June 27, 2022

Volume XII, Number 178

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June 27, 2022

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June 24, 2022

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New U.S. Sanctions Restrict Investment and Services in Russia and Block Major Russian Banks

On 6 April 2022, the United States imposed a new round of sanctions on Russia in response to its continued actions in Ukraine. K&L Gates covered previous rounds of sanctions in alerts on 24 February25 February15 March, and 25 March.

As part of a coordinated effort with the G-7 and European Union, President Biden issued an executive order on 6 April 2022 (the Order), that imposes a ban on all new investment in Russia, as well as a ban on the provision of certain services to Russia. Furthermore, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) broadened the scope of blocking sanctions to include two of Russia’s largest banks, Russian politicians and their families, and five Russian vessels. This alert provides an overview of the new sanctions and their implications.

BAN ON NEW INVESTMENT IN RUSSIA

The Order, entitled “Prohibiting New Investment in and Certain Services to the Russian Federation in Response to Continued Russian Federation Aggression,” bans all new investment in Russia by U.S. persons, wherever located. In this context, U.S. persons are U.S. citizens and permanent residents (wherever located), persons located in the United States (whatever their nationality), entities organized in the United States (including foreign branch offices and their employees), and entities located in the United States (including U.S. subsidiaries and branch offices of non-U.S. companies).

The Order does not define the term “investment,” but in other contexts, OFAC has interpreted the term “investment” broadly to include any transaction that constitutes a commitment or contribution of funds or other assets or a loan or other extension of credit to an enterprise. This would include, among other things, loans, extensions of credit, assumptions or guarantees, overdrafts, currency swaps, purchases of debt securities, loan purchases, sales of financial assets subject to an agreement to repurchase, renewals or refinancings whereby funds or credits are transferred or extended to a borrower or recipient, issuance of standby letters of credit, and drawdowns on existing lines of credit. In the past, OFAC has also treated the deferral of payments for goods and services as an extension of credit.

This action expands upon prior restrictions on new investment in Russia’s energy sector, detailed in our alert of 15 March, by banning all new investments in Russia, regardless of sector. According to a White House press statement, new investment is now barred in all Russian industry sectors in order to “make sure that the mass exodus from Russia that we’re seeing from the private sector, which is now over 600 multinational companies and growing — that it will endure.”

Although the Order pertains only to “new” investments, parties with existing business in Russia must exercise caution to ensure any activities related to prior investments do not constitute “new” investments for purposes of the action.

PROHIBITED SERVICES

The Order also prohibits the exportation, reexportation, sale, or supply (directly or indirectly) to any person in Russia, from the United States, or by a United States person (wherever located) of certain services. The services subject to this prohibition will be identified by OFAC after consultation with the U.S. Department of State. We anticipate that OFAC will publish guidance on this issue shortly. 

It is important to note that U.S. persons are prohibited not only from providing certain services and making new investments contrary to the Order, but they are also strictly prohibited from facilitating such transactions and activities by non-U.S. persons. Facilitation includes, among other things, U.S. persons providing any approval, financing, guarantee, transportation, insurance, business or legal planning, or other means of support. It also includes U.S. persons referring prohibited transactions to non-U.S. persons and the alteration of policies and procedures to permit non-U.S. persons to conduct transactions prohibited for U.S. persons. 

BLOCKING SANCTIONS ON TWO RUSSIAN BANKS

In conjunction with the above actions, on 6 April 2022, OFAC imposed full blocking sanctions, pursuant to Executive Order 14,024, on Russia’s largest public and private banks, Public Joint Stock Company Sberbank of Russia (Sberbank) and Joint Stock Company Alfa-Bank (Alfa-Bank), expanding upon the less-restrictive sanctions previously imposed on these entities, as detailed in K&L Gates’ alert of 25 February.

The blocking sanctions apply to Sberbank, Alfa-Bank, 42 Sberbank subsidiaries, 6 Alfa-Bank subsidiaries, and any entities owned 50% or more (directly or indirectly) by these banks. As a consequence, any property and property interests of these blocked entities that is within U.S. jurisdiction or in the possession of a U.S. person is blocked (frozen). Among other property, this includes five Alfa-Bank-owned vessels that are now blocked. In addition, U.S. persons are strictly prohibited from all direct and indirect dealings with these blocked entities. 

These blocking sanctions are effective immediately. However, OFAC issued the following general licenses (GLs), authorizing the wind down of certain transactions with Sberbank and Alfa-Bank entities temporarily, subject to certain limitations.

  • GL 21: authorizes through 12:01 a.m. Eastern Daylight Time, 7 June 2022, all transactions ordinarily incident and necessary to the wind down of Sberbank CIB USA, Inc. (or any entity it owns 50% or more), including the processing and payment of salaries, severance, and expenses; payments to vendors and landlords; and closing of accounts.

  • GL 22: authorizes through 12:01 a.m. Eastern Daylight Time, 13 April 2022, all transactions ordinarily incident and necessary to the wind down of transactions involving Public Joint Stock Company Sberbank of Russia (or any entity it owns 50% or more), that are prohibited by Executive Order 14,024. This general license does not affect the restrictions on U.S. financial institutions maintaining correspondent or payable-through accounts.

  • GL 23: authorizes through 12:01 a.m. Eastern Daylight Time, 6 May 2022, all transactions ordinarily incident and necessary to the wind down of transactions involving Joint Stock Company Alfa-Bank (or any entity it owns 50% or more), that are prohibited by Executive Order 14,024.

RUSSIAN OFFICIALS

In addition to new blocking sanctions on major Russian banks, OFAC designated on the Specially Designated Nationals and Blocked Persons List (SDN List) additional Russian elites, oligarchs, and other individuals. Notably, these blocking sanctions target family members of Russian President Vladimir Putin himself, daughters Katerina Vladimirovna Tikhonova and Maria Vladimirovna Vorontsova, as well as Russian Foreign Minister Sergey Lavrov’s wife and daughter. In addition, OFAC designated on the SDN List the 21 remaining members of the Russian Security Council who were not previously designated.

OTHER GENERAL LICENSES

In conjunction with GL 21, 22, and 23, described above, OFAC issued the following general licenses, which supersede prior licenses to engage in certain transactions with sanctioned Russian financial institutions.

  • GL 8B: authorizes transactions “related to energy” until 24 June 2022 for (i) State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank, (ii) Public Joint Stock Company Bank Financial Corporation Otkritie, (iii) Sovcombank Open Joint Stock Company, (iv) Public Joint Stock Company Sberbank of Russia, (v) VTB Bank Public Joint Stock Company, (vi) Joint Stock Company Alfa-Bank, and any entity owned 50% or more by these entities.

  • GL 9B: authorizes through 12:01 a.m. Eastern Daylight Time, 25 May 2022, all transactions that are ordinarily incident and necessary to dealings in debt or equity of one or more of the following entities issued prior to 24 February 2022: (i) State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank, (ii) Public Joint Stock Company Bank Financial Corporation Otkritie, (iii) Sovcombank Open Joint Stock Company, (iv) Public Joint Stock Company Sberbank of Russia, (v) VTB Bank Public Joint Stock Company and any entity owned 50% or more by these entities. 

  • GL 10B: authorizes through 12:01 a.m. Eastern Daylight Time on 25 May 2022, all transactions that are ordinarily incident and necessary to the wind down of derivative contracts entered into prior to 4:00 p.m. Eastern Standard Time, 24 February 2022, that (i) include one of the following entities (together, the Tranche 1 entities) as a counterparty or (ii) are linked to debt or equity of a Tranche 1 entity are authorized through 12:01 a.m. Eastern Daylight Time, 25 May 2022, provided that any payments to a blocked person are made into a blocked account. The relevant entities are (i) State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank, (ii) Public Joint Stock Company Bank Financial Corporation Otkritie, (iii) Sovcombank Open Joint Stock Company, (iv) Public Joint Stock Company Sberbank of Russia, (v) VTB Bank Public Joint Stock Company, or any entity owned 50% or more by these entities.

This general license also authorizes through 12:01 a.m. Eastern Daylight Time, 30 June 2022, all transactions that are ordinarily incident and necessary to the wind down of derivative contracts entered into prior to 4:00 p.m. Eastern Daylight Time, 6 April 2022, that (i) include Alfa-Bank (or any entity it owns 50% or more) as a counterparty or (ii) are linked to debt or equity of an Alfa-Bank entity. Any such payments to a blocked person, however, must be made into a blocked account.

CONCLUSION

Our team will continue to track and provide updates as soon as practicable on continuing developments with respect to Russia sanctions.

Copyright 2022 K & L GatesNational Law Review, Volume XII, Number 97
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Jeffrey Orenstein Trade Lawyer KL Gates Law Firm
Counsel

Jeffrey Orenstein is a counsel in the firm’s Washington, D.C. office. He has over 12 years of experience handling international trade and transportation matters. He specializes in providing strategic counsel in the areas of U.S. sanctions, export controls, customs, maritime, and railroad regulation. He is a trusted advisor for trade-related compliance, investigations, due diligence, training programs, and representation in enforcement actions, including matters before the Office of Foreign Assets Control (OFAC), the Bureau of Industry and Security (BIS), the Directorate of Defense Trade...

202.778.9465
Steven F. Hill, KL Gates, enforcement matters lawyer, export controls attorney
Partner

Steven Hill is a partner in the firm’s Washington, D.C. office. He has nearly 20 years of experience in a broad array of international trade regulation compliance and enforcement matters, particularly export controls, including the Export Administration Regulations (EAR) and International Traffic in Arms Regulations (ITAR), sanctions laws enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), customs and other importation laws, anti-boycott laws, and anti-corruption laws, such as the Foreign Corrupt Practices Act (FCPA).

202-778-9384
Associate

Catherine Johnson is an associate at the firm’s Washington, D.C. office. She is a member of the Antitrust, Competition & Trade Regulation practice group. Prior to joining the firm Catherine served as an associate for a full-service law firm, and focused her practice on international trade compliance and transporation regulation. Through this role, Catherine researched and analyzed numerous international trade issues, including import and export classification, country of origin, qualification for free trade agreements, and compliance with customs regulations.

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Stacy Ettinger, KL Gates Law Firm, Public Policy and Financial Matters Attorney
Partner

Stacy J. Ettinger is a partner in the firm’s Washington, D.C. office and focuses her practice on public policy. She has over 20 years of experience working in Congress and the executive branch. Her experience spans a variety of fields, including international trade, intellectual property, and regulatory issues, as well as food and product standards, motor vehicle safety, and consumer financial services.

Ms. Ettinger has substantial experience working closely with senior U.S. and foreign government officials and Fortune 500 executives, navigating...

202-778-9072
Erica L. Bakies, Antitrust, Competition, Attorney, KL Gates, Law Firm
Associate

Erica Bakies is an associate in the firm’s Washington, D.C. office. She works with both the Antitrust, Competition & Trade Regulation practice group and the Government Contracts & Procurement Policy practice group. Ms. Bakies’ government contracts and procurement policy practice focuses on a wide range of federal procurement issues, including bid protests and regulatory compliance. In international trade, Ms. Bakies concentrates on export controls such as the Export Administration Regulations, sanctions enforced by the United States Department of the Treasury’s...

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