US sanctions on Russia
It has been a few days since the Western countries announced sweeping sanctions against Russia which aim to impose severe economic costs with both immediate and long-term effects on the Russian economy and financial system.
According to OFAC, these actions were tailored with its partners to weigh most heavily on the Government of Russia and its economy while mitigating impacts on America and its allies.
Economic sanctions imposed by the US
In February 2022, the US Treasury Department’s Office of Foreign Assets Control (OFAC) undertook major economic actions by sanctioning Russia’s largest financial institutions and their subsidiaries. These actions included the following:
Correspondent and Payable-Through Account Sanctions (the CAPTA List)
PJSC Sberbank has been targeted by sanctions pursuant to Directive 2 under Executive Order 14024. Under this Directive, Sberbank and its 25 subsidiaries are added to the so-called CAPTA List (List of Foreign Financial Institutions Subject to Correspondent Account and Payable-Through Account Sanctions). Directive 2 under E. O. 14024 prohibits the following activities by a U.S. financial institution, except to the extent provided by law, or unless licensed or otherwise authorized by OFAC:
the opening or maintaining of a correspondent account or payable-through account for or on behalf of foreign financial institutions determined to be subject to the prohibitions of this Directive, or their property or interests in property; and the processing of a transaction involving foreign financial institutions determined to be subject to the prohibitions of this Directive, or their property or interests in property.
The prohibitions of this Directive shall take effect with respect to Sberbank and its subsidiaries as well as any foreign financial institutions that are 50% or more owned, directly or indirectly, individually or in the aggregate, by one or more such foreign financial institutions determined to be subject to this Directive beginning at 12:01 a.m. Eastern Daylight Time on 26 March 2022. All U.S. financial institutions must close any correspondent and payable-through account maintained for sanctioned entities by 26 March 2022 and must reject any future transactions after 26 March 2022. Payments that Sberbank attempts to process in U.S. dollars for its clients will be disrupted and rejected once the payment hits a U.S. financial institution.
The prohibitions of Directive 2 under E.O. 14024 apply only to U.S. financial institutions. U.S. individuals and entities are not prohibited from processing non-U.S. dollars transactions involving Sberbank and its subsidiaries. Under the term “U.S. financial institution”, OFAC means any U.S. entity including its foreign branches but not foreign branches, offices, or agencies. OFAC clarifies that Directive 2 under E.O. 14024 prohibits foreign branches of a U.S. institution to open or maintain a correspondent account for or on behalf of, or process a transaction involving, a foreign financial institution determined to be subject to the prohibitions of the Russia-related CAPTA Directive. OFAC therefore clarifies that the prohibitions of Directive 2 under E.O. 14024 apply with respect to any currency.
All other activities are permitted, provided that such activities are not otherwise prohibited by law, the Order, or any other sanctions program implemented by OFAC. For example, Sberbank is also subject to Directive 3 under E.O. 14024 which we will describe below.
In terms of compliance with prohibitions of Directive 2 under E.O. 14024 by non-U.S. financial institutions, OFAC notes that the Russia-related CAPTA Directive prohibits any transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of or attempts to violate any of the prohibitions of this directive as well as any conspiracy of or attempts to violate any of the prohibitions. At the same time, OFAC will not view as “evading or avoiding” efforts by non-U.S. persons to comply with US sanctions by replacing sanctioned suppliers or service providers (including financial institutions) with non-sanctioned persons. OFAC does not provide further clarification related to “evading or avoiding” efforts which non-U.S. financial institutions may take.
It is notable that prior to this recent action, only one bank had been added to the CAPTA List; Bank Kunlun Co. Ltd in China was sanctioned by OFAC back in July 2012. It was first added to the Part 561 List under the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA). Bank Kunlun was sanctioned for having provided significant financial services to more than six Iranian banks that were designated by the U.S. in connection with Iran’s weapons of mass destruction (WMD) programs or its support for international terrorism. The Part 561 List was replaced with the CAPTA List by the U.S. Treasury in March 2019.
Starting from 22 February 2022, the US Department of Treasury has imposed full blocking sanctions on several Russian financial institutions targeting the core infrastructure of the Russian financial institutions in order to have both immediate and long-term effects on the Russian economy and financial system.
On 22 February 2022, the U.S. Treasury designated two financial institutions: State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB) and Promsvyazbank as well as their 42 subsidiaries. According to OFAC, these financial institutions “play significant roles in the Russian economy, holding combined assets worth tens of billions of dollars”.
On 24 February 2022, the U.S. Treasury has imposed full blocking sanctions on the second largest bank of Russia called VTB Bank and its 20 subsidiaries. VTB Bank has been added to the Specially Designated Nationals List (SDN List) pursuant to E.O. 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”.
Apart from VTB Bank, the following major Russian financial institutions have been designated by OFAC: Bank Otkritie and its 12 subsidiaries; Novikom; and Sovcombank and its 22 subsidiaries.
On 28 February 2022, OFAC designated three entities “critical to managing one of Russia’s key sovereign wealth funds: Russian Direct Investment Fund (RDIF); its management company, JSC Management Company of the RDIF; and one of the managing company’s subsidiaries, LLC RVC Management Company”. The CEO of RDIF, Kirill Dmitriev has been added to the SDN List on the same day.
As a result, all property and interest in property of these entities in the possession or control of U.S. persons, including U.S. financial institutions, or within the U.S. jurisdiction, are blocked and must be reported to OFAC. U.S. persons are generally prohibited from transacting with blocked entities unless exempt or authorized by OFAC. Under OFAC’s 50% ownership rule, any entity owned 50% or more in the aggregate, directly or indirectly by one or more blocked persons is considered blocked.
OFAC has issued several General Licenses authorizing certain transactions with blocked Russian financial institutions that should be consulted for further information regarding their scope.
Debt and Equity Prohibitions
On 24 February 2022, OFAC issued Directive 3 under E.O. 14024 to prohibit transactions and dealings by U.S. persons or within the United States in new debt of longer than 14 days maturity and new equity of 13 major Russian firms that operate in the financial services sector and other sectors that are determined to be critical for the Russian economy.
Directive 3 under E.O. 14024 prohibits all transactions in, provision of financing for, and other dealings in new debt of longer than 14 days or new equity where such new debt or new equity is issued on or after 12:01 a.m. eastern daylight time on March 26, 2022 U.S. Persons, except to the extent provided by law, or unless licensed or otherwise authorized by OFAC.
The following entities subject to the prohibitions of Directive 3 have been added to OFAC’s Non-SDN Menu-Based Sanctions List:
• Gazprom Neft
• Russian Agricultural Bank
• Russian Railways
• Credit Bank of Moscow
Prohibitions of Directive 3 apply to the entities listed above as well as entities 50% or more owned, directly or indirectly, individually or, in the aggregate, by one or more entities subject to the prohibitions.
OFAC provides definitions of “debt” and “equity” used in Directive 3:
• “Debt” includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper;
• “Equity” incudes stocks, share issuances, depositary receipts, and any other evidence of title or ownership.
Russia-related Sovereign Transactions Directive (Non-SDN Menu-Based List)
On 28 February 2022, OFAC has issued new Directive 4 under E.O. 14024 entitled “Prohibitions Related to Transactions Involving the Central Bank, the National Wealth Fund, and the Ministry of Finance of Russia”.
Pursuant to this Directive, U.S. persons are prohibited from engaging in any transaction involving the Central Bank, the National Wealth Fund, or the Ministry of Finance of Russia, including any transfer of assets to such entities or any foreign exchange transaction for or on behalf of such entities. All other activities with entities determined to be subject to the prohibitions of this Directive are permitted.
The entities determined to be subject to the prohibitions of this Directive are added to the OFAC’s Non-SDN Menu-Based Sanctions. Non-SDN Menu-Based Sanctions List includes entities to which certain sanctions apply. These sanctions are less than full blocking sanctions
According to OFAC’s press release, the decision to implement this action has been coordinated with its partners and allies on 26 February 2022. This decision aims to prevent the Central Bank of Russia from deploying its international reserves in ways that would undermine the impact of Western sanctions.
We also note that OFAC has expanded restrictions on dealings in Russia’s sovereign debt by issuing Directive 1a under E.O. 14024 on 22 February 2022. Pursuant to Directive 1a under E.O. 14024 as of 1 March 2022 prohibits a U.S. financial institution to participate in the secondary market for ruble or non-ruble denominated bonds issued after 1 March 2022 by the Central Bank, the National Wealth Fund, or the Ministry of Finance of Russia.
As mentioned earlier, US sanctions against Russia which target its financial sector have been supported by the European countries, the UK, Canada, Japan, etc.
The United States, the European Union, the United Kingdom, and Canada agreed to cut off some Russian banks from the SWIFT global payment system on Saturday 27 February 2022. On 28 February 2022, the US Government sanctioned the Central Bank of Russia. On Monday, the Russian currency lost 30% of its value following the news.
On 28 February 2022, President Putin signed a decree on Special Economic Measures in Connection with Unfriendly Actions by the US and its allies. The text of it was published on the website of the Kremlin. These countermeasures aim to protect Russian national interests. The decree applies to both Russian citizens and legal entities, and some of these measures are as follows:
• Within three business days from 28 February 2022, residents involved in cross-border commercial activity must sell 80% of the foreign currency received from foreign counterparties since 1 January 2022. This would particularly affect export of goods, providing services to foreign customers, and transfer of intellectual property rights abroad.
• Starting from 28 February 2022, residents involved in cross-border commercial activity must sell 80% of the foreign currency received from foreign counterparties on an ongoing basis within three business days of receipt of each transfer. Russia’s Central Bank is to issue a regulation on the mandatory sale of foreign currency by residents.
• Until 31 December 2022, any Russian public company is in general allowed to buy back its issued shares if all certain conditions are met.
Furthermore, on 1 March 2022, Reuters as well as other Russian media reported that Russia is planning to expand its countersanctions measures in response to sanctions imposed by the West. At a government meeting, Prime Minister Mikhail Mishustin suggested the imposition of temporary curbs on exit from Russian assets. Mishustin stated that this measure will ensure that businesses can make a considered decision not driven by political pressure.
Director, Corporate Intelligence
Regional Head for Corporate Intelligence | Europe Middle East & Africa
Analyst, Corporate Intelligence
Certified Global Sanctions Specialist
Tor Henning Knudsen
Legal & Forensic Services