U.S. Readies Sanctions against Russia related to Ukraine Crisis

Key Takeaways

• The United States, Russia, the North Atlantic Treaty Organization (“NATO”) and the Organization for Security andCo-operation in Europe (“OSCE”) held a series of talks this week aimed at de-escalating the situation at the Ukrainian border.  
• U.S. officials have indicated that if the talks fail to prevent Russia from further escalating tensions with Ukraine, the United States will respond by imposing harsh new economic sanctions against Russia, as well as other financial, technological, and military measures. U.S. officials have described the strategy as “start high, stay high.” 
• In the meantime, U.S. Senate Democrats have introduced the Defending Ukraine Sovereignty Act of 2022 (“DUSA”), which would require the White House to impose sanctions on senior Russian government officials and certain Russian financial institutions, cut off those financial institutions from SWIFT and other financial messaging services, prohibit U.S. persons from engaging in transactions involving new Russian sovereign debt, and sanction parties involved in the Nord Stream 2 gas pipeline and potentially sanction additional Russian extractive industries. 
• DUSA was presented as an alternative to Senator Ted Cruz’s recent bill related to Russia that focused on placing extensive sanctions on businesses involved in the Nord Stream 2 pipeline.  Senator Cruz’s bill raised concerns that it would create potential discord with the European Union.   
• While DUSA reportedly has the support of the White House, it is not clear how quickly the Senate will act.  Even if DUSA becomes law, its measures will not take effect unless the White House determines that Russia is involved in a significant escalation of hostilities in Ukraine with the intention of undermining, overthrowing, or dismantling the Government of Ukraine or otherwise interfering in Ukraine’s territorial or sovereign integrity.  In the interim, President Biden could implement most of the measures set out in DUSA on his own at any time through executive orders.  
• All companies and individuals with exposure to Russia should monitor developments as the proposed measures could meaningfully impact international finance and commerce. 

Background

In 2014, the United States imposed through executive orders a number of escalating economic sanctions on Russian government entities and officials as well as on the Russian defense, financial services, and energy sectors.  The United States also imposed severe restrictions on trade with Crimea.  In 2017, in response to Russia’s alleged interference in the U.S. presidential election, cyberattacks, and other “aggressive” actions, Congress passed legislation codifying the Russian sanctions – the Countering America’s Adversaries Through Sanctions Act (“CAATSA”) – and providing for the possibility of imposing sanctions on non-U.S. persons engaging in significant transactions with sanctioned parties.

Additional economic sanctions and trade restrictions were imposed on Russia in response to its alleged use of chemical weapons, including a prohibition on U.S. banks participating in the primary market for certain sovereign debt issued by the Russian government (“Sovereign Debt Sanctions”).  (See our prior OnPoints here and here).  

In addition to the Sovereign Debt Sanctions, current economic sanctions include so-called blocking sanctions (“SDN Sanctions”), which generally prohibit U.S. persons from transacting  with certain Russian entities/persons on the List of Specially Designated Nationals (“SDN List”); sectoral sanctions, which restrict U.S. persons from providing certain financing to specified companies on the Sectoral Sanctions Identification List in the financial, defense and oil sectors in Russia (the “SSI Sanctions”); and certain export restrictions (see our OnPoint).

Overview of Measures

DUSA sets out a variety of possible measures, including additions to the SDN List and expansion of the Sovereign Debt Sanctions, that the U.S. President would be required to impose if a determination is made by the President that Russia “is engaged in or knowingly supporting a significant escalation in hostilities or hostile action in or against Ukraine,” compared with the level of hostilities prior to December 1, 2021, which is intended to undermine, overthrow or dismantle the Government of Ukraine (a “Presidential Determination”).  Set out below is an overview of the measures. 

Sanctions on Russian government officials relating to operations in Ukraine.  DUSA specifies a list of twelve officials, including the president and prime minister of Russia, plus a catch-all for other senior armed forces and government officials, who must be sanctioned following a Presidential Determination.  The sanctions to be imposed would include SDN Sanctions and visa bans and revocations.  

Sanctions on Russian financial institutions.  The President must also impose blocking sanctions on at least three Russian financial institutions (out of the 12 listed).  A number of these financial institutions are already on the SSI List, but those sanctions still allow US persons to transact with them.  The new sanctions would completely block US persons from interacting with those institutions.   

Sanctions regarding the provision of specialized financial messaging services to sanctioned Russian financial institutions.  This measure would effectively cut off the sanctioned financial institutions from the SWIFT messaging system, which facilitates global financial transfers, by imposing sanctions on SWIFT (or any other messaging service) if it services the sanctioned banks.  This measure is not as severe as previously proposed (i.e., the complete blocking of Russian entities from the SWIFT messaging system).  Russia has taken a number of steps since 2014 to try to reduce the consequences of being cut off from SWIFT.  China has also joined Russia’s domestic version of SWIFT.  

Prohibition and sanctions on transactions in Russian sovereign debt.  The bill also would prohibit all transactions by U.S. persons in any sovereign debt issued after the date of the bill’s enactment into law, including bonds, of the Russian Government.  Note that this restriction is broader than the current Sovereign Debt Sanctions in that it covers all U.S. persons – not just “U.S. financial institutions” as defined in Directive 1 to Executive Order 14024 – and expands the prohibitions to the secondary markets.  In addition, the bill contains a provision requiring the President to impose blocking sanctions and travel bans on certain non-U.S. persons who transact in Russian sovereign debt issued on or after the date on which the bill is enacted.  Those non-U.S. persons must have engaged in transactions involving the debt of “not less than 10 entities owned or controlled by the Government of the Russian Federation,” although the wording is unclear on this point.  The bill does not impact trading in debt issued before its enactment. 

Sanctions in connection with Nord Stream 2.  DUSA directs the President to impose blocking sanctions and travel bans on those involved in the planning, construction, or operation of the Nord Stream 2 pipeline or a successor entity.  President Biden has refused in the past to impose additional sanctions on non-Russian persons involved in the operation of Nord Stream 2 given the potential that such sanctions would be opposed by Germany, an important U.S. ally on sanctions.   

Sanctions on Russian extractive industries.  The bill provides for blocking sanctions against the oil and gas, coal, mineral, and “any other sector or industry with respect to which the President determines the imposition of sanctions” is in U.S. national security interests.  This type of sweeping sanction will likely be opposed by the Biden Administration given the disruption to energy supplies, which could lead to energy shortages and higher energy prices.  Also, much of Russia’s mining sector is under private ownership and thus not the target of sanctions. 

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The business landscape in Russia continues to change rapidly.  Companies should continue to keep abreast of legal developments including U.S., UK, and EU sanctions and export control laws and how they impact their business. As always, Dechert is available to advise on the economic sanctions imposed on Russia as well as on the potential impact of the proposed new measures.