On February 21, 2022, President Biden issued a new executive order targeting the breakaway regions known as the Donetsk People’s Republic (“DNR”) and Luhansk People’s Republic (“LPR”, and together with the DNR, the “Covered Regions”) in eastern Ukraine. On February 22, 2022, President Biden announced further sanctions, specifically designating two major Russian banks and three close associates of Russian President Vladimir Putin, and imposed increased restrictions on dealings in Russia’s sovereign debt. On February 23, 2022, the EU adopted, a set of new Regulations and Decisions implementing asset freezes and travel bans notably against senior Russian officials and close associates of President Putin, financial restrictions limiting Russia’s access to the EU’s capital and financial markets, and trade restrictions targeting economic relations with the Covered Regions. The actions follow President Putin’s formal recognition of the independence of those breakaway regions and react to the continued involvement of Russian military forces.
New U.S. Sanctions
February 21, 2022 Executive Order
The February 21 executive order largely extends the existing restrictions on the Crimea region of Ukraine and applies them to the Covered Regions. In particular, the executive order prohibits:
-New investment in the Covered Regions;
-Importation into the U.S. of any goods, services, or technology originating in the Covered Regions;
-Exportation, reexportation, sale or supply from the United States or by a U.S. persons of any good, services or technology to the Covered Regions; and
-Any approval, financing, facilitation, or guarantee by a U.S. person of prohibited transactions.
The executive order further authorizes the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) to add to the Specially Designated Nationals (“SDN”) list any person determined by the Secretary of the Treasury, in consultation with the Secretary of State:
-To operate in the Covered Regions;
-To be a leader, official, senior executive officer, or member of the board of directors of an entity operating in the Covered Regions;
-To be owned or controlled or acting on behalf of any person blocked under the executive order; or
-To have materially assisted or supported any person blocked under the executive order.
However, although some individuals in the Covered Regions have been previously designated under the Crimea-related authorities, no person has been designated yet under the executive order as of the date of this alert.
Simultaneously with the issuance of the executive order, OFAC issued six general licenses to permit otherwise prohibited activity in the Covered Regions. Most significantly, General License 17 authorizes all transactions that are ordinarily incident and necessary to the winddown of transactions in the Covered Region until March 23, 2022. Note, however, that a specific license from OFAC would still be required for any transactions with an SDN designated under the executive order. The other five general licenses authorize the following activity:
–General License 18– authorizing the export or reexport to the Covered Regions of certain agricultural, medical, and COVID-19 related products and services;
–General License 19– authorizing transactions that are ordinarily incident and necessary to the receipt or transmission of telecommunications in the Covered Regions;
–General License 20– authorizing transactions by the United Nations and other specified non-governmental organizations;
–General License 21– authorizing transactions related to non-commercial, personal remittances to the Covered Regions; and
–General License 22– authorizing transactions related to the exportation of services or software from the United States or by U.S. persons that are incident to the exchange of personal communications over the internet, such as instant messaging, chat and email, social networking, sharing of photos and movies, web browsing, and blogging.
One key question following the issuance of the executive order is how the specific territories of the Covered Regions will be determined. This may be particularly challenging, given the shifting borders of the DNR and LPR throughout their prolonged conflict with the Ukrainian government. We anticipate that OFAC will seek to clarify this question through the guidance in the form of responses to “Frequently Asked Questions” in the coming days.
February 22, 2022 Actions
On February 22, 2022, in a speech in which President Biden stated that “Russia has now undeniably moved against Ukraine,” he announced “the first tranche of sanctions to impose costs on Russia,” promising to “continue to escalate sanctions if Russia escalates.” Subsequently, OFAC issued a press release detailing the specific actions, all of which were taken pursuant to the existing Executive Order 14024, which included the designation of two major Russian banks and three close associates of President Putin as SDNs as well as restrictions on transactions involving Russian sovereign debt.
Specifically, the two Russian banks targeted are the Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (“VEB”) and Promsvyazbank Public Joint Stock Company (“PSB”), along with 42 of their subsidiaries. The designations were made pursuant to a contemporaneous determination issued by Treasury Secretary Janet Yellen that Russian financial institutions are eligible for sanctions under Executive Order 14024 (previously, determinations had also been made on April 15, 2021, with respect to the technology sector and defense sectors). Both banks are state-owned institutions and play key roles in servicing Russia’s sovereign debt and defense contracts. Further, in connection with PSB’s designation, OFAC designated the following five Russian-flagged vessels in which PSB has an interest:
-Baltic Leader (IMO: 9220639), a cargo vessel;
-Linda (IMO: 9256858), a crude oil tanker;
-Pegas (IMO: 9256860), a crude oil tanker;
-Fesco Magadan (IMO: 9287699), a container ship; and
-Fesco Moneron (IMO: 9277412), a container ship.
In addition, three close associates to President Putin – including the Chairman and CEO of PSB and two sons of previously designated oligarchs – were added to the SDN list. As a result of these designations, U.S. persons are prohibited from virtually all transactions with the listed parties or entities of which they own fifty percent or more, directly or indirectly. In addition, “significant” transactions with these entities could create secondary sanctions liability under Section 228 of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”).
OFAC also issued a new Directive 1A under Executive Order 14024, which replaces the prior Directive 1. The effect of the new Directive 1A is to expand existing sovereign debt prohibitions to cover participation in the secondary market for 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. Specifically, Directive 1 previously prohibited U.S. financial institutions from, as of June 14, 2021, participating in the primary market for bonds issued by Russia’s Central Bank, National Wealth Fund or Ministry of Finance, or lending funds to those organizations. Directive 1A keeps those prohibitions in place, and additionally prohibits U.S. financial institutions – effective March 1, 2022 – from participating in the secondary market for bonds issued by the listed organizations. Note that OFAC clarified in FAQ guidance that the fifty percent rule does not apply to Directive 1A so that entities owned by the institutions identified in Directive 1A are not themselves automatically subject to the restrictions.
In conjunction with these restrictions, OFAC also issued General License 2, which authorizes transactions involving the servicing of bonds issued by VEB prior to March 1, 2022, and General License 3, which authorizes a winddown period with respect to VEB through March 24, 2022. No similar general license has been issued yet regarding transactions involving PSB.
Potential Further Action
The Biden Administration has also implied that additional multi-lateral sanctions could be forthcoming, indicating an incremental approach. A Fact Sheet issued in conjunction with the February 21, 2022 executive order explained that the executive order “is distinct from the swift and severe economic measures we are prepared to issue with Allies and partners in response to a further Russian invasion of Ukraine. We are continuing to closely consult with Ukraine and with Allies and partners on next steps and urge Russia to immediately deescalate.” As also noted above, President Biden characterized the February 22, 2022 actions as the “first tranche” of sanctions and kept open the possibility for “escalation” depending on how Russia responds. An embargo on semiconductors and advanced technology has reportedly been considered as part of a second tranche of actions if Russia escalates or continues its incursion further into Ukraine.
New EU Sanctions
February 21, 2022 Designations
On February 21, the Council of the European Union (“EU”) imposed travel bans and asset freezes (including a prohibition to make funds or economic resources available) on five new individuals “for actively supporting actions and implementing policies that undermine or threaten the territorial integrity, sovereignty and independence of Ukraine,” bringing the total number of designated parties to 193 individuals and 48 entities on the EU’s list of parties subject to Ukraine-related sanctions.
The new designations include members of the State Duma of the Russian Federation, who were elected to represent the annexed Crimean peninsula and the City of Sevastopol on 19 September 2021, as well as the head and deputy head of the Sevastopol electoral commission.
February 22-23, 2022 Actions
On February 22, the Presidents of the European Council and European Commission jointly announced that an additional package of restrictive measures will be swiftly adopted by the EU in reaction to Russia’s latest aggression against Ukraine, which the EU sees as “illegal and unacceptable” under the Minsk Agreements, which stipulate the full return of the Covered Regions to the control of the Ukrainian government.
The same day, Josep Borrell, the High Representative of the Union for Foreign Affairs and Security Policy, urged Russia “to reverse the recognition, uphold its commitments, abide by international law and return to the discussions within the Normandy format and the Trilateral Contact Group.” Borrell later announced in a joint press conference with French Minister for Europe and Foreign Affairs Jean-Yves Le Drian that the 27 Member States had unanimously agreed on a new package of sanctions.
The new package has been swiftly adopted and published in the Official Journal of the EU on February 23 through 4 Council Decisions and 5 Regulations amending EU’s current sanctions program targeting Russia progressively strengthened since 2014, which already included:
-Individual restrictive measures consisting of travel bans and assets freezes on designated individuals and entities;
-Comprehensive restrictions on economic relations with Crimea and Sevastopol, including (i) an import ban on goods from Crimea and Sevastopol, (ii) restrictions on trade and investment related to certain economic sectors and infrastructure projects, (iii) a prohibition to supply tourism services in Crimea or Sevastopol, and (iv) an export ban for certain goods and technologies;
-An import and export ban on trade in arms as well as an export ban for dual-use items for military end-users or end-use in Russia;
-Financial restrictions limiting access to EU primary and secondary capital markets for certain Russian banks and companies;
-Economic restrictions limiting Russia’s access to sensitive technologies and services that can be used for oil production and exploration.
As announced, the new package of sanctions is quite wide-ranging and intended to “hurt [Russia] a lot” in the words of High Representative Borrell.
First, the legal acts of February 23 (Council Implementing Regulation (EU) 2022/260 and 2022/261 ; Council Decision (CFSP) 2022/267) formally designate individuals and entities which will be subject to individual restrictive measures, namely a travel ban and an asset freeze, in the Union. The new designations target:
-336 members of the Russian State Duma who voted for the recognition of the two self-proclaimed republics; and
-22 decision-makers involved in the illegal decision in addition to 4 entities (Internet Research Agency, Bank Rossiya, PROMSVYAZBANK and VEB) financially and materially supporting, or benefiting from them, those operating in the Russian defense sector and having played a role in the invasion such as senior military officers, as well as individuals engaging in a “disinformation war” against Ukraine.
The legal acts (Council Implementing Regulation (EU) 2022/259 ; Council Decision (CFSP) 2022/265) also provided for a derogation from the application of the new restrictive measures targeting Bank Rossiya, PROMSVYAZBANK and VEB. The competent authorities of a Member State may authorize the release of certain frozen funds or economic resources belonging to these Russian banks, or the making available of certain funds or economic resources to those entities, under such conditions as the competent authorities deem appropriate and after having determined that such funds or economic resources are necessary for the termination by August 24, 2022, of operations, contracts, or other agreements, including correspondent banking relations, concluded with those entities before February 23, 2022.
Moreover, further financial restrictions limiting Russia’s access to the EU’s capital and financial markets will now apply (Council Implementing Regulation (EU) 2022/262 ; Council Decision (CFSP) 2022/264) including notably:
-A prohibition to directly or indirectly purchase, sell, provide investment services for or assistance in the issuance of, or otherwise deal with transferable securities and money-market instruments issued after March 9, 2022 by Russia and its government, the Central Bank of Russia or any person or entity acting on behalf or at the direction of the said Central Bank;
-A prohibition to directly or indirectly make or be part of any arrangement to make any new loans or credit to the above-mentioned persons and entities;
-The current prohibitions applicable to securities giving the right to acquire or sell such transferable securities are extended to the securities giving rise to a cash settlement determined by reference to transferable securities.
Finally, the legal acts (Council Implementing Regulation (EU) 2022/263 ; Council Decision (CFSP) 2022/266) introduce extensive trade restrictions targeting economic relations with the Covered Regions of Donetsk and Luhansk, on the model of those already targeting Crimea and Sevastopol including:
-A prohibition to import goods from the Covered Regions into the EU and to provide, directly or indirectly, financing or financial assistance as well as insurance and reinsurance related to such imports;
-A prohibition to (i) acquire any new, or extend any existing participation in ownership of, real estate in or located in the Covered Regions, including the acquisition in full of such an entity or the acquisition of shares therein, and other securities of a participating nature of such an entity; (ii) grant or be part of any arrangement to grant any loan or credit or otherwise provide financing, including equity capital, to an entity in the Covered Regions, or for the documented purpose of financing such an entity; (iii) create any joint venture in the Covered Regions or with an entity in the Covered Regions; and (iv) provide investment services directly related to these prohibited activities;
-A prohibition to sell, supply, transfer or export goods and technology listed in Annex II suited for use in the transport, telecommunications, energy, oil and gas and mineral sectors, to (i) any natural or legal person, entity or body in the Covered Regions, or (ii) for use in the Covered Regions;
-A prohibition to provide, directly or indirectly, technical assistance or brokering services related to the goods and technology listed in Annex II, or related to the provision, manufacture, maintenance and use of such items to any natural or legal person, entity or body in the Covered Regions or for use in the Covered Regions;
-A prohibition to provide, directly or indirectly, financing or financial assistance related to the goods and technology listed in Annex II to any natural or legal person, entity or body in the Covered Regions or for use in the Covered Regions.
-A prohibition to provide technical assistance, or brokering, construction or engineering services directly relating to infrastructure in the specified territories in the mentioned sectors, independently of the origin of the goods and technology; and
-A prohibition to provide services directly related to tourism activities in the Covered Regions.
The new restrictive measures entered into force on February 23, the date of their publication in the Official Journal of the EU.
Potential Further Action
In reaction to the latest events, Olaf Scholz, Germany’s Chancellor, announced that Germany will halt the certification of Nord Stream 2, a gas pipeline designed to bring natural gas from Russia directly to Europe, a decision welcomed by both High Representative Borrell and President Ursula von der Leyen.
On February 23, 2022, President Biden announced that he would direct OFAC to sanction Nord Stream 2 AG – a wholly owned subsidiary of Gazprom, which is already subject to U.S. sectoral sanctions – and its corporate officers.
The EU had warned it will leave the door open to the adoption of more wide-ranging political and economic sanctions at a later stage should Russia use “the newly signed pacts with the self-proclaimed “republics” as a pretext for taking further military steps against Ukraine.” As President Putin declared war against Ukraine and escalated military action on February 24, President Michel of the European Council urgently convened an extraordinary meeting of the European Council. EU leaders intend to meet later today to discuss further restrictive measures that “will impose massive and severe consequences on Russia for its action, in close coordination with our transatlantic partners.”
The Member States will also keep a close eye on Belarus, which is said to have “aided and supported the Russian actions” in Ukraine, and the EU is ready to enlarge the listing criteria “to target those who provide support or benefit from the Russian government – the oligarchs, in plain language,” if needed.