US Economic Sanctions on Russia Grow Amid Ukraine Crisis: What Businesses Need to Know | Manatt, Phelps & Phillips, LLP

On Monday, February 21, 2022, President Biden issued Executive Order No. 14024 (EO 14024), “Blocking of Assets with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation,” which opens the door to series of new sanctions. .

Donetsk and Luhansk regions

Among other limitations, EO 14024 prohibits American persons from importing goods, services or technology from, or exporting them to, the two breakaway regions of Ukraine: Donetsk and Lugansk. EO 14024 also blocks the property and interests of persons operating in Donetsk and Luhansk, as well as persons (including officers and directors) running business entities operating in these regions. These restrictions actually mirror the existing set of industry sanctions put in place in 2014, prohibiting U.S. persons from doing business in the former Crimea region of Ukraine, and so should be familiar to compliance professionals to modify their protocols. screening.

To facilitate the termination of business that U.S. persons may have in these regions, the Treasury Department’s Office of Foreign Assets Control (OFAC) has released General License No. 17 allowing U.S. persons to terminate existing business transactions and relationships in the Donetsk and Luhansk regions by March 23, 2022. Other general licenses allow limited transactions to continue with the Donetsk and Luhansk regions, including including the export of certain agricultural products, medicines and medical devices, among other goods, personal remittances, telecommunications and mail, certain services and software related to Internet communications and transactions of specific international organizations.

Designation of VEBs and PSBs

US restrictions on Russia’s ability to raise funds were tightened following President Biden’s public announcement on Tuesday, February 22, 2022, with the sanctions against two of the largest Russian banks, Vnesheconombank (VEB) and Promsvyazbank (PSB), as well as 42 of their subsidiaries. The designation of VEB and PSB as Specially Designated Nationals (SDN) under EO 14024 effectively cuts them off from the US financial system and freezes (locks) their assets in US jurisdiction. No U.S. person may therefore do business with these designated institutions, and with respect to any ongoing business with VEB – which services Russia’s sovereign debt – U.S. persons must end transactions by March 24, 2022.

Designation of persons

In addition to the VEB and PSB designations, the Biden administration added several Russian officials and their close relatives to the SDN list pursuant to EO 14024. The administration alleges that these individuals have close ties to Russian President Vladimir Putin and participate in what the administration calls government corruption. As the situation in Ukraine worsens, we expect the number of Russian officials and their family members added to the SDN list to increase.

Additional Restrictions on Russian Sovereign Debt Transactions

On February 22, OFAC also increasing existing restrictions on Russian sovereign debt transactions, further limiting Russia’s ability to generate revenue. Directive 1A under EO 14024 extends these prohibitions to cover secondary market participation in 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. Federation.

Designation of more financial institutions and individuals, and export controls

On February 24, 2022, President Biden announced a new wave of US economic sanctions against Russian companies and individuals in response to the escalating situation in Ukraine. He announced that the United States was adding four more Russian banks to the SDN list, including VTB Bank, which is one of Russia’s largest financial institutions and holds over $250 billion in assets. As with VEB and PSB, VTB’s assets in US jurisdiction will be blocked and US persons will be prohibited from doing business with VTB except as permitted by the OFAC license. As noted above, more Russian nationals who serve in the Putin administration or who are identified as having close ties to the Russian leader are likely to be added to the SDN list, along with their relatives. The United States is also expected to restrict investment by American persons in Russian state-owned companies and impose stricter export controls on the sale of American technology to Russia.

Restrict U.S. banking transactions with certain large financial institutions and investments in certain large public companies

At the time of the preparation of this client alert, OFAC had issued two new guidelines regarding Russian financial institutions and public companies under EO 14024. Guideline 2 now prohibits US financial institutions from opening or maintaining correspondent accounts or sweepstakes accounts for or on behalf of several Russian financial institutions listed in the directive, which notably includes another major Russian bank, Sberbank. Directive 2 also prohibits US financial institutions from processing transactions involving any of the listed Russian financial institutions. Guideline 3in turn, prohibits American persons from investing in new debt or shares in a number of Russian state-owned companies, including, among others, Sberbank, energy giant Gazprom and telecommunications giant Rostelecom.

QUICK?

During February 24and press conference, President Biden was asked if the United States and its European allies would block Russian financial institutions from accessing the Society for Worldwide Interbank Financial Telecommunication’s financial messaging network. He replied that, although there is no agreement to do so at the moment, it remains an option if the circumstances warrant it.

Take away food

Compliance professionals at U.S. companies and their overseas subsidiaries and affiliates should continue to closely monitor events unfolding in Ukraine and the ever-expanding sets of sanctions put in place by Treasury departments. and Commerce, among other federal government agencies tasked with implementing US economic sanctions. While many of the new sanctions programs provide a short grace period to end business and financial transactions, U.S. companies and their affiliates that do business with Russian or Ukrainian interests should act quickly to review their databases of customers, suppliers and subcontractors; ensure their compliance frameworks are updated; and verify that their payment processes with these parties are compliant and viable, among other risk mitigation measures.

The panoply of economic sanctions imposed by the United States and our European allies is nothing less than a sea change in the global economy. Unfortunately, as these sanctions multiply and create further separation between Russia and the rest of the international business community and the US financial system in particular, we can expect to see significant trade disruptions for US companies operating in the world. ‘Mondial economy.

This is a very fluid situation and Manatt is following developments closely and will continue to provide information and ideas as they become available.

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