As the U.S. government and the governments of many other countries continue to sanction Russia and Belarus for the Russian invasion into Ukraine, companies around the world are grappling with the consequences that comes with the escalating economic restrictions placed on conducting business in the region. Here at Diaz Trade Law we are working to keep you up to date on all relevant sanction activity and what it could mean for you and your business.

Sanctions on DNR and LNR regions of Ukraine 

On February 21, 2022, the Office of Foreign Assets Control (OFAC) issued an executive order (E.O.) blocking property of certain persons and prohibiting certain transactions with respect to continued Russian efforts to undermine the sovereignty and territorial integrity of Ukraine in addition to an issuance of Ukraine related general licenses. More specifically, this E.O. prevents any U.S. persons from engaging the Donetsk People’s Republic (DNR) or Luhansk People’s Republic (LNR) (collectively named the “Covered Regions”) in most, if not all activities, including the following:

  • new investment in the Covered Regions
  • the importation into the United States, directly or indirectly, of any goods, services, or technology from the Covered Regions
  • the exportation, re-exportation, sale, or supply, from the United States or by a U.S. person, directly or indirectly, of any goods, services, or technology to the Covered Regions
  • any approval, financing, facilitation, or guarantee by a foreign person that would also be prohibited for a U.S. person. 

This E.O. also gives OFAC the authority to impose further sanctions on persons and entities determined to be:

  • operating in the Covered Regions
  • a leader, official, senior executive officer, or member of the board of directors of an entity operating in the Covered Regions
  • owned or controlled by any person whose property and interests in property are blocked pursuant to this order
  • materially assisting, sponsoring, or providing financial, material, or technological support for, or goods or services to or in support of, any person and property blocked under this E.O. 

Sanctions on Russia 

On February 24, 2022, the United States took significant and unprecedented action to respond to Russia’s further invasion of Ukraine by imposing severe economic costs that will have both immediate and long-term effects on the Russian economy and financial system.

Targeting Russia’s Two Largest Financial Institutions

  • The U.S. Treasury is taking “unprecedented action” against Russia’s two largest financial institutions, Public Joint Stock Company Sberbank of Russia (Sberbank)and VTB Bank Public Joint Stock Company (VTB Bank), drastically disrupting their ability to operate in U.S. dollars and process payments through the U.S. financial system.

Correspondent and Payable-Through Account Sanctions on Sberbank

  • As part of the sanctions on Sberbank, the Treasury is requiring all U.S. financial institutions to close any Sberbank correspondent or payable-through accounts and to reject any future transactions involving Sberbank or its foreign financial institution subsidiaries within 30 days.
    • To implement these sanctions on Sberbank, OFAC issued Directive 2 under E.O. 14024, prohibiting U.S. financial institutions from:
      • the opening or maintaining of a correspondent account or payable-through account for or on behalf of any entity determined to be subject to the prohibitions of the Russia-related CAPTA Directive, or their property or interests in property
      • the processing of transactions involving any such entities determined to be subject to the Russia-related CAPTA Directive, or their property or interests in property. 
  • Sberbank and other affiliated entities determined to be subject to the Russia-related CAPTA Directive have been added to OFAC’s CAPTA List.
    • The prohibitions of the Russia-related CAPTA Directive take effect beginning on March 26, 2022. Accordingly, by March 26, 2022, U.S. financial institutions must have closed any correspondent or payable-through account maintained for Sberbank all other entities listed in Annex 1 to the Russia-related CAPTA Directive, and all foreign financial institutions owned 50 percent or more by the foregoing. 

Full Blocking Sanctions on VTB

  • OFAC has imposed full blocking sanctions on VTB Bank and 20 of its subsidiaries, for being owned, controlled by, or acting on behalf of (either directly or indirectly) the Government of Russia the GoR, and having operated in the financial services sector of the Russian Federation economy. Further, all entities owned 50 percent or more, directly or indirectly, by VTB Bank are subject to blocking, even if not identified by OFAC.

Blocking Other Major Russian Financial Institutions 

OFAC has also imposed blocking sanctions on three additional major Russian financial institutions – Otkritie, Novikom, and Sovcom and their identified subsidiaries – for either being controlled by, or acting on behalf of, the Russian Government as well as for operating having operated in the financial services sector of the Russian economy.

  • The Treasury also notes that all entities owned 50 percent or more by the above financial institutions are subject to blocking, even if not identified by OFAC.

Debt and Equity Prohibitions Against Major State-Owned and Private Entities 

OFAC also issued Directive 3 under E.O. 14024, implementing new debt and equity restrictions on 13 major firms critical to the Russian economy.

  • These restrictions “prohibit transactions and dealings by U.S. persons in new debt of longer than 14 days maturity and new equity of Russian state-owned enterprises, entities that operate in the financial services sector of the Russian Federation economy, and other entities determined to be subject to the prohibitions in this directive”.

The 13 identified firms are as follows

Pursuant to E.O. 14024, OFAC identified the following 11 Russian entities as being owned or controlled by, or having acted or purposed to act for or on behalf of, directly or indirectly, the GoR:

  • Sberbank is Russia’s largest financial institution. Today, Sberbank was also identified as subject to the Russia-related CAPTA Directive.
  • Gazprombank Joint Stock Company is Russia’s third-largest financial institution and is closely affiliated with the energy sector.
  • Joint Stock Company Russian Agricultural Bank is Russia’s fifth-largest financial institution and closely affiliated with the agricultural sector.
  • Public Joint Stock Company Gazprom is the world’s largest natural gas company.
  • Public Joint Stock Company Gazprom Neft is one of Russia’s largest oil producers and refiners.
  • Public Joint Stock Company Transneft (Transneft) manages Russia’s network of petroleum-related pipelines.
  • Public Joint Stock Company Rostelecom is Russia’s largest telecommunications company.
  • Public Joint Stock Company RusHydro is a hydroelectricity company and one of Russia’s largest power companies.
  • Public Joint Stock Company Alrosa is the world’s largest diamond mining company, responsible for 90 percent of Russia’s diamond mining capacity, which accounts for 28 percent globally.
  • Joint Stock Company Sovcomflot is Russia’s largest maritime and freight shipping company.
  • Open Joint Stock Company Russian Railways is one of the world’s largest railroad companies.

Pursuant to E.O. 14024, OFAC identified the following three Russian entities for operating or having operated in the financial services sector of the Russian Federation economy:

  • Joint Stock Company Alfa-Bank is Russia’s largest privately owned financial institution, and Russia’s fourth-largest financial institution overall.
  • Credit Bank of Moscow Public Joint Stock Company is Russia’s largest non-state public bank and Russia’s sixth-largest financial institution.
  • Sberbank, which is described above.

General Licenses 

To ensure that these sanctions and prohibitions have an impact on the intended targets and to minimize unintended consequences on third parties, OFAC has also issued the following general licenses in connection with these actions.

  • General License 5: authorizes transactions for the conduct of the official business of certain international organizations and entities
  • General License 6: “Transactions Related to the Exportation or Re-exportation of Agricultural Commodities, Medicine, Medical Devices, Replacement Parts and Components, or Software Updates, or the Coronavirus Disease 2019 (COVID-19) Pandemic” authorizes transactions ordinarily incident and necessary for the trade of agricultural commodities, medicine and medical devices.
  • General License 7: “Authorizing Overflight Payments, Emergency Landings, and Air Ambulance Services” authorizes transactions ordinarily incident and necessary to:
    • the receipt of, and payment for, services rendered in connection with overflights of or emergency landings in the Russian Federation by aircraft registered in the United States or owned by U.S.
    • provide air ambulance and related medical services to individuals in the Russian Federation
  • General License 8: “Authorizing Transactions Related to Energy” authorizes until June 24, 2022, transactions related to energy involving 5 specified entities and their subsidiaries of which they own a 50 percent or greater interest.
    • “For the purposes of this general license, the term “related to energy” means the 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.”
  • General License 9: “Authorizing Transactions Related to Dealings in Certain Debt or Equity” authorizes until May 25, 2022, dealings in debt and equity issued prior to February 24, 2022, with 5 specified Russian entities and their subsidiaries. Any divestment or transfer of covered debt or equity must be to a non-U.S. person.
  • General License 10: “Authorizing Certain Transactions Related to Derivative Contracts” authorizes until May 25, 2022 all transactions ordinarily incident and necessary to the wind down of derivative contracts entered into prior to 4:00 p.m. EST, February 24, 2022. Any payments to a blocked person must be made into a blocked account.
  • General License 11: “Authorizing the Wind Down of Transactions Involving Certain Blocked Persons” authorizes until March 26, 2022, all transactions ordinarily incident and necessary to the wind down of transactions involving Otkritie, Sovcombank, VTB, and any entity in which they one 50% or greater interest.
  • General License 12: “Authorizing U.S. Persons to Reject Certain Transactions” authorizes until March 26, 2022, U.S. persons to reject all transactions prohibited by Executive Order (E.O.) 14024 involving one or more of Otkritie, Sovcombank, VTB, and any entity in which they one 50% or greater interest.

Actions Targeting Russian Elites 

On February 25, 2022, the United States continued to impose sanctions on President of the Russian Federation Vladimir Putin and the Minister of Foreign Affairs Sergei Lavrov, along with other members of Russia’s Security Council. These sanctions, along with previous sanctions on Russia’s economic continue to impose unprecedented diplomatic and economic costs on Russia and isolate it from the global financial system and international community.

Sanctions on Belarus 

On February 24, 2022, OFAC sanctioned 24 Belarusian individuals and entities due to Belarus’s support for, and facilitation of, the invasion. Among the sanctioned entities are two significant state-owned banks, as well as multiple entities and individuals associated with the Belarusian defense and security industries.

Along with this action OFAC also issued two general licenses related to the Belarus Sanctions Program:

  • General License 6: “Official Business of the United States Government” authorizes transactions for the conduct of the U.S. Government’s official business.
  • General License 7: “Official Business of Certain International Organizations and Entities” authorizes transactions for the conduct of the official business of certain international organizations and entities

Looking Ahead 

As these sanctions may only represent the initial stage of an ongoing and volatile economic landscape, we encourage the trade community to stay informed on all latest sanctions and how they may impact YOU. Should you need any assistance navigating OFAC sanctions please contact us at info@diaztradelaw.com.

To receive an email notification whenever a new post is published, please subscribe to our weekly blog here.