provision of investment services for,
or assistance in the issuance of, or otherwise dealing, directly or
indirectly, with, transferable securities and money-market
instruments issued after March 9, 2022, by Russia and its
government, the Central Bank of Russia, or a person or entity
acting on their behalf or at their direction. The prohibition also
covers the provision of loans or credit to these
entities.
United Kingdom:
The UK Foreign Office has said that in the coming weeks, the UK
will introduce new sanctions to prevent Russia from issuing
sovereign debt in the UK market.
Capital market restrictions for Russian strategic industries
United States:
The Treasury Department issued Directive 3 under Executive Order 14024,
"Prohibitions Related to New Debt and Equity of Certain
Russia-related Entities," to limit the ability of over a dozen
major Russian state-owned and private entities to access US capital
markets. The Directive 3 restrictions closely resemble the sectoral
sanctions imposed against some of the same Russian companies under
EO 13662, which then-President Obama issued following Russia's
annexation of Crimea in 2014. The new restrictions will prohibit
transactions and dealings by US persons or within the United States
in new debt of longer than 14 days' maturity, and in new
equity, of the identified companies. The restrictions cover 13
entities from the financial services, energy, telecommunications,
shipping, railroad and mining sectors.
United Kingdom:
On February 24, the government announced that it will restrict
state-owned and key strategic private Russian companies from
accessing its capital markets by preventing them from issuing
transferable securities and money-market instruments in the UK.
Some Russian banks were already subject to long-term financing
restrictions, which were introduced by the EU after the annexation
of Crimea in 2014 and retained by the UK after Brexit. These
restrictions have prohibited persons from dealing directly or
indirectly with transferable securities (shares, bonds, etc.) or
money-market instruments (Treasury bills, certificates of deposit,
etc.) issued by the designated entities, and from providing
investment services or assistance in relation to those securities
or instruments.
Nord Stream 2
On Tuesday, February 22, in response to Russia's recognition of the two separatist regions in Donbas as independent, Germany halted certification of the Nord Stream 2 pipeline, reversing an approval that then-Chancellor Angela Merkel's government issued before she left office. On Wednesday, February 23, President Biden rescinded an earlier waiver of sanctions applicable to Nord Stream 2 AG and its CEO, Mattias Warnig, thereby effectuating the imposition of blocking sanctions against both the company and Mr. Warnig. OFAC issued a general license authorizing certain wind-down of transactions related to Nord Stream 2 AG until March 2, 2022.
Export controls
United States:
The US Commerce Department also announced that it is dramatically
expanding restrictions under the Export Administration Regulations
(EAR) on exports of certain products and technology to Russia.
Export controls apply to the exports of United States-origin goods,
software or technology. The Commerce Department issued a final rule, "Implementation of Sanctions
Against Russia Under the EAR," which comprises the new
restrictions and more stringent licensing requirements on exports
to Russia. This rule imposes new license requirements on exports to
Russia of certain electronics, computers, telecommunication and
informational security items, sensors and lasers, navigation and
avionic items, marine items, and aerospace and propulsion items.
Fifty-eight new categories (i.e., 58 new Export Control
Classification Numbers, or ECCNs) of controlled items may now not
be exported, reexported or transferred to Russia (or to Russian
nationals) without a Commerce Department license. The new rule also
limits the use of license exceptions for exports to Russia and
applies a review policy of denial for the Commerce Department's
consideration of any export license applications.
As anticipated, the new rule expands the Foreign Direct Product Rule (FDPR), effectively expanding US export control jurisdiction over a broader range of foreign-produced items that rely on certain US software or technology or that are produced by certain plants or major components thereof that are themselves the direct products of such software or technology.
The new rule also creates a new FDPR with respect to Russian military end users, which is more expansive in capturing foreign-produced items that are being exported to certain designated Russian end users. It also expands the number of Russian entities on the Entity List, including by transferring 47 entities from a less-restrictive Military End User List to the Entity List and adding two Russian military end users to the Entity List.
United Kingdom:
In a statement given on February 24, the UK government announced
that a tough package of export controls, focused on electronics,
telecom and aerospace companies, would be imposed on Russia in due
course.
European Union:
European Commission President Ursula von der Leyen stated that the
EU will "target the energy sector, a key economic area which
especially benefits the Russian state. Our export ban will hit the
oil sector by making it impossible for Russia to upgrade its
refineries."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
