The United States is preparing sanctions against Russia linked to the crisis in Ukraine | Dechert LLP
Key points to remember
- The United States, Russia, the North Atlantic Treaty Organization (“NATO”) and the Organization for Security and Cooperation in Europe (“OSCE”) held a series of talks this week aimed at defuse the situation on the Ukrainian border. .
- US officials have indicated that if the talks fail to prevent Russia from further escalating tensions with Ukraine, the United States will respond by imposing tough new economic sanctions against Russia, as well as other financial measures. , technological and military. US officials described the strategy as “start high, stay high.”
- Meanwhile, US Senate Democrats introduced the 2022 Law on Defense of Sovereignty of Ukraine (“DUSA”), which would compel the White House to impose sanctions on senior Russian government officials and certain Russian financial institutions, cut these financial institutions off from SWIFT and other financial messaging services, prohibit American persons from engaging in transactions involving new debt and sanctioning parties involved in the Nord Stream 2 gas pipeline and possibly sanctioning other Russian extractive industries.
- The DUSA was introduced as an alternative to Senator Ted Cruz’s recent Russia bill, which sought to impose significant penalties on companies involved in the Nord Stream 2 pipeline. it only creates potential discord with the European Union.
- While DUSA is said to have the support of the White House, it is unclear how quickly the Senate will act. Even if DUSA becomes law, its measures will only come into effect if the White House determines that Russia is involved in a significant escalation of hostilities in Ukraine with the intent to undermine, overthrow, or dismantle the Ukrainian government or otherwise interfere with territories or sovereign integrity. In the meantime, President Biden could implement most of the measures set out in the DUSA himself at any time through executive orders.
- All businesses and individuals with exposure to Russia should monitor developments as the proposed measures could have a significant impact on international finance and trade.
In 2014, the United States imposed a number of escalating economic sanctions by executive order on Russian government entities and officials as well as the Russian defense, financial services, and energy sectors. The United States also imposed severe restrictions on trade with Crimea. In 2017, in response to alleged Russian interference in the US presidential election, cyberattacks and other “aggressive” actions, Congress passed legislation codifying Russian sanctions – the Countering America’s Adversaries Through Sanctions Act. (“CAATSA”) – and providing for the ability to impose sanctions on non-US persons who engage in material transactions with sanctioned parties.
Additional economic sanctions and trade restrictions have been imposed on Russia in response to its alleged use of chemical weapons, including a ban on US banks from participating in the primary market for certain sovereign debt issued by the Russian government (“Sovereign Debt Sanctions”). (See our previous OnPoints here and here).
In addition to sovereign debt sanctions, current economic sanctions include so-called blocking sanctions (“SDN sanctions”), which generally prohibit U.S. persons from transacting with certain Russian entities/persons on the Specially Listed Nationals designated (“SDN list”). ; sectoral sanctions, which prevent U.S. persons from providing certain financing to companies specified on the list identifying sectoral sanctions in the financial, defense and oil sectors in Russia (the “SSI Sanctions”); and certain export restrictions (see our About).
Overview of measures
The DUSA sets out a variety of possible measures, including additions to the SDN list and expanding sovereign debt sanctions, which the US President would be required to impose if it is determined by the President that Russia “is engaged in or knowingly supports a significant escalation of hostilities or hostile actions in or against Ukraine”, compared to the level of hostilities before December 1, 2021, which aims to undermine, overthrow or dismantle the government of Ukraine (a “presidential decision Below you will find an overview of the measures.
Sanctions against Russian government officials linked to operations in Ukraine. DUSA specifies a list of twelve officials, including the President and Prime Minister of Russia, plus a catch-all for other senior military and government officials, who are to be sanctioned following a presidential decision. Sanctions to be imposed would include SDN sanctions and visa bans and revocations.
Sanctions against Russian financial institutions. The president must also impose blocking sanctions on at least three Russian financial institutions (of the 12 listed). A number of these financial institutions are already on the SSI list, but these sanctions still allow US persons to transact with them. The new sanctions would completely prevent Americans from interacting with these institutions.
Sanctions regarding the provision of specialized financial messaging services to sanctioned Russian financial institutions. This measure would effectively cut off sanctioned financial institutions from the SWIFT messaging system, which facilitates global financial transfers, by imposing sanctions on SWIFT (or any other messaging service) if it serves sanctioned banks. This measure is not as severe as the one previously proposed (i.e. the complete blocking of Russian entities from the SWIFT messaging system). Russia has taken a number of steps since 2014 to try to reduce the consequences of a SWIFT shutdown. China has also joined the Russian national version of SWIFT.
Prohibition and sanctions on transactions on Russian sovereign debt. The bill would also prohibit all transactions by U.S. persons in any sovereign debt issued after the bill’s enactment date, including bonds, of the Russian government. Note that this restriction is broader than the current sovereign debt sanctions in that it covers all American persons – not just “American Financial Institutions” as defined in Guideline 1 to Executive Order 14024 – and extends the prohibitions to secondary markets. In addition, the bill contains a provision requiring the President to impose blocking sanctions and travel bans on certain non-U.S. persons who transact in Russian sovereign debt issued on or after the bill’s enactment date. . These non-US persons must have engaged in debt transactions of “at least 10 entities owned or controlled by the government of the Russian Federation”, although the wording is unclear on this point. The bill does not affect trading in debt securities issued prior to its passage.
Sanctions related to Nord Stream 2. DUSA directs the President to impose blocking sanctions and travel bans on those involved in the planning, construction or operation of the Nord Stream 2 pipeline or a successor entity. President Biden has in the past refused to impose additional sanctions on non-Russians involved in the operation of Nord Stream 2, given the possibility that such sanctions would face opposition from Germany, an important ally. of the United States on sanctions.
Sanctions against Russian extractive industries. The bill provides for blocking sanctions against oil and gas, coal, minerals and “any other sector or industry in respect of which the president determines the imposition of sanctions” is in the interest of security national of the United States. The Biden administration is likely to oppose this kind of sweeping sanction given the disruption in the energy supply, which could lead to energy shortages and higher energy prices. In addition, much of Russia’s mining sector is privately owned and therefore not subject to sanctions.
The business landscape in Russia continues to change rapidly. Businesses should continue to stay abreast of legal developments, including US, UK and EU sanctions and export control laws and their impact on their business. As always, Dechert is available to advise on the economic sanctions imposed on Russia as well as the potential impact of proposed new measures.