More Severe “Second Round” of Sanctions and Export Controls on Russia as Ukraine Conflict Escalates

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On February 24, 2022, the United States, UK, and EU imposed significant new sanctions and export controls on Russia in response to the escalating conflict in Ukraine.  This follows the first round of sanctions on February 22 and 23, described in our prior client briefing. 

In this latest round of sanctions, the US Treasury Department’s Office of Foreign Assets Control (OFAC) restricts access to the United States financial system for Russia’s largest financial institutions and state-owned private entities and limits their ability to raise capital. Among those targeted are Russia’s two largest banks and 90 financial institution subsidiaries worldwide, Russian elites and their families, and the new debt and equity of specified Russian state-owned enterprises. 

Additionally, the UK imposed asset freezes on six Russian banks, including VTB, and five individuals.  At the same time, the EU announced a sanctions package that will impose restrictions on the Russian energy, financial, and transport sectors, in addition to imposing export controls and restrictions on export financing.

The key takeaways are:

• Several major Russian banks are now on the US List of Specially Designated Nationals (SDN list), targeted by full blocking sanctions:  VTB Bank, Bank Otkritie, Novikombank, Sovcombank, and their subsidiaries, following the previous designations of Vnesheconombank (VEB) and Promsvyazbank (PSB). 
• US correspondent and payable-through account sanctions have been imposed against Sberbank and its subsidiaries, requiring US financial institutions to close Sberbank’s accounts and eliminating the ability of Sberbank to process US dollar payments.
• Expanded debt- and equity-related US sectoral sanctions prohibit certain transactions of Russian state-owned enterprises (including energy and telecommunications companies) and entities that operate in the financial services sector of the Russian economy, restricting capital-raising through the US market.
• Families close to President Putin and elites in the financial sector were added to the SDN list, as were certain Belarusian individuals and entities with close ties to Russia. 
• US export controls on Russia have been expanded significantly to require export licenses for a wider range of items to Russia, as well as to restrict Russia’s ability to acquire non-US produced items that are the direct product of US-origin software or technology.  Other countries are also committing to imposing more restrictive export controls on Russia.
• UK and EU sanctions are increasing, with notable but imperfect overlap among the sanctions regimes and more sanctions announced than have been published.  Additional coordinated US, UK, and EU sanctions are expected to follow.

United States designates major Russian banks and key individuals, imposes correspondent banking restrictions, and expands debt and equity sanctions 

SDN designations for major Russian financial institutions and subsidiaries 

OFAC added (i.e., imposed full blocking sanctions on) several major Russian financial institutions to the SDN list, under Executive Order 14024 of April 15, 2021 (EO 14024), including:

• VTB Bank Public Joint Stock Company (VTB Bank) and 20 subsidiaries
• Public Joint Stock Company Bank Financial Corporation Otkritie (Otkritie) and 12 subsidiaries
• Joint Stock Commercial Bank Novikombank (Novikombank)
• Open Joint Stock Company Sovcombank (Sovcombank) and 22 subsidiaries

All entities owned 50 percent or more by one or more of the above-mentioned entities (or other SDNs) in the aggregate are also blocked, even if not specifically designated by OFAC.

Correspondent and payable-through account (CAPTA) sanctions against Sberbank

OFAC’s new Directive 2 under EO 14024 (the CAPTA Directive) targets the largest financial institution in Russia: Public Joint Stock Company Sberbank of Russia, 25 of its foreign subsidiaries, and any foreign financial institution owned 50 percent or more by Sberbank or a Sberbank subsidiary (collectively Sberbank).  Under this directive, US financial institutions (including foreign branches, but not foreign subsidiaries) are prohibited from:

• opening or maintaining a correspondent account or payable-through account for or on behalf of Sberbank or its property or interests in property; and
• processing any transaction involving Sberbank or its property or interests in property. 

The CAPTA Directive also prohibits transactions that evade or avoid, or have the purpose of evading or avoiding, or attempts to violate any prohibitions in the Directive and any conspiracy formed to violate prohibitions in the CAPTA Directive.

These prohibitions apply to dealings in any currency and take effect at 12:01 AM EST on March 26, 2022.  Accordingly, US financial institutions have until March 26, 2022 to close any Sberbank correspondent and payable-through accounts. 

Debt and equity prohibitions against major state-owned and private institutions

OFAC’s new Directive 3 under EO 14024 (the Debt and Equity Directive) imposes restrictions similar to the United States’ 2014 sectoral sanctions.  The Debt and Equity Directive prohibits all dealings by US persons, or in the United States, in new debt of longer than 14 days maturity and new equity of 13 targeted Russian entities: Credit Bank of Moscow, Gazprombank, Alfa-Bank, Russian Agricultural Bank, Sovcomflot, Russian Railways, Alrosa, Gazprom, Gazprom Neft, Rostelecom, RusHydro, Sberbank of Russia, and Trannsneft.

The Debt and Equity Directive also prohibits transactions that evade or avoid, or have the purpose of evading or avoiding, or attempts to violate any prohibitions in the Directive and any conspiracy formed to violate prohibitions in the Directive.

These prohibitions take effect at 12:01 AM EST on March 26, 2022.  For any additional entities designated under the Debt and Equity Directive, restrictions will take effect 30 days after the designation.  This Directive, however, does not prohibit US persons from engaging in dealings related to debt or equity issued before the Directive’s effective date. 

SDN designations of families close to President Putin and “financial system elites”

OFAC added to the SDN list three families close to President Putin as well as four senior elites in Russia’s financial sector under EO 14024.  These sanctions generally prohibit all dealings with these individuals involving US persons or any other US nexus.

Nord Stream 2 SDN designation

On February 23, OFAC added Nord Stream 2 AG, the project company for the Nord Stream 2 natural gas pipeline, and its CEO Matthias Warnig to the SDN list.

OFAC general licenses for dealings with persons designated under EO 14024

All of the US sanctions in this briefing and some from our prior briefing, other than the sanctions imposed related to Nord Stream 2, are under the authority of EO 14024.  OFAC issued eight general licenses under EO 14024.  These include authorizations related to international organizations, food and medicine, flight-related activities, energy transactions, and wind down activities.  The key wind down activities authorized for limited timeframes, with certain conditions, are:

• General License 9 (debt and equity wind down):  authorizes divestment or transfer to non-US persons of any debt or equity issued prior to February 24, 2022, of VEB, Otkritie, Sovcombank, Sberbank, and VTB, until May 25, 2022
• General License 10 (derivative contract wind down):  authorizes the wind down of derivative contracts entered into prior to 4:00 PM EST, February 24, 2022, that include or are linked to debt or equity of VEB, Otkritie, Sovcombank, Sberbank, or VTB, until May 25, 2022
• General License 11 (general wind down):  authorizes the wind down of transactions involving Otkritie, Sovcombank, or VTB until March 26, 2022
• General License 12 (reject rather than block):  authorizes US persons to reject – rather than block or freeze – transactions involving Otkritie, Sovcombank, or VTB, until March 26, 2022

United States imposes further sanctions on Belarus 

OFAC also added 24 Belarusian individuals and entities to the SDN list, pursuant to Executive Order 14038 (EO 14038), due to Belarus’ support for, and facilitation of, Russia’s invasion of Ukraine.  These Belarus sanctions target:

• Two Belarusian state-owned banks, Belarussian Bank of Development and Reconstruction Belinvestbank Joint Stock Company (Belinvestbank) and Bank Dabrabyt Joint-Stock Company (Bank Dabrabyt), as well as two Minsk-based companies (Limited Liability Company Belinvest-Engineering and CJSC Belbizneslizing) for having acted for Belinvestbank;
• 16 entities and individuals in the Belarusian defense and security industries; and
• Three senior Belarusian defense officials and members of President Lukashenka’s inner circle.

OFAC simultaneously issued general licenses related to official US government business and international organizations.

US export controls targeting Russia increase in scope and complexity

In addition to the sanctions described above, the US Commerce Department’s Bureau of Industry and Security (BIS) implemented a suite of export controls on Russia under the US Export Administration Regulations (EAR).  These new export controls represent a significant increase in restrictions, covering a wide range (and huge number) of items.

These changes include:

• Significant expansion of licensing requirements:  new license requirements for Russia – with a policy of denial – for goods, software, and technology (items) in Categories 3 through 9 of the EAR’s Commerce Control List (CCL), which includes, for example, microelectronics, telecommunications items, sensors, navigation equipment, marine equipment, and aircraft components
• Export license application policy of denial: exports that require a license for Russia will be denied as a matter of policy, with certain limited categories (such as safety of flight and humanitarian needs) reviewed on a case-by-case basis
• Military end use and users:  expanded restrictions on Russian “military end users” and “military end uses,” which now cover all items subject to the EAR; this includes limited exceptions for food, medicine, and mass market encryption, so long as the exports are not for government end users or Russian state-owned enterprises
• Expanded Foreign Direct Product Rule:  new Foreign Direct Product Rule restrictions will apply to the acquisition of non-US produced items that are the direct product of software or technology (or of a complete plant or major component of a plant) subject to the EAR under CCL Categories 3 through 9 when it is known that the foreign-produced item is destined for Russia or will be incorporated into or used the production or development of any component destined for Russia
• For Russian military end user, the rule expands to cover non-US produced items that are the product of software or technology (or of a complete plant or major component of a plant) subject to the EAR under any CCL category
• These rules will not cover foreign-produced items that would be designated as EAR99 (i.e., items not listed on the CCL)
• License exception limits:  restrictions on the use of EAR license exceptions for exports to Russia.  For example, License Exception ENC (Encryption Commodities, Software, and Technology) now excludes Russian government end users and Russian state-owned enterprises
• Entity Listings:  addition of 49 Russian military end-users to the EAR’s Entity List, which creates a licensing requirement (subject to a policy of denial) for the export, reexport, or transfer (in-country) of all items subject to the EAR to those entities, with limited exceptions
• Embargo on separatist-controlled territories:  comprehensive ban on exports, reexports, and in-country transfers of all items subject to the EAR, with limited exceptions, to the so-called Donetsk People’s Republic and Luhansk People’s Republic regions of Ukraine

According to the White House, Australia, Canada, the European Union, Japan, and the UK have all committed to coordinating with the United States in taking “similarly forceful actions” that may include more robust export controls or embargoes on Russia.

United Kingdom imposes asset freezes on major Russian banks

On February 24, 2022, the UK Government imposed asset freezes on six significant Russian entities:

• JSC Research and Production Corporation UralVagonZavod
• United Aircraft Corporation
• United Shipbuilding Corporation
• Rostec
• Tactical Missiles Corporation
• VTB Bank

The UK also imposed asset freezes and travel bans on five individuals:  Denis Bortnikov, Petr Fradkov, Alexandrovna Georgieva, Kirill Nikolaevich Shamalov, and Borisovic Slyusar.  These asset freezes prohibit any dealings with, or providing any funds or economic resources to or for the benefit of, directly or indirectly, any of the entities and individuals listed above. 

In contrast to the US sanctions regime, to date there has been no issuance of general licenses permitting certain types of specified activity otherwise prohibited by the new sanctions.  A Foreign Office press release, however, suggested that general licenses may be under consideration, stating that “any General Licences related to sanctions against VTB will be published on OFSI’s pages.”

As with the sanctions released on February 22, 2022, the UK sanctions powers underlying the new designations were already contained in the UK’s Russia Regulation, last updated on February 10, 2022.  Accordingly, all other sanctions and related provisions in the existing legislative framework remain unchanged as of this briefing.   

There have also been strong indications from the UK Government that further sanctions are expected in the coming days.  Announcements have referenced “all major Russian banks,” so the list of targeted banks may expand in the coming days.  Additionally, Foreign Secretary Liz Truss announced that a further round of “comprehensive sanctions” are expected with more than “100 companies and oligarchs” intended to be targeted.  She also previewed “forthcoming” new legislation introducing new types of sanctions, imposing additional financial restrictions, new sanctions on Russian banks, and export controls measures in sectors such as electronics, telecommunications and aerospace. Separately, the UK has also indicated that it may be working with “allies to exclude Russia from the SWIFT financial system.”

European Union announces sanctions package targeting Russian energy, financial and transport sectors

The EU held an emergency summit on February 24, 2022 and has adopted a sanctions package that imposes restrictions on the Russian energy, financial, and transport sectors as well as export controls and restrictions on export financing.  Although the details and legal texts have not been published as of the date of this briefing, the sanctions are understood to include the following measures.

Financial restrictions

• Russian banks subject to restrictions on mid- to long-term financing are expected to include Alfa Bank and Bank Otkritie (in addition to Gazprombank, Russian Agricultural Bank, Sberbank, VEB and VTB)
• Prohibitions on dealings with securities issued by a number of state-owned Russian companies.  While no names are available yet, this would include companies in the aerospace and defense sector, shipping and shipbuilding
• A number of state-owned companies will be barred from listing on EU stock exchanges.
• Russian nationals will be banned from making deposits exceeding € 100,000 in EU banks
• 
  

Export controls (including targeting the energy and transport sectors)

• Prohibition on sales of aircraft and spare parts for the aviation industry from the EU to Russia
• Prohibition on all sales of equipment (likely including technical services and maintenance) needed to upgrade Russian oil refineries
• Plans to implement a wide-ranging regime of export controls – requiring authorization or banning the export of a broad range of advanced technology items, including electronics, sensors, telecommunications, marine applications and lasers as well as goods that can be used by the military

There will likely be additional asset freeze measures against Russian individuals and entities – the names will be published in the coming days.

This second round of EU sanctions is not expected to include new sanctions on Russian oligarchs but the EU is understood to be preparing the sanctions framework to designate certain Russian high-net worth individuals and their families in a third round of sanctions.

This follows the first round of EU sanctions that were announced on February 22 and published on February 23, available here.  As previewed, those sanctions imposed asset freezes on hundreds of individuals, restricted economic relations with the separatist-controlled territories (i.e., bans on imports and imports, trade and investment, and tourism) similar to the EU’s restrictions on Crimea and Sevastopol, and restricted Russian access the EU’s capital and financial markets.

Conclusion and recommendations

Increasingly severe sanctions and export controls against Russia appear likely to continue, driven by political events that are escalating rather than resolving.  Additionally, several other countries have announced their intention to take additional measures against Russia in the coming days.  Coordination among allies to impose sanctions on Russia appears to have materialized.

With these greater sanctions comes an even greater risk that 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 can take steps to ensure compliance with these sanctions, including revising sanctions screening and due diligence processes and updating compliance policies.

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

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