U.S., EU and UK Impose Unprecedented Sanctions Against Russia

Key Takeaways

• The US, EU, and UK have taken unprecedented actions to impose economic sanctions and export controls restrictions on Russia and various Russian entities in response to the further invasion of Ukraine by Russia

• The new measures go well beyond prior restrictions and will require businesses to thoroughly vet their activities involving Russia and newly-sanctioned entities, individuals, and regions to determine what actions need to be taken.

• As the geopolitical situation in Ukraine evolves, it remains possible that further sanctions and export controls restrictions will be imposed by Western countries.

Background

As noted in our prior update, the United States, European Union, and United Kingdom imposed certain sanctions in connection with Russia’s recognition of the Donetsk and Luhansk regions of Ukraine. Following Russia’s full-scale invasion of Ukraine on February 24, 2022, unprecedented (since the fall of the Soviet Union) new sanctions and export controls have now been imposed against Russia and various Russian entities. The new measures go well beyond prior restrictions and will require businesses to thoroughly vet their activities involving Russia and newly-sanctioned entities, individuals, and regions to determine what actions need to be taken. As the geopolitical crisis in Ukraine evolves, it remains possible that further sanctions and export controls restrictions will be imposed by Western governments.

I. New U.S./EU/UK Sanctions

The most impactful sanctions imposed by the United States, European Union, and United Kingdom from February 24, 2022 are summarized below. As described in the US Treasury Department’s Office of Foreign Assets Control’s (“OFAC”) press release, the objective of the sanctions measures is to “significantly impair their ability to use the Russian economy and financial system [and] … imperil Russia’s ability to raise capital key to its acts of aggression.” Thus, the new sanctions measures seek to cut off significant parts of the Russian financial system and economy from access to the U.S. and global financial system.

U.S. Sanctions

• Listings/asset freezes on certain Russian banks: VTB Bank, Otkritie, Sovcombank, Novicombank, and subsidiaries
  •  OFAC added four Russian banks to the List of Specially Designated Nationals (“SDN List”), most notably VTB Bank. U.S. persons generally are prohibited from engaging in activities involving these banks and their property interests (including debt and equity instruments issued by these banks), subject to the general licenses noted below.
  •  General License 8 permits U.S. persons to engage in transactions “related to energy” involving VEB, VTB Bank, Otkritie, Sovcombank, or Sberbank until June 24, 2022. “Related to energy” is defined to include a range of activities, including extraction and purchase of petroleum products, and the development or transmission of power through any means.
  • General License 9 authorizes U.S. persons to continue to hold debt and equity securities of VEB (which was sanctioned on February 22), VTB Bank, Otkritie, Sovcombank, or Sberbank until May 25, 2022. U.S. persons are permitted (but not required) to divest any such holdings to non-U.S. persons during this time but are not permitted to increase their holdings of such securities. Absent further guidance from OFAC, any securities of these banks that are held past the authorized period likely will need to be blocked and reported to OFAC. Novicombank was not included in the scope of General License 9, and it is unclear why Sberbank was included in this general license as it is not subject to blocking measures and at present there are no restrictions on holding existing debt or equity securities of Sberbank.
  • General License 10 permits U.S. persons to engage in activities to wind down derivative contracts linked to a debt or equity instrument of VEB, VTB Bank, Otkritie, Sovcombank, and Sberbank until May 25, 2022.
  •  General License 11 authorizes U.S. persons to engage in all transactions necessary to wind down all other activities involving Otkritie, Sovcombank, or VTB until March 26, 2022.
  • OFAC issued other general licenses related to these SDN listings, including authorizations related to official business of certain international organizations (General License 5), agricultural commodities, medicine and medical devices (General License 6), and overflight payments (General License 7).
  • OFAC also issued guidance stating that non-U.S. persons can be subject to potential secondary sanctions for engaging in activities involving these newly-sanctioned entities.
• Banking restrictions but not full blocking measures: Sberbank and subsidiaries
  • OFAC issued Directive 2 under E.O. 14024 to impose banking restrictions on Sberbank and twenty-five subsidiaries. Within 30 days, OFAC 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.
  • These sanctions are not full blocking sanctions – Sberbank remains subject to new debt or equity restrictions under Directive 1 of the Sectoral Sanctions Identification List (“SSI List”) and the new debt and equity restrictions under Directive 3 of E.O. 14024 (discussed below). U.S. persons generally are permitted to continue to engage in activities involving Sberbank (and its debt or equity instruments issued prior to the SSI List sanctions), but U.S. financial institutions will not process transactions involving Sberbank unless the activity is covered by one of the general licenses issued by OFAC (as described above).
• New debt and equity restrictions: Alfa Bank, Alrosa, Credit Bank of Moscow, Gazprom, Gazprom Neft, Gazprombank, Rostelecom, RusHydro, Russian Agricultural Bank, Russian Railways, Sberbank, Sovcomflot, Transneft and subsidiaries
  • OFAC issued Directive 3 under E.O. 14024 to prohibit U.S. persons from dealing in any new equity or new debt instruments with a maturity of more than 14 days issued by thirteen Russian entities. These measures are identical to restrictions set forth under Directive 1 of the SSI List.
  • A number of the entities listed in this directive already were subject to new debt and/or equity restrictions under Directive 1 of the SSI List.
    
• Listings/asset freezes related to Belarus: Belinvestbank, Bank Dabrabyt and various other Belarusian entities and individuals
  • OFAC also added numerous Belarusian entities and individuals to the SDN List due to Belarus’s support for, and facilitation of, the invasion of Ukraine. These include two state-owned banks (Belinvestbank and Bank Dabrabyt), various entities in the Belarus defense and security industries, and various Belarusian individuals (including government officials) involved in security-related activities. OFAC did not issue any wind down licenses with respect to these new designations.
• Listings/asset freezes against “elites”: Seven individuals described as being members of “families close to Putin” and “financial elites”
  • Three of the individuals are sons of current SDNs; another individual is the wife of a new SDN

UK Sanctions

• On February 24, 2022, the UK announced its second wave of sanctions, building on the sanctions announced earlier this week, and implementing asset freezes on five individuals and six entities. Significantly, the asset freezes apply with immediate effect to VTB Bank, Rostec, Russia’s largest defense company, and several other prominent defense, aircraft and shipbuilding companies. The individuals sanctioned include the Chairman and Deputy President of the management board of VTB Bank and the Chairman/CEO of Promsvyazbank (which itself was subjected to a UK asset freeze on February 22, 2022).

• The Prime Minister also announced that the UK would, among other measures, freeze the assets of all major Russian banks (resulting in their exclusion from the UK financial system), introduce legislation to stop major Russian companies from raising finance on UK markets, ban Russia’s national airline Aeroflot from operating flights to or from the UK (Russia immediately retaliated by banning British aviation companies from flying to and over Russian territory), as well as introduce further asset freezes on over 100 new entities and individuals and trade restrictions and export controls against Russia’s hi-tech and strategic industries. The secondary legislation to introduce these far-reaching restrictions will be announced in the coming days. The Prime Minister also set out that there is the potential to exclude Russia from the Swift payments system and that “nothing is off the table.”

EU Sanctions

• On February 24, 2022, EU leaders met at a special summit and agreed on further sanctions against Russia. The package of sanctions has five pillars covering:
  • Capital markets: Financial sanctions that cut Russia’s access to capital markets, including targeting 70% of the Russian banking market and key state-owned companies.
  • Energy: An export ban that will hit the oil sector by making it difficult for Russia to upgrade its oil refineries.
  • Aircraft: A ban on the sale of all aircraft, spare parts and equipment to Russian airlines.
  • Technology: Restrictions on Russia’s access to important technologies, including semiconductors and other cutting-edge technologies.
  • Visas: Diplomats and related groups, and businesspeople, will no longer have privileged access to the European Union.

II. Export Controls

In coordination with approximately 32 allies that have committed to imposing similar rules, BIS has implemented a range of new measures that will restrict Russia’s access to Western-made products, including products made outside the United States on the basis of sensitive U.S. technology. As described above, the U.S. government is targeting the Russian aerospace, defense and maritime sectors. BIS’ press release announcing the measures (available here) expresses an objective to “cut the Russian military off from the technologies and products it needs to sustain its… aggression.” These export control measures became effective on February 24, 2022, the date they were published in the Federal Register (available here). BIS also published a fact sheet to summarize the new restrictions (available here).

A selected summary of the new measures is provided below:

• New License Requirements and Licensing Policy of Denial. BIS imposed new license requirements, and announced a licensing policy of denial, for all Export Control Classification Numbers in Categories 3-9 of the Commerce Control List, impacting a wide swath of items not previously subject to licensing requirements for export or reexport to Russia. This will restrict Russia’s ability to obtain goods it cannot produce itself without BIS authorization, including, in particular, many sensitive items on which Russia’s defense, maritime and aerospace industries rely.
• New Direct Product Rules. The implementation of two significant new Foreign Direct Product (“FDP”) rules specific to Russia and Russian military end users (“MEU”).
  • New FDP rule for all of Russia (“Russia FDP rule”). The Russia FDP rule restricts Russia’s ability to acquire foreign-made items that are (i) direct products of certain U.S.-origin software or technology subject to the Export Administration Regulations (“EAR”), or (ii) produced by certain plants or machinery that are themselves the direct product of certain U.S.-origin software or technology subject to the EAR. Foreign-produced EAR99 items are not subject to this rule, so ordinary Russians will continue to be able to access many consumer items.
  • New FDP rule for Russian MEU (“Russia-MEU FDP rule”). The Russia-MEU FDP rule extends beyond the Russia FDP rule to cover foreign-made items that are (i) direct products of any software or technology subject to the EAR that is on the Commerce Control List (“CCL”), or (ii) produced by certain plants or machinery that are themselves the direct product of any U.S.-origin software or technology on the CCL. These restrictions apply to most items designated EAR99.
  • Exemptions for Partner Countries. Exports and reexports to certain allied countries that are adopting or have expressed an intent to adopt substantially similar measures to BIS are not and will not be subject to the Russia and Russia-MEU FDP rules.
• Entity List Additions. Approximately 50 Russian entities have been added to the Entity List, requiring a BIS license to export, reexport, or transfer (in-country) all items subject to the EAR (including foreign-produced items under the Russia-MEU FDP rule) to these entities, with limited exceptions. BIS indicated that additional entities may be added to the Entity List in the future.
• Narrowing of License Exceptions. Restricts the use of many license exceptions for Russia exports, reexports and transfers (in-country). While certain sections of existing license exceptions remain available for exports to Russia, a number of existing license exceptions were narrowed. License applications for exports, reexports and in-country transfers no longer covered by license exceptions now are subject to case-by-case review.
• Extends the scope of restrictions on Russian military end users and uses to almost all items subject to the EAR. This covers all items subject to the EAR except for (i) food and medicine designated as EAR99; and (ii) items classified as ECCN 5A992.c or 5D992.c (related to encryption), so long as they are not for Russian “government end users” or Russian state-owned enterprises.
  

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. In particular, identifying the growing array of companies, entities and individuals captured by the new sanctions and export controls restrictions will require careful consideration. In addition, companies should remain alert to available carveouts or exemptions and wind-down periods in connection with recent sanctions measures. As always, Dechert is available to advise on compliance with sanctions and export controls measures.