On Tuesday, February 22, 2022, US President Joseph R. Biden issued additional sanctions targeting Russia in response to Russian President Vladimir Putin’s decision to recognize the so-called Donetsk and Luhansk People’s Republics (DNR and LNR) as “independent” states and to deploy troops to these regions. These further measures build on the February 21, 2022 US actions and include sanctions against two major Russian state-owned financial institutions and a number of their subsidiaries, additional restrictions on transactions in Russian sovereign debt, and sanctions designations of five Kremlin-connected elites. The Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) also issued two new general licenses (“GLs”), two new Frequently Asked Questions (“FAQs”), and amendments to various existing FAQs in connection with the newly-issued sanctions.

Sanctions on two major Russian financial institutions

The February 22, 2022 sanctions designated two state-owned Russian financial institutions, the Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (“VEB”) and Promsvyazbank Public Joint Stock Company (“PSB”).

OFAC designated VEB pursuant to Executive Order (“EO”) 14024 for being owned or controlled by, or for having acted or purported to act for or on behalf of, directly or indirectly, the Government of Russia, and for operating or having operated in the financial services sector of the Russian Federation economy. The President also designated 25 of VEB’s subsidiaries for being owned or controlled by, or for having acted or purported to act for or on behalf of, directly or indirectly, VEB or the Government of Russia.

OFAC designated PSB under EO 14024 for operating or having operated in the defense and related materiel and financial services sectors of the Russian economy. In addition to PSB, 17 of its subsidiaries were designated pursuant to EO 14024 for being owned or controlled by, or for having acted or purported to act for or on behalf of, directly or indirectly, PSB. OFAC designated five vessels owned by PSB

As a result of these designations, the property and interests in property within US jurisdiction of VEB, PSB and their named subsidiaries (and, in the case of PSB, the named vessels) are blocked (frozen), and US persons are prohibited from doing business with them. Additionally, pursuant to OFAC’s 50 Percent Rule, all entities owned 50% or more by VEB or PSB, directly or indirectly, are also now blocked, even if those entities were not specifically identified in the February 22, 2022 sanctions. Furthermore, foreign (i.e., non-US) persons may themselves be designated by the US for sanctions under EO 14024 or other authorities if they provide “material support” to VEB, PSB or their blocked subsidiaries - and, depending on how OFAC interprets its authorities, foreign persons may also be subject to secondary sanctions for engaging in “significant transactions” involving these entities.

New restrictions on trading in Russian sovereign debt

The February 22, 2022 sanctions extend existing sovereign debt prohibitions to secondary market transactions in Russian sovereign debt. Directive 1A, issued pursuant to EO 14024 will prohibit as of March 1, 2022, secondary market dealing in ruble and non-ruble denominated bonds issued on or after March 1, 2022 by the Central Bank, National Wealth Fund, or Ministry of Finance of the Russian Federation. Directive 1A also adopts a broader definition of the term “financial institution” than its predecessor Directive, now including money services businesses, operators of credit card systems, insurance companies, and dealers in precious metals, stones, or jewels.

Additional sanctions designations

Additionally, and in what many expect to be a first round of further sanctions designations against prominent Russian political, security and business leaders, OFAC designated five Russian “elites” in Putin’s inner circle. This includes the Chairman and CEO of PSB, as well as the son of the Director of the Federal Security Service (also known as the “FSB”).

As a result of these designations, the property and interests in property within US jurisdiction of these designated persons are blocked (frozen), and US persons are prohibited from doing business with them. Additionally, pursuant to OFAC’s 50 Percent Rule, all entities owned 50% or more by these designated persons, directly or indirectly, are also now blocked, even if those entities were not specifically identified in the February 22, 2022 sanctions. And, as with the sanctions on VEB and PSB described above, foreign (i.e., non-US) persons may themselves be designated by the US for sanctions under EO 14024 or other authorities if they provide “material support” to these persons - and, depending on how OFAC interprets its authorities, foreign persons may also be subject to secondary sanctions for engaging in “significant transactions” involving them.

New licenses and guidance

As part of the package announced on February 22, 2022, OFAC issued two new general licenses (each a “GL”): GL No. 2 and GL No. 3.[1]

GL No. 2 authorizes all transactions otherwise prohibited by EO 14024 involving VEB or any entity in which VEB owns, directly or indirectly, a 50 percent or greater interest, that are ordinarily incident and necessary to the servicing of bonds issued before March 1, 2022 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation. GL No. 2 does not authorize any transactions prohibited by Directive 1A.

GL No. 3 authorizes all transactions otherwise prohibited by EO 14024 that are ordinarily incident and necessary to the wind down of transactions involving VEB, or any entity in which VEB owns, directly or indirectly, a 50 percent or greater interest, until 12:01 a.m. eastern daylight time, on March 24, 2022. The Department of the Treasury did not issue a similar license as to PSB.

In addition to these GLs, OFAC also issued FAQs 964 and 965, and amended certain existing FAQs. FAQ 964 provides clarification with respect to the Secretary of the Treasury’s determination to target the financial services sector of the Russian Federation economy pursuant to EO 14024. Specifically, the FAQ explains that this “sector determination does not automatically impose sanctions on all persons who operate or have operated in the sector,” requiring instead an affirmative designation by the relevant US authorities for persons operating in that sector to become subject to sanctions. FAQ 965 outlines the difference between Directive 1 and newly-issued Directive 1A, clarifying that Directive 1A expands upon the existing prohibitions in Directive 1 to also prohibit, as of March 1, 2022, participation in the secondary market for ruble or non-ruble denominated bonds issued by the named entities after March 1, 2022, and expands upon the definition of “US financial institution,” as outlined above.

These measures represent the latest punitive actions taken by the United States in response to Russia’s further escalation of the situation in Ukraine. In tandem with its new actions against Russia on February 22, 2022, Biden administration officials for the first time referred to Russia’s troop movements into Ukraine as an “invasion,” a description officials were reluctant to use even one day prior. Correspondingly, President Biden, in announcing the administration’s new punitive actions, described the sanctions as the “first tranche,” signaling repeatedly that the US government stands ready to impose much more severe measures in response to further escalation of the crisis in Ukraine. Many observers believe that a future tranche of punitive measures could include the imposition of export controls that would prohibit Russia’s access to certain key technologies.

The Dentons International Trade and Public Policy teams continue to monitor these developments closely and will provide updates as this very fluid situation evolves.

[1] Because the sanctions announced on February 22, 2022 were issued pursuant to EO 14024, they are categorized under OFAC’s “Russian Harmful Foreign Activities Sanctions” program, not the “Ukraine-/Russia-Related Sanctions” program. Accordingly, among other distinctions, the numbering convention for these GLs is different from most Russia/Ukraine-related GLs.