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| George Wang |
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| Abram Ellis |
These new sanctions are extensive and have forced businesses with exposure to the region, or to Russian individuals or companies, to react rapidly. Companies have had a matter of days, sometimes even less, to monitor and understand the rapidly changing regulatory environment, evaluate their risk profile and compliance with applicable law, and adjust operations accordingly.
The extensive nature of the new sanctions has prompted a growing number of companies around the world to announce they will be limiting, suspending or fully exiting their Russia operations. Businesses so announcing include such household names as American Express Co., Apple Inc., The Boeing Co., The Goldman Sachs Group Inc., McDonald's Corp., Netflix Inc., Shell PLC, Starbucks Corp. and Visa Inc. Many of these firms have taken this initiative, even when not legally required to do so.
All of this has led to an increasingly ostracized Russia, precisely the goal of sanctions.
To understand and stay compliant with the tightening restrictions on dealings with Russia, businesses will logically analyze all of their Russian touch points. Potential touch points run the gamut. They include big obvious ones, such as having a Moscow office or direct sales to Russia. But many companies have also had to analyze both legal compliance and the business wisdom of continuing a wide assortment of less direct dealings with Russia.
Examples include:
- Whether goods made in a third country, based in part on U.S. technology, can be exported to Russia;
- Whether a company can or should continue to provide warranty services for products previously sold to Russia, and how to address contractual warranty obligations;
- Evaluating alternative means of transmitting funds to satisfy an existing debt where the Russian recipient's bank is now sanctioned;
- Whether to continue business with a counterparty that is not on any sanctions list, but that operates through entities in a third country, such as Cyprus, with historical connections to Russia;
- Whether to continue to receive services from Russian-based independent contractors;
- Whether to provide software updates to a Russian customer;
- What to do where a counterparty or investor is 49.99% owned by sanctioned Russians; and
- The permissibility of making loan payments to a lending syndicate where one or more participating bank is now the target of sanctions.
Companies, of course, have to analyze the legality and risk associated with their current or potential dealings with Russia and Russian touch points. But they also have to design and implement policies and procedures that will enable them going forward to ensure continued compliance in light of the array of new regulations.
New U.S. Economic Sanctions
The Office of Foreign Assets Control of the U.S. Department of the Treasury is one of the governmental agencies leading the charge on responding to the Ukraine crisis with economic sanctions. OFAC has principal responsibility for administering and enforcing U.S. economic and trade sanctions, based on U.S. foreign policy and national security goals, against targeted foreign countries and regimes. We describe below key aspects of the new economic sanctions administered by OFAC.
Blocking and Other Sanctions Targeting Designated Persons and Entities
Disconnecting Russian Financial Institutions
In an effort to deliver a blow to the Russian financial system, the U.S. government has sanctioned many of Russia's largest financial institutions.
In particular, OFAC has placed the following institutions on its list of specially designated nationals, or SDNs, and blocked persons: Novikombank, Bank Otkritie, Promsvyazbank, Sovcombank, Vnesheconombank, VTB Bank and all of their subsidiaries. U.S. companies and persons are strictly forbidden from doing business with these institutions, absent authorization from OFAC. All assets of these SDNs under U.S. jurisdiction are frozen.
Even foreign companies must pay attention to these sanctions because even foreign persons may be sanctioned if they materially assist, sponsor, or provide financial, material, or technological support for, or goods or services to, any Russian SDN financial institutions.
The U.S. has also endeavored to cut off Russia's access to U.S. dollars. Toward that end, the U.S. has sanctioned Sberbank, one of Russia's largest banks. U.S. financial institutions are now barred from providing U.S. dollar correspondent or payable-through account sanctions to Sberbank. This sanction effectively ends Sberbank's ability to engage in U.S. dollar transactions.
The U.S. has also prohibited the export of U.S. dollar bank notes from the U.S. or by a U.S. person to the Russian government or anyone in Russia.
The U.S. has also worked with several European governments to disconnect several Russian and Belarusian banks from the Society for Worldwide Interbank Financial Telecommunications, or SWIFT, system — the global financial messaging system that enables financial institutions to securely transfer funds. Removal from the SWIFT network will seriously hinder these financial institutions' ability to make international payments and transfers.
Major credit card operators such as Visa, MasterCard Inc. and American Express have also suspended their operations in Russia and Belarus, further restricting financial transactions in those countries.
Taken together, these sanctions and actions make it increasingly difficult to make payments to or from Russia. Any company transacting business in Russia may now encounter serious practical challenges in effecting transfers to and from Russia, particularly in U.S. dollars, as well as other reserve currencies such as pounds and euros.
While some companies have identified alternative banks in Russia through which U.S. dollar transactions can be made, some companies have discontinued or are winding down operations in Russia due to operational difficulties.
Others are exploring alternative payment methods such as bitcoin, although there are risks with such methods. Companies, for example, need to be mindful that the U.S. government has been quick to warn against sanctions evasions risk. On March 8, for example, the Treasury's Financial Crimes Enforcement Network issued an alert to financial institutions underscoring the risk of sanctions evasions and outlining red flags to be considered in identifying such evasion.
Russian State Instrumentalities
OFAC has issued a directive prohibiting U.S. persons from engaging in any transaction involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation and the Ministry of Finance of the Russian Federation, unless authorized.
This effectively cuts off the Russian government from foreign reserves held at U.S. banks, and potentially even overseas banks. This prohibition will make many dealings with the Russian state more challenging for businesses, although some routine transactions are temporarily authorized.
New Debt and Equity of Major Russian Companies
The U.S. government also prohibited dealings in new debt and equity of over a dozen major Russian companies including Alfa Bank and Gazprom.
Sanctions Against Belarus' Defense Sector and Financial Institutions
The U.S. has also designated two Belarusian state-owned banks and several state-owned and privately owned defense and security-related entities as SDNs for their support of Russia's invasion of Ukraine.
Territorial Sanctions
Executive Order No. 14065 effectively bars dealings by U.S. persons with the Donetsk People's Republic and the Luhansk People's Republic. From a practical standpoint, U.S. persons should now treat the DNR and LNR as comprehensively embargoed territories, similar to the current treatment of Iran and North Korea, for example.
Foreign persons operating in the DNR or LNR territories may also be subject to sanctions in some instances where there is some other U.S. nexus to the transaction, such as when the transaction is facilitated by a U.S. person or denominated in U.S. dollars. The executive order also provides that foreign persons may be sanctioned for operating in the two territories.
The targeted geographical regions in Ukraine could expand over time if the Russian attack on Ukraine continues to expand.
Sanctions Against Russia's Oil and Natural Gas Industries
On March 8, the U.S. banned the import of Russian-origin oil, liquefied natural gas and coal. U.S. persons are also prohibited from making new investments in Russia's energy sector and from approving, financing or facilitating transactions by foreign persons that would be prohibited for U.S. persons, or from taking other actions to evade these restrictions.
Blocking sanctions have also been issued against Nord Stream 2 AG, a Swiss firm whose parent company is the Russian state-owned Gazprom, and its CEO.
U.S. Export Controls
The U.S. Department of Commerce's Bureau of Industry and Security has imposed significant and broad new restrictions on exports to Russia, Belarus, DNR, LNR, Crimea and end users in those areas, and also on exports to companies in the Russian defense, aerospace and maritime sectors.
These sanctions collectively are intended to cause pain on the Russian government and strain on the Russian economy. According to the U.S. government, the new export controls "will cut off more than half of Russia's high-tech imports, restricting Russia's access to vital technological inputs, atrophying its industrial base, and undercutting Russia's strategic ambitions to exert influence on the world stage."
Under the Export Administration Regulations, BIS exercises jurisdiction over certain items and the U.S. government's jurisdiction travels with these items. In broad terms, all items in the U.S., all U.S.-origin items and certain foreign-made commodities that incorporate, are bundled with or are the direct product of controlled U.S.-origin commodities are considered subject to the EAR.
The new export controls apply to a range of items subject to the EAR and to certain foreign-made items derived from certain U.S. technologies. These developments in U.S. export controls, therefore, may have relevance to both U.S. and foreign businesses.
BIS has tightened its export controls across a number of areas.
The U.S. government has effectively barred the export of all items subject to the EAR to the DNR and LNR, with very narrow exceptions.
The U.S. effectively barred the export of most dual-use items that can be used for both civilian and military purposes to Russia and Belarus. While it is technically possible to apply for a license, any such application will be presumptively denied.
The U.S. has also restricted the export of luxury goods to Russia, a measure on its face designed to target Russian oligarchs and elites.
BIS has expanded its jurisdiction over some items made outside of the U.S. through two new foreign direct product rules.
U.K., EU and Other Sanctions
Like the U.S., the U.K. and EU have each imposed hefty sanctions targeting Russia. While there are differences across the regimes, there has been increasing convergence over time. The U.K. has, among other things, sanctioned a number of companies and imposed asset freezes and travel restrictions on more than a hundred high-net-worth individuals and entities.
The EU, too, has frozen the assets of hundreds of individuals and entities associated with the Russian elite and major Russian financial institutions, including notable asset freezes targeting members of the Russian State Duma for voting in favor of recognition of the DNR and LNR. The EU has imposed a variety of other prohibitions and restrictions as well.
Both the U.K. and EU have also implemented export controls, among other things, prohibiting the export of dual-use goods and technologies to Russia.
Many other countries — including Australia, Canada, Japan, New Zealand, South Korea and Switzerland — have announced parallel sanctions against Russian elites and financial institutions. These sanctions include asset freezes, limitations on financial transactions and restrictions on trading in securities of designated entities.
Continued Impact for Companies
U.S., U.K., EU and other partner nations' sanctions regimes continue to develop rapidly in response to continued Russian aggression in Ukraine. Additionally, many private-sector entities are preemptively suspending operations in Russia, Belarus and portions of Ukraine for a combination of prudential and moral concerns with operating in those jurisdictions.
Companies and individuals with ongoing businesses, partners and relationships in the region can expect continued disruptions to payment and transactions systems, and should be prepared for increased diligence and compliance requirements as these sanctions and export control requirements become effective and continue to expand.
George Wang and Abram Ellis are partners at Simpson Thacher & Bartlett LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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