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Expanded U.S. Sanctions Targeting Russia’s Financial Sector

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On February 24, 2022, in response to Russia’s attack on Ukraine, President Biden announced further sanctions on Russian individuals and entities. These measures are in addition to those already announced on February 22 and 23 and are primarily targeted at Russia’s financial sector.

These sanctions are part of a global, coordinated effort to maximize consequences for Russia’s actions and show solidarity for Ukraine’s sovereignty. Global partners, including the UK, EU, Canada, Australia and Japan, have also issued sanctions.

Measures were taken both by the Office of Foreign Asset Control (OFAC) and the Bureau of Industry and Security (BIS). The below contains a summary of recent OFAC sanctions action. We published a separate alert detailing recent amendments to the US Export Administration Regulations (EAR).

Additions to OFAC’s Specially Designated Nationals (SDN) List
OFAC has imposed full blocking sanctions on the following Russian financial institutions:

  • VTB Bank Public Joint Stock Company (VTB Bank);
  • Public Joint Stock Company Bank Financial Corporation Otkritie (Otkritie);
  • Open Joint Stock Company Sovcombank (Sovcombank); and
  • Joint Stock Commercial Bank Novikombank (Novikombank).

OFAC also added several subsidiaries of the aforementioned companies to the SDN List. Regardless of whether individually designated, pursuant to OFAC’s “50% Rule” any entity owned at least 50% by one more SDNs is also considered a blocked party.

Additionally, OFAC designated a number of Russian elites in President Putin’s inner circle and within “elite positions of power” within the Russian state. Many serve within leadership positions of the companies designated above.

Finally, 24 Belarusian individuals and entities were designated as SDNs for their support of the invasion, including two significant Belarusian state-owned banks, nine defense firms, and seven regime-connected official and elites. The full list of designated Belarusian parties is available here.

As a result of designation to the SDN List, all assets of the aforementioned SDNs (and their subsidiaries) must be frozen and US persons are prohibited from business dealings absent an OFAC authorization or exemption.

Other Restrictions Imposed Against Russian Financial Institutions
OFAC also issued two new directives pursuant to Executive Order (E.O.) 14032 targeting Russia’s financial sector.

Directive 2
OFAC issued Directive 2 under E.O. 14024 which imposes correspondent and payable-through account sanctions. These sanctions fall short of a full asset freeze, and instead, prohibits U.S. financial institutions from: (i) the opening or maintaining of a correspondent account or payable-through account for or on behalf of a designated entity; and (ii) the processing of transactions involving any such entities.

Accordingly, U.S. financial institutions must reject payments a Directive 2 entity attempts to process in US dollars for its clients unless exempt or authorized by OFAC.

At this time, only Sberbank and its subsidiaries have been sanctioned pursuant to Directive 2. OFAC guidance clarifies that its “50% Rule” also applies to Directive 2.

Directive 3
OFAC further expanded debt and equity prohibitions against certain Russian entities by implementing a new Directive 3 under E.O. 14024. Directive 3 prohibits transactions and dealings by U.S. persons or within the United States in new debt of longer than 14 days maturity and new equity of certain designated Russian state-owned enterprises and entities that operate in Russia’s financial services sector.

The substantive restrictions of Directive 3 under E.O. 14024 mirror those of Directive 1 issued under E.O. 13662. OFAC notes that each of its directives operate independently from one another.

Initially, the following 13 entities are subject to Directive 3:

  • Sberbank;
  • Gazprombank Joint Stock Company;
  • Joint Stock Company Russian Agricultural Bank;
  • Public Joint Stock Company Gazprom;
  • Public Joint Stock Company Gazprom Neft;
  • Public Joint Stock Company Transneft (Transneft);
  • Public Joint Stock Company Rostelecom;
  • Public Joint Stock Company RusHydro;
  • Public Joint Stock Company Alrosa;
  • Joint Stock Company Sovcomflot;
  • Open Joint Stock Company Russian Railways;
  • Joint Stock Company Alfa-Bank; and
  • Credit Bank of Moscow Public Joint Stock Company.

For these 13 entities, the Directive 3 restrictions apply to debt or equity issued on or after March 26, 2022.

General Licenses
In order to minimize unintended consequences on third parties, OFAC simultaneously issued an additional eight general licenses allowing certain transactions related to:

  • international organizations and entities;
  • agricultural and medical commodities and the COVID-19 pandemic;
  • overflight and emergency landings;
  • energy;
  • dealings in certain debt or equity;
  • derivative contracts;
  • the wind down of transactions involving certain blocked persons; and
  • the rejection of transactions involving certain blocked persons.

In particular, per General License 8, certain transactions “related to energy” are authorized through June 24, 2022. 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.

However, the ability to make payments under GL8 must be carefully examined and in many cases will need to be made through third-country intermediary banks. Care must also be taken to assess whether such third countries have adopted similar sanctions restrictions that would impact payments in or through those countries.

General License 11 authorizes a wind-down period through March 26, 2022 at 12:01 am Eastern Time for transactions involving VTB Bank, Otkritie, and Sovcombank. There is no authorized wind down period for Novikombank. OFAC guidance also states the GL 11 authorizes only new or continued business activities that are ordinarily incident and necessary to wind-down activities. Wind-down activities do not include the continued processing of funds transfers, securities trades, or other transactions involving a blocked person that were part of ongoing business activities prior to the imposition of sanctions, unless separately authorized.

We continue to monitor for additional U.S. sanctions developments as the situation unfolds.