New U.S. Sanctions on Russia and Belarus in Response to the Ukraine Invasion Impose New Compliance Responsibilities
Beginning on February 24, 2022, the U.S. Department of the Treasury Office of Foreign Assets Control (OFAC) and the U.S. Department of State imposed several successive waves of economic sanctions on Russia following the Russian invasion of Ukraine. These new measures target Russia’s largest financial institutions, restrict Russian access to U.S. capital markets, expel certain major Russian entities from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system, and freeze the assets of senior oligarchs and Russian Government officials – including President Putin himself. Together with new export controls administered by the U.S. Department of Commerce’s Bureau of Industry & Security (BIS), the net result was to transform Russia into one of the most heavily sanctioned countries in the world in just a few days.
These steps are just the beginning. In the coming days, the U.S. Government likely will impose additional sanctions on Russia on a closely coordinated basis with Australia, Canada, the United Kingdom, and the twenty-seven European Union (EU) member states. The White House also announced a transatlantic task force dedicated to tracking down and seizing Russian assets held in shell companies and trusts overseas. Even formally neutral countries are joining the multilateral coalition, with Switzerland recently announcing that it will adopt the EU’s sanctions for the first time in history.
Faced with these unprecedented sanctions and new export control restrictions, multinational companies that have Russian affiliates, operate in Russia, or otherwise conduct business with Russian parties should immediately familiarize themselves with these new restrictions. Some companies also may need to temporarily pause Russia-related business and assess the potential risks before conducting any new commercial and financial transactions with Russian parties or even continuing existing patterns of trade. Failure to pause and take stock now could result in inadvertent sanctions or export control violations, especially given the rapid imposition of new legal requirements and swiftly deteriorating conditions in Ukraine. A short but non-inclusive summary of key sanctions risks follows below.
Financial Sector Sanctions
The latest U.S. sanctions now prohibit – or otherwise restrict – financial transactions with many of Russia’s largest commercial banks. Under Executive Order 14024, OFAC enacted full blocking sanctions on state-owned VTB Bank (VTB), Russia’s second-largest financial institution and the holder of approximately 20 percent of Russia’s private banking assets. Otkritie, Sovcombank, and Novikombank are now also Specially Designated Nationals (SDNs), as are dozens of their majority-owned subsidiaries. These restrictions prohibit any parties subject to U.S. jurisdiction from conducting any commercial or financial transactions that directly or indirectly involve these banks, even if their Russian customers are not sanctioned.
OFAC also imposed new restrictions on other leading Russian banks. Chief among them is Sberbank, the largest financial institution in Russia and the main creditor for Russia’s business economy. Effective March 26, 2022, U.S. financial institutions will be prohibited from processing transactions involving Sberbank or any of its majority-owned subsidiaries. This requirement arises under Directive 2 to Executive Order 14024 and will prohibit Sberbank from engaging in U.S. dollar-denominated transactions. The net effect will be to cut Russia’s largest bank from the U.S. financial system indefinitely.
Transactions involving other Russian banks may also prove problematic. Under Directive 3 to Executive Order 14024, OFAC imposed broad restrictions on debt and equity transactions involving another 13 Russian financial institutions and State-Owned Enterprises (SOEs). These restrictions expand the so-called “sectoral sanctions” imposed on Russian entities following the annexation of Crimea in 2014. And while they are not as rigorous as the other financial sanctions described above, parties subject to U.S. jurisdiction cannot engage in any transactions involving credit or debt arrangement with a maturity period longer than 14 days. Companies conducting otherwise lawful business through these sanctioned banks may need to adopt up-front payment models or novate existing contracts to comply with the 14-day maturity deadline, because OFAC would view any failure to pay an outstanding debt within 14 days to be an extension of credit, even if the reason this occurred was the failure to be paid on time. Such measures may also be necessary given the expulsion of many Russian entities from the SWIFT banking network and the anticipated delays in payment processing.
Oligarchs & Government Officials
In addition to the new restrictions on Russian financial institutions, OFAC took the unprecedented step of sanctioning Russian President Vladimir Putin and three other senior Russian officials. This designation subjects President Putin to the same asset seizures and other restrictions that previously were reserved for the leaders of Syria, North Korea, and Belarus. It also accompanies the imposition of similar sanctions on several new Russian oligarchs. Notable examples include Sergei Ivanov, Andrey Patrushev, and Ivan Sechin, all of whom are adult children of close Putin associates, as well as several senior executives at certain state-owned Russian banks. Significantly, OFAC warned that it “will designate more in the future if Russia’s unprovoked campaign against Ukraine does not immediately conclude.”
These designations are important for two reasons. First, they underscore how quickly OFAC and its European counterparts can target Russian political and business leaders. With Russian forces advancing on Kyiv and other major Ukrainian cities, companies conducting business in Russia should anticipate additional designations and conduct sanctioned party screening on a frequent basis. Taking this approach to Russian business partners and the Russian financial institutions discussed above will help companies stay ahead of future changes to the Specially Designated Nationals and Blocked Persons List (SDN) and other applicable sanctions programs. Similar screening against the EU’s Consolidated Sanctions List and United Kingdom’s Consolidated List of Financial Sanctions Targets is also a wise strategy.
Second, and more significantly, the sanctions imposed on Russian parties automatically flow down to the businesses they own. This “50 Percent Rule” applies to any entity that is at least 50 percent owned by or more sanctioned parties – even if those businesses do not currently appear on OFAC sanctions lists. Given the outsized role that sanctioned Russian oligarchs and financial institutions play in the Russian economy, there is a growing possibility that routine transactions with seemingly innocuous Russian business partners might implicate U.S. sanctions programs and unintentionally expose companies to significant liability. Identifying and screening a Russian partner’s upstream owners is often the best – and only – way to mitigate these risks.
Ukraine & Belarus Risks
Three additional risks merit careful consideration. First, companies that continue to conduct business in Ukraine should take affirmative steps to avoid any activities involving the Russian-occupied Crimea, Donetsk, and Luhansk regions. Nearly all commercial and financial activities involving these regions are now prohibited, including new investments, entering into contracts, and the provision of goods and services. Further, any indirect attempts to engage in such transactions are equally forbidden. Although some exceptions may apply for humanitarian and other purposes, OFAC construes these exceptions narrowly. Ensuring compliance under wartime conditions appears that it will likely present significant practical challenges.
Second, companies conducting business in Ukraine should continue to screen their local business partners, intermediary bank, and other transaction parties for SDNs and other sanctioned persons. Although the risk of potential sanctions exposure in Ukraine is much lower than it is in neighboring Russia, there are still a limited number of sanctioned parties that may still be operating on Ukrainian soil. Taking a proactive approach to sanctions screening in Ukraine will help companies avoid accidental sanctions violations and may help identify parties operating in the three sanctioned regions discussed above.
Third, the United States recently imposed new sanctions on Belarus following Belarusian President Alexander Lukashenko’s decision to support Russian military operations in Ukraine. These sanctions currently target senior Belarusian defense officials, as well as various entities and individuals in the Belarusian banking and defense sectors. Notable examples include Belinvestment and Bank Dabrabyt, as well as numerous Belarusian SOEs. The EU and other foreign government-imposed similar targeted sanctions. With Belarusian forces now operating alongside their Russian counterparts, companies that conduct business in Belarus or with Belarusian parties should anticipate extensive new sanctions in the near future – including measures that may mirror the sanctions currently imposed on Russia.
Foreign Sanctions Programs
In addition to the U.S. and EU sanctions described briefly above, a growing number of countries have imposed or are currently imposing substantially similar measures. Chief among them are Australia, Canada, and the United Kingdom, which continue to target many of the same Russian parties through substantially similar measures. Although many of these steps complement and are coordinated with the new U.S. sanctions, companies operating outside the United States should familiarize themselves with these overlapping requirements. In some cases, companies may be required to apply both U.S. and foreign sanctions requirements when conducting business with their Russian, Belarusian, or Ukrainian counterparts, especially if they are using the U.S. financial system or are otherwise subject to U.S. jurisdiction.