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February 22, 2022

Comprehensive Sanctions on Separatist-Controlled Territory, Designations, and Russian Sovereign Debt Restrictions

The United States, EU, UK, Australia, Japan, and Canada are imposing sanctions on Russia related to the conflict in Ukraine’s Donetsk and Luhansk regions, with additional sanctions expected to follow if the situation in Ukraine escalates further.

On February 22, the United States designated two major Russian state-owned financial institutions and their subsidiaries, as well as five individuals, under Executive Order 14024 of April 2021 (EO 14024), and imposed further restrictions related to Russian sovereign debt.  In the EU, sanctions have been announced that will target certain members of the State Duma and Russian banks financing the Russian military, and restrict Russian access to capital, financial markets, and trade.  Additionally, the UK sanctioned five Russian banks and three individuals.

These developments, however, are not the coordinated and more extensive US, EU, and UK sanctions that have been threatened and may still be forthcoming.  These new sanctions have been referred to as a “first round” of sanctions in connection with Russia’s recognition of the so-called Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR) regions of Ukraine (collectively, the Covered Regions).  The sanctions also follow President Biden’s Executive Order 14065 of February 21, 2022 (EO 14065), which imposes comprehensive sanctions on the Covered Regions.

The key take-aways are:

  • US sanctions generally prohibit all dealings related to the Covered Regions that involve a US nexus, including US dollar payments cleared through the US financial system.
  • The US Treasury Department’s Office of Foreign Assets Control (OFAC) general licenses authorize US persons to wind down activities related to the Covered Regions through March 23, as well as limited activities after that date.
  • US secondary sanctions may target non-US person facilitation of “significant transactions” for or on behalf of an individual or entity sanctioned pursuant to EO 14024 or new EO 14065.
  • EU, UK, and US sanctions target additional designated individuals and financial institutions, though the designations differ by jurisdiction.
  • More significant and coordinated US, EU and UK sanctions may follow.
  • Multilateral sanctions and wider participation among allied nations may increase the impact.
  • Companies may need to consider new steps to identify existing business and to conduct effective compliance due diligence related to the Covered Regions.

Background

These new sanctions draw heavily from the US, EU, and UK sanctions on Russia starting on March 18, 2014, related to the Crimea region.  This included US Executive Order 13660, 13661, and 13662 (the Crimea EOs); Regulation No. 269/2014; and the UK’s later-issued Russia (Sanctions) (EU Exit) Regulations 2019 (the Russia Regulation).

Since 2014, conflict has ensued in the Donbas Region of Ukraine (home to the Donetsk and Luhansk Oblasts) between the Ukrainian government and pro-Russian, anti-Ukrainian government separatists supported by Russia.  Two agreements, the Minsk Protocol and Minsk II, eventually led to a fragile ceasefire and general stalemate that has lasted for several years.  Russia recently amassed military forces around the Ukrainian border with Belarus to the North, Russia to the East, and the Crimea region to the South.

United States imposes comprehensive sanctions on the Covered Regions, adds new designations, and targets Russian sovereign debt; OFAC general licenses available

The new US sanctions largely mirror those imposed by the United States in 2014 related to Crimea, with some notable additions related to Russian sovereign debt and the immediate application of secondary sanctions.

Comprehensive sanctions on the Covered Regions

EO 14065 imposes comprehensive sanctions on the Covered Regions and generally prohibits all dealings related to the Covered Regions that involve a US nexus, including involvement of US persons (e.g., citizens, permanent residents, and entities incorporated in the United States) and US dollar payments cleared through the US financial system.  This action is largely similar to the sanctions imposed against the Crimea region of Ukraine.  Specifically, EO 14065 prohibits:

  • new investment in the Covered Regions by US persons;
  • importation into the United States, directly or indirectly, of any goods, services, or technology from the Covered Regions;
  • exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a US person, of any goods, services, or technology to the Covered Regions; and
  • approval, financing, facilitation, or guarantee by a US person of a transaction that would be prohibited for the US person to enter into.

OFAC also issued six general licenses in connection with EO 14065 that are largely similar to the general licenses issued alongside the Crimea EOs in 2014.

  • General License 17: Authorizes the wind down of transactions involving the Covered Region – including the divestiture or transfer to a non-US person or a US person’s share of ownership in any pre-EO investment – through March 23, 2022
  • General License 18: Authorizes the exportation or reexportation of agricultural commodities, medicine, medical devices, replacement parts and components related to COVID-19 to the Covered Regions
  • General License 19: Authorizes transactions ordinarily incident and necessary to the receipt or transmission of telecommunications
  • General License 20: Authorizes transactions that are for the conduct of the official business of the UN and its bodies and organizations; the International Centre for Settlement of Investment Disputes and Multilateral Investment Guarantee Agency; certain development banks; the Red Cross; and the Organization for Security and Co-operation in Europe
  • General License 21: Authorizes noncommercial, personal remittances to or from the Covered Regions, or for or on behalf of an individual ordinarily resident in the Covered Region; and
  • General License 22: Authorizes the exportation of certain services and software incident to internet-based communication

New designation authority related to the Covered Regions

Additionally, similar to the Crimea EOs, EO 14065 authorizes US sanctions on anyone with virtually any connection to the Covered Regions.  Individuals and entities can be added to the US list of Specially Designated Nationals (SDN List) if the Secretary of the Treasury, in consultation with the Secretary of State, has determined such person:

  • to operate or have operated since the date of the EO in the Covered Regions;
  • to be or have been since the date of the EO a leader, official, senior executive officer, or member of the board of directors of an entity operating in the Covered Regions;
  • to be owned or controlled by, or have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to this order; or
  • to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to the EO.

Sanctions designations under this new EO – just like other sanctions designations by the United States with respect to the Russian Federation – may expose non-US persons to secondary sanctions risks under Section 228 of Countering America’s Adversaries Through Sanctions Act (CAATSA).  In practice, that means that non-US persons can be added to the SDN List for facilitating significant transactions for or on behalf of an SDN or blocked party under EO 14065, or for providing material support or assistance to any blocked party under EO 14065.

Financial institution designations, individual designations, and sovereign debt restrictions

On February 22, 2022, the United States added the financial services sector of the Russian economy to the sectors targeted under EO 14024, then the United States sanctioned two major Russian state-owned financial institutions that OFAC described as “crucial to financing the Russian defense industry”: the Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB) and Promsvyazbank Public Joint Stock Company (PSB), as well as 42 of their subsidiaries.  Since persons sanctioned pursuant to EO 14024 are “subject to sanctions imposed by the United States with respect to the Russian Federation,” US secondary sanctions under CAATSA would apply to persons designated under this executive order. 

OFAC also sanctioned five individuals connected with the Russian government and issued Directive 1A under EO 14024, which generally prohibits US financial institutions from:

  • participating in the primary market for ruble or non-ruble denominated bonds issued after June 14, 2021 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;
  • lending ruble or non-ruble denominated funds to the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation as of June 14, 2021; and
  • participating in the secondary market for ruble or non-ruble denominated bonds issued after 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.

OFAC has issued two General Licenses in connection with these designations:

  • General License 2: Authorizes certain servicing transactions involving VEB or any entity in which VEB owns, directly or indirectly, a 50 percent or greater interest, for 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.
  • General License 3: Authorizes the wind down of transactions involving VEB, or any entity in which VEB owns, directly or indirectly, a 50 percent or greater interest, through March 24, 2022.

EU sanctions to target Duma, banks financing the Russian military, and access to capital, financial markets, and trade

On February 22, 2022, the EU announced additional sanctions in connection with Russia’s recognition of the Covered Regions.  The EU has also prepared additional measures to be adopted at a later stage if needed in the event of further developments.

The EU sanctions will target:  

  • individuals involved in the decision to recognize the Covered Regions, which has been described as 27 persons and entities involved in the decision, 351 members of the State Duma who voted in favor of the decision, and 11 members who proposed the decision;
  • Russian banks that are financing Russian military operations and other operations in the Covered Regions;
  • Russia’s access to capital and financial markets and services of the EU; and
  • trade to and from the Covered Regions, including prohibitions on the import into the EU of goods, services or technology from the Covered Regions; the export from the EU to the Covered Regions of certain equipment and technology for use in the transport, energy and/or oil and gas sectors; and new investments in the Covered Regions.

These EU sanctions will apply to EU individuals and entities, as well as to circumstances where there is an EU nexus, such as business conducted from within the EU.  These sanctions will also ban any EU individual or entity from dealing with economic resources owned, held or controlled by a designated person or providing funds or economic resources to such persons.

The names of the specific individuals and banks are still subject to official confirmation by the EU and have not yet been published at the time of the publication of this briefing.

Additionally, in coordination with the EU, Germany has suspended the regulatory certification process of the Nord Stream 2 pipeline project that is a pre-condition for the pipeline to become operational.

UK sanctions five Russian banks and three oligarchs

On February 22, 2022, the UK Government announced sanctions on five Russian banks (Bank Rossiya, Black Sea Bank for Development and Reconstruction, Joint Stock Company Genbank, IS Bank and PSB) and three individuals (Gennadiy Nikolayevich Timchenko, Boris Romanovich Rotenberg and Igor Arkadyevich Rotenberg).  These sanctions represent the UK’s first use of its expanded powers to impose sanctions on Russia that more closely match the United States’ sanctioning authority.

As a result, UK individuals and entities are now prohibited from any dealings with, or providing any funds to or for the benefit of, directly or indirectly, any of the Russian banks or individuals.  Additionally, the designated individuals are banned from entering the UK.

These UK sanctions powers are already contained in the UK’s Russia Regulation, so all other rules in the existing legislative framework – for example, relating to licensing, reporting obligations, exclusions and other types of trade, financial and investment restrictions – remain unchanged.

Australia, Japan, and Canada impose sanctions on Russia

A number of other countries have also announced initial sanctions against Russia, led by Australia, Japan, and Canada.

Australia announced that its sanctions would include travel bans, measures against members of Russia’s National Security Council, targeting individuals aiding and abetting invasion, and broader sanctions on the Covered Regions.

Canada announced that it would ban financial dealings with the Covered Regions, ban purchases of Russian sovereign debt, sanction State Duma members who voted to recognize the Covered Regions, and sanction two state-owned Russian financial institutions.

Japan announced that in the coming days it will prohibit issuing Russian bonds in Japan and will impose sanctions on certain Russian individuals, including travel banks; Japan will reportedly begin targeting Russian banks and oligarchs.  Japan also issued a joint statement with Taiwan and Singapore committing to limit technology exports to Russia.

Conclusion and recommendations

The sanctions levied against Russia in response to escalating events in Ukraine and the recognition of the Covered Regions represent a significant increase in tensions between Russia and the United States, EU, and UK.  These sanctions are threatened to be the first of many if there is further escalation in Ukraine.  The reported high degree of coordination among allies to impose sanctions on Russia is already apparent and may become the hallmark feature of these new sanctions on Russia. In addition, Russia may impose its own sanctions or retaliate against governments, entities, and individuals its government considers hostile, involved in the promotion of sanctions, or otherwise supporting the Ukrainian government.

Companies still have time to prepare for the potential imposition of additional sanctions and countermeasures in connection with Ukraine.  In addition to taking stock of the potential impact of the sanctions that have already been imposed, see our guide on how to prepare for potential Russia sanctions.

We will continue to monitor this situation closely and provide further updates as this situation develops.

Visit our Russia sanctions hub for the latest insights and resources.