Biden Administration Issues Second Set of Sanctions on Russia Broadly Targeting the Financial and High-Tech Sectors

The Biden Administration has issued a second set of economic sanctions against the Russian Federation in response to Russia’s full-scale invasion of Ukraine. The United States, in coordination with its allies and partners including the European Union and the United Kingdom, have responded with a broad set of economic sanctions and export controls targeting Russia. These measures follow the initial tranche of sanctions imposed on February 22, 2022 following Russia’s entry into the Donetsk and Luhansk regions of Ukraine, discussed in our previous alert. 

The newly imposed economic sanctions primarily target the Russian financial sector in an effort to restrict access to the U.S. financial system. These include blocking sanctions and asset freezes on major Russian banks, and restrictions on Sberbank, Russia’s largest financial institution, from engaging in transactions with U.S. financial institutions. The sanctions also prohibit transactions in equity and debt of 13 major Russian companies, which are intended to restrict those companies’ ability to raise capital but also impose restrictions on extensions of credit including through commercial payment terms.  

In addition, the Biden Administration has implemented new export controls targeting Russian access to products and technology related to microelectronics, telecommunications, sensors, navigation equipment, avionics, marine equipment, and aircraft components. The export controls include an expanded “foreign direct product” rule that allows the U.S. Commerce Department to control the export to Russia of many high tech items produced outside the United States if they are produced using U.S. software, technology, or equipment.

The economic sanctions targeting the Russian financial sector will impact not only the designated Russian financial institutions but will also restrict the ability of companies and individuals in Russia that use them to engage in international transactions and global trade. The export controls primarily target Russia’s defense, maritime, and aerospace sectors from key technological inputs, but do not restrict exports of most consumer items used by the Russian people.

For now, other major sectors of the Russian economy have not been broadly targeted. Most notably, the energy sector is not a focus of this set of sanctions, though it was a major target following Russia’s invasion of Crimea in 2014 and thereafter. However, the situation in Ukraine continues to develop and additional economic sanctions and other measures may be forthcoming in response to continued Russian aggression.

Financial Sector Sanctions

The primary focus of this new round of sanctions is the Russian financial sector, and include the imposition of full blocking sanctions, correspondent and payable-through account sanctions, and new debt and equity restrictions.

A. Blocking Sanctions on Financial Institutions

Blocking sanctions freeze assets under U.S. control of designated entities and prohibit U.S. persons from engaging in transactions, directly and indirectly, with designees.

The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) imposed blocking sanctions on four Russian banks and a number of their subsidiaries: (1) VTB Bank Public Joint Stock Company (“VTB”), (2) Bank Otkritie, (3) Sovcombank OJSC, and (4) Novikombank.

As a result of these sanctions, the U.S. assets of these banks are blocked and U.S. persons are prohibited from engaging in transactions with the banks, their designated subsidiaries, and any entity owned 50% or more by them.

To account for ongoing U.S. business with these banks, OFAC issued a general license authorizing U.S. persons to engage in transactions to wind down their existing business activities with VTB,

Otkritie, and Sovcombank through March 25, 2022.

B. Correspondent and Payable-Through Account Sanctions Against Sberbank

OFAC issued Directive 2 (“CAPTA Directive”) under E.O. 14024, which prohibits U.S. financial institutions from opening or maintaining correspondent or payable-through accounts for or on behalf of foreign financial institutions designated under the CAPTA Directive. In addition, the CAPTA Directive prohibits U.S. financial institutions from processing transactions involving designated foreign financial institutions.

Pursuant to the CAPTA Directive, OFAC designated Sberbank and 25 of its subsidiaries, including banks, trusts, and insurance companies both inside and outside Russia. OFAC’s 50% Rule also applies to the CAPTA Directive, which means that any entity owned 50% or more by Sberbank or its 25 designated subsidiaries is also subject to the CAPTA Directive restrictions. 

As a result, all U.S. financial institutions are required to close any correspondent or payable-through accounts and to reject any future transactions involving Sberbank or its subsidiaries as of March 26, 2022. 

C. Debt and Equity Restrictions

OFAC issued Directive 3 (“Russia-related Entities Directive”) under E.O. 14024, which prohibits U.S. persons from engaging in transactions in new debt of longer than 14 days maturity and new equity of designated Russian entities. “Debt” includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper. “Equity” includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership. 

The prohibitions of the Russia-related Entities Directive are effective as of March 26, 2022 and the initial set of 13 designated entities are: Sberbank, Gazprombank, Russian Agricultural Bank, Gazprom, Gazprom Neft, Transneft, Rostelecom, RusHydro, Alrosa, Sovcomflot, Russian Railways, Alfa-Bank, and Credit Bank of Moscow. Entities owned 50% or more by these 13 companies are also subject to the debt and equity restrictions.

As a result, U.S. companies cannot extend payment terms to these entities beyond 14 days.

Additional Blocking Sanctions

In addition to the sanctions targeting the Russian financial sector, the Biden Administration imposed sanctions on Russian oligarchs and Russian elites as well as Belarusian individuals and companies because of Belarus’ support of Russia’s actions against Ukraine. 

OFAC added the following individuals to the Specially Designated National and Blocked Persons List for their participation in, or benefit from, “the Russian regime’s kleptocracy, along with their family members” and extravagant standard of living: (1) Sergei Sergeevich Ivanov, CEO of Russian state-owned diamond mining company Alrosa, board member of Gazprombank and son of Sergei Borisovich Ivanov, who is the Special Presidential Representative for Environmental Protection, Ecology, and Transport and previous Chief of Staff of the Presidential Executive Office, Deputy Prime Minister, and Defense Minister of Russia; (2) Andrey Patrushev, who served in leadership at Gazprom Neft, is employed in Russia’s energy sector, and is son of Nikolai Patrushev, Secretary of the Russian Federation Security Council; (3) Ivan Igorevich Sechin, reported deputy head of a Rosneft department and son of Igor Ivanovich Sechin, who is CEO, Chairman of the Management Board, and Deputy Chairman of the Board of Directors of Rosneft; (4) Alexander Vedyakhin, First Deputy Chairman of the Executive Board of Sberbank; (5) Andrey Puchkov, high-ranking VTB Bank executive; (6) Yuriy Soloviev, high-ranking VTB Bank executive; (7) Galina Ulyutina, Soloviev’s wife.

OFAC also sanctioned 24 Belarusian individuals and entities including state-owned banks, defense and security industry firms, and defense officials and regime-connected elites. 

Export Controls

Concurrent with the economic sanctions imposed by OFAC, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) issued new regulations imposing restrictions on the export of certain goods and technology to Russia, many of which Russia cannot produce itself. These items include semiconductors, computers, telecom equipment, information security equipment, lasers, and sensors that are relied on by the Russian defense, maritime, and aerospace industries. Under the new regulations, the items above will now require licenses from BIS for export to Russia, which will be reviewed under a policy of denial. 

BIS also created a new “foreign direct product” rule that extends U.S. jurisdiction and related controls to certain foreign-produced items that are based on U.S.-origin technology destined for Russia. These expanded rules are modeled on measures that target Huawei and will enable the United States to restrict Russia from accessing high-tech products like semiconductors because of the prevalence of U.S.-origin software, technology, and equipment used in the manufacture of those items.

These measures are intended to target Russia’s military and defense capabilities and the United States is coordinating its actions with its allies and partners in Australia, Canada, the European Union, Japan, New Zealand, and the United Kingdom. The export controls generally do not impose restrictions on consumer goods used by the Russian people.

Implications

These economic sanctions and export controls are broader than the United States has previously imposed on Russia, but continue to follow a targeted approach focusing on specific sectors of the Russian economy and access to foreign capital. The United States thus far has refrained from imposing comprehensive sanctions and will continue to coordinate with its allies as further sanctions are considered, including reported sanctions targeting President Putin.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Greta Lichtenbaum, an O’Melveny partner licensed to practice law in the District of Columbia, David J. Ribner, an O’Melveny counsel licensed to practice law in the District of Columbia and New York, and Dillon Roseen, an O’Melveny law clerk, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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