Executive Summary
Our International Trade & Regulatory Group continues its
investigation of the ever-growing sanctions regimes imposed on
Russia since its invasion of Ukraine.
- Russian banks cut off from the SWIFT payment messaging
system - New U.S. export controls on Belarus and Russian oil refining
operations - DOJ creates KleptoCapture to enforce the sanctions
Since Russia first began its invasion of Ukraine on February 22,
2022, coordinated measures adopted by the United States and its
allies, such as in the form of economic sanctions and export
control restrictions, have accelerated to punish the Russian state
and ensure it or its military will not benefit from further Western
financing and advanced technology.
As discussed in advisories published on February 24 and February 28, the United States in the first
two “tranches” imposed measures such as: (1) isolating
Russian banks from the U.S. financial system by executing partial
and full blocking sanctions on some of the largest Russian banks,
such as Sberbank, VTB Bank, and VEB; (2) restricting U.S. exports
and the transfer of technology through the application of new
Foreign Direct Product Rules (FDPR) against Russian importers and
the Russian military; and (3) further reducing the Russian
Federation’s ability to raise funds via Western financing by
restricting certain debt and equity transactions involving U.S.
persons as well as prohibiting transactions by U.S. financial
institutions involving Russian sovereign debt on the secondary
market. Additionally, the United States and other countries
sanctioned Russian government officials and elites, including
President Vladimir Putin. So far, more than 30 countries,
representing half the global economy, have announced some form of
sanctions or export controls on Russia.
As the fighting in Ukraine continues and civilian casualties
grow, the United States on March 2, 2022, in coordination with its
allies, announced additional measures against
Russia as well as new sanctions against Belarus for its support of
Russian operations in Ukraine. These new sanctions and export
controls highlight the need for companies with connections to
either Russia or Belarus to be monitoring changes in real time and
to prospectively develop plans to pivot rapidly should new
sanctions impact existing business activities. Companies continuing
to do business in or with Russia must be vigilant in ensuring their
compliance program takes these new restrictions into
consideration.
SWIFT Cutoff
On March 2, 2022, the EU announced that seven important Russian
banks would be denied access to the SWIFT payment messaging system,
which links more than 11,000 banks and other financial
organizations in more than 200 countries and territories. This
comes after much negotiation within the EU and with allied nations
in deciding which Russian banks to include within such a ban, while
taking into account financial transactions for crucial Russian
energy shipments to Europe. The seven Russian banks to be
disconnected from SWIFT have been subject in previous tranches to
various multinational sanctions: Otkritie, Novikombank,
Promsvyazbank, Bank Rossiya, Sovcombank, VEB, and VTB BANK.
Noticeably absent from the ban are Sberbank and Gazprombank, both
important banks to the Russian economy, but also significant
because their continued presence on SWIFT will allow for the
processing of payments for Russian energy exports. SWIFT announced that the ban would take effect
on March 12, 2022.
While the SWIFT system does not itself move money between banks,
it is viewed by financial institutions as a critical part of the
global payment system infrastructure due to its integration with
banks across the globe. While there are some alternative methods of
communicating and effecting cross-border payments between banks,
they are far less commonly accepted and generally require greater
time and effort on the part of financial systems. The immediate
impact of the SWIFT cutoff is therefore likely to be that the banks
that are cut off will be largely cut off from the ability to
process cross-border payments in all currencies. It will remain to
be seen whether any major non-Russian banks will seek to facilitate
payments via alternative means or whether the majority of Russian
cross-border banking will move to Sberbank and Gazprombank and
other Russian banks not subject to full blocking sanctions and not
included on the list of banks being cut off from SWIFT.
Financial institutions around the world will necessarily be
scrambling to evaluate and mitigate the business and operational
challenges that will arise when the SWIFT cutoff begins. Companies
doing business in Russia should likewise evaluate their connections
with the identified banks and determine whether risk mitigation is
necessary.
New U.S. Export Controls on Belarus; Corrections to February 24
Rule
The U.S. Department of Commerce Bureau of Industry and Security
(BIS), also acting on March 2, 2022, imposed additional U.S. export
restrictions on Belarus similar to those imposed on Russia in the
second tranche of sanctions. These controls extend the new Russia
FDPR and Russia Military End User (MEU) FDPR to Belarus. This
expansion of export controls is an apparent attempt to curtail
access to advanced technology in multiple sectors important to both
nations, such as the defense, aerospace, and high-tech commercial
sectors. The controls will also limit the Russian and Belarusian
militaries’ access to the advanced technology needed for
technological innovations. Similar export restrictions announced by
the European Union would effectively ban the majority of exports from Belarus into the
EU. Additionally, 91 entities across 10 countries that were found
to provide support to the Russian security services, military, and
defense sectors were also added to Commerce’s Entity List,
further restricting their access to U.S. exports.
In the same rule, BIS made certain corrections to the earlier
February 24 rule imposed on Russia. Specifically, BIS removed the
exclusion that was previously available for transactions involving
5A992 and 5D992 items to certain Russian military end-users.
These changes highlight the need for companies with potentially
controlled items to evaluate their exposure to the Russian market
and determine whether additional export control compliance measures
may need to be implemented.
New U.S. Export Controls on Russian Oil Refining
Operations
On March 4 ,2022, BIS issued an additional round of new export controls,
with similar controls meted out by the allies, that restrict the
export, reexport, or in-country transfer of certain commodities and
technology that are necessary for oil refining. These additional
controls, which build on oil and gas industry controls first
enacted in 2014, will severely affect the modernization of Russian
oil refineries and reduce a crucial revenue source for the Russian
state. These new export controls align with similar restrictions on
oil refinery technology previously announced by the European Union.
However, because Russia is a leading energy supplier, to ensure a
steady flow of crude oil to the global market, the United States,
as well as allies, allowed American banks through a general license released during the second
tranche of measures to continue processing payments related to
energy, from production to consumption, from Russian sanctioned
financial institutions, such as Sberbank and VTB Bank, until 12:01
a.m. eastern daylight time, June 24, 2022.
Further Blocking Sanctions of Russian Oligarchs and Defense
Companies
The U.S. Department of the Treasury imposed sanctions on
additional Russian oligarchs and their family members connected to
Putin, such as the wife and children of Putin confidante Yevgeny
Prighozin, with allies taking similar actions. Notably, Alisher
Usmanov, reportedly the 99th wealthiest person in the world, was among
those recently sanctioned. However, a general license released by Treasury
allows U.S. persons to continue doing business with companies 50%
or more owned by Usmanov, unless those companies themselves are
also sanctioned by Treasury. In addition, 26 Russia- and
Ukraine-based individuals and seven Russian entities connected to
Russian intelligence organizations were also sanctioned due to
their activities in disinformation and influencing operations on
topics such as the Ukrainian government and the COVID-19 pandemic.
On March 3, 2022, the U.S. Department of State, acting in
coordination with Treasury, designated 22 Russian defense-related
entities that have directly contributed to Russian hostilities in
Ukraine through their material and services. OFAC added these
entities to the Specially Designated National (SDN) List, and U.S.
persons and entities will now be prohibited from virtually all
dealings with these entities and any entities that are 50 percent
or more owned, directly or indirectly, in the aggregate by such
entities.
DOJ Operation KleptoCapture
On March 2, 2022, the U.S. Department of Justice announced the launch of a task force to
enforce the sweeping sanctions and export controls against Russian
entities and individuals, many of which have only been in place for
a week. The standing up of this interagency task force, called
“KleptoCapture,” is unprecedented—the U.S.
government usually allows for a period of adjustment with such
changes before it starts enforcement investigations.
KleptoCapture’s formation so soon after the first two tranches
of economic sanctions signals that the Biden Administration
believes these measures are critical to national security and
confirms the Administration’s dedication to tracing and seizing
the assets of designated Russian individuals and entities, a
process that is extremely complex and resource-intensive.
With the establishment of the KleptoCapture task force, U.S.
financial institutions and U.S. companies more generally should
expect an increase in law enforcement requests and subpoenas as the
U.S. government seeks to untangle the web of Russian SDN ownership
of assets around the world. The task force will also undoubtedly
focus on confirming that U.S. persons and entities are complying
with the new Russia sanctions and prosecuting those that seek to
circumvent sanctions.
The U.S. task force mirrors the establishment of similar task
forces in other allied nations, suggesting that the United States
and its allies intend to conduct their investigations in
concert.
DOT and FAA Airspace Restrictions
On March 2, 2022, the U.S. Department of Transportation, and its
Federal Aviation Administration, issued orders, in the form of
a Notice to Air Missions, denying Russian
aircraft from entering or using U.S. airspace. Similar prohibitions
were previously announced by Canada, the EU, and the UK. In total,
the United States joins over 30 countries in barring Russian
aircraft from their airspace. Russia has also imposed reciprocal
bans on these countries. As a result, these bans will require
emplaced aircraft, such as those flying routes from Europe to Asia,
to take indirect routes to avoid prohibited airspace, resulting in
longer flight times and added fees.
Russian (Counter) Blocking Sanctions
In response to the multilateral sanctions imposed on Russia by
the United States, EU, UK, and several other countries, Russia has
announced its intent to enact counter sanctions. On February 28,
2022, Putin issued “Decree 79,” “On the Application
of Special Economic Measures in Connection with the Unfriendly
Actions of the United States of America and Foreign States and
International Organizations Who Have Joined the United States of
America.” These measures will require Russian residents to
sell 80% of foreign currency received under contracts with foreign
persons. On the following day, Putin issued Decree 81, which is
intended to require Russian government approval for certain
transactions with “unfriendly countries,” including
providing loans to foreign persons and transactions that would give
rise to a property right to securities or real estate in
Russia.
As these counter sanctions measures are relatively new, it is
not clear what enforcement will look like. Historically, we have
seen companies devise strategies to balance competing compliance
obligations in the face of other blocking measures, though the
Russian legal system is less reliable than others. Companies that
continue to operate in Russia need to be aware of these measures
and continually evolving political risk.
Conclusion
The current situation remains very fluid. The United States, EU,
UK, and other nations continue to impose new measures on an almost
daily basis. Companies should be prepared to adjust accordingly to
ensure compliance during this extraordinary time.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
