Following the Russian Federation’s full-scale invasion of Ukraine in February 2022, the United States and its allies—most notably, the United Kingdom (“UK”) and the European Union (“EU”)—have imposed a series of progressively more punitive measures on the regime of Russian President Vladimir Putin for violating the territorial sovereignty of an independent nation.
Unprecedented in recent history, the sanctions imposed by these nations have been both closely coordinated and decisively implemented at a pace rarely seen in contemporary geopolitics.
Broadly speaking, the sanctions imposed on the Russian Federation have targeted industries deemed critical to sustaining Russia’s ability to wage continuous war in Ukraine. Affected entities include those operating in the Russian banking and finance sector, the defense and logistics space, and military research and development, as well as organizations with demonstrable ties to Russian oligarchs.
Sanctions activity has included both broad transactional prohibitions involving persons subject to the jurisdiction of the sanctioning government, as well as more narrow sanctions freezing the assets of individuals and institutions with close connections to the Russian government.
Sanctions Activity in the United States
Sanctions activity in the United States has largely taken the form of executive orders issued by President Biden and administrative action by the U.S. Department of the Treasury’s Office of Foreign Asset Control (“OFAC”) and the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”).
Recent action by OFAC has included the designation of hundreds of individuals and institutions complicit in Russia’s Ukraine excursion as Specially Designated Nationals and Blocked Persons (“SDNs”). Under U.S. law, all assets of SDNs in the possession of U.S. persons (broadly defined) are effectively blocked and U.S. persons are further prohibited from engaging in any transactions with the SDN in question.
Among the more recent notable additions to the SDN list include the daughters of President Putin—namely, Maria Vorontsova and Katerina Tikhonov—as well as the wife and daughter of Russian Foreign Minister Sergey Lavrov.
From an institutional perspective, OFAC has also used its SDN designation power against a vast network of leading Russian financial institutions including Russia’s largest publicly owned financial institution, Sberbank. Although originally subject only to correspondent and payable-through account (“CAPTA”) restrictions, Sberbank (and Alfabank, Russia’s largest privately-owned financial institution) became the subject of full blocking sanctions on April 6, 2022, in response to Russia’s continued defiance of international calls to halt its offensive military operations. In announcing the imposition of blocking sanctions, the Treasury Department specifically noted that it was targeting Sberbank as an institution “uniquely important to the Russian Federation economy, holding about a third of all bank assets in Russia.”
While the full practical effect of the blocking sanctions remains to be seen, it is highly probable that Sberbank and Alfabank’s ability to engage in international transactions will be considerably constrained. Moreover, the mere designation of the financial institutions as SDNs will cause even organizations not subject to U.S. sanctions regulations to pause and consider whether the risk of conducting business with Sberbank and Alfabank is outweighed by any potential pecuniary benefit the organization stands to realize.
In addition to blocking sanctions, the U.S. has also significantly expanded previously selective prohibitions on new investment in the Russian economy. Pursuant to Executive Order 14071 issued on April 6, 2022, U.S. persons—“wherever located”—are now generally prohibited from partaking in any “new investment” involving the Russian Federation. While OFAC has not identified the precise contours of the new investment prohibition within the context of additional regulatory guidance, it should be assumed that the complete investment ban is a general prohibition with broad applicability to any new investment that implicates the Russian Federation in any way.
Finally, U.S. sanctions activity has included robust trade controls designed to stem the flow of dual-use (military/civil) commodities of U.S.-origin—or produced with substantial reliance on U.S.-origin technology—to the Russian Federation. On February 24, 2022, BIS announced that a new license review policy of denial would apply to the most sensitive items on the Commerce Control List (“CCL”) in Categories 3 through 9 for the export of commodities utilized by the Russian defense, aerospace and maritime industries. These items include semiconductors, computers, telecommunications hardware, information security equipment, lasers, and sensors when bound for any location in the Russian Federation. These controls were expanded by BIS on April 9, 2022 with the announcement of additional restrictions encompassing commodities controlled in Categories 0 through 2 of the CCL. As a consequence of this expansion, all commodities in any category of the CCL now require a license when exported, reexported or transferred (in-country) to the Russian Federation.
Sanctions Activity in the United Kingdom
Recent sanctions activity in the United Kingdom has been more aggressive than the United States. While the UK and the U.S. have generally collaborated on specific sanctions activity, the United Kingdom has frozen the assets of a number of Russian entities and individuals that remain unsanctioned by the United States—including most notably Roman Abramovich, a billionaire confidant of Putin and owner of Chelsea Football Club. U.S. officials have reportedly declined to sanction Abramovich, citing the intervention of Ukrainian President Volodymyr Zelensky on Abramovich’s behalf.
In spite of this notable difference, however, the United Kingdom’s sanctions activity has also included both economic sanctions targeting individuals and institutions and trade sanctions aimed at curtailing exports of sensitive dual-use technology to Russia.
With respect to economic sanctions particularly, since the start of Russia’s Ukraine incursion in late February 2022, the United Kingdom has sanctioned hundreds of individuals and institutions with connections to the Russian government. Specifically, UK regulations provide that the Secretary of State may designate persons by name for the purpose of financial, immigration, aircraft or shipping sanctions if they are, or have been, involved in a “relevant activity” as defined in regulation 6 of the Russia (Sanctions) (EU Exit) Regulations 2019 (as amended) (“Regulations”). Once designated, such individuals appear on the UK Sanctions List. Similar to OFAC’s sanctions database, the UK Sanctions List provides identifying information for the individual, institution, aircraft or vessel designated and a description of the sanctions imposed on that individual, institution, aircraft or vessel.
The prohibitions and requirements imposed by the Regulations apply within the territory of the United Kingdom and in relation to the conduct of all United Kingdom persons wherever located. The Regulations also apply to entities incorporated or constituted under the law of any part of the United Kingdom. As such, the Regulations apply to all companies established in the United Kingdom and to branches of United Kingdom companies operating overseas.
The Regulations impose significant blocking sanctions on designated persons through asset freezes and blanket prohibitions on making funds or other economic resources available to a designated person on either a direct or indirect basis.
In addition, the Regulations contain a number of stringent financial services and investment restrictions, including prohibitions on:
- Dealing with a select number of Russian-based financial institutions with respect to any transferable securities or money market instruments;
- Granting or entering into any arrangement to grant new loan or credit with a maturity exceeding 30 days to any number of Russian entities identified in Schedule 2 to the Regulations;
- Establishing or continuing a correspondent banking relationship with a designated person when the relationship involves a UK-based credit or financial institution;
- Providing financial services for the purpose of foreign exchange reserve and asset management to certain designated Russian entities including the Central Bank of Russia, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation; and
- Making or continuing to make investments in relation to non-government-controlled Ukrainian territory.
In tandem with economic sanctions, the United Kingdom has also imposed significant trade restrictions on the Russian Federation through a ban on certain imports from, and exports to, Russian territory. Among these prohibitions is a complete ban on the export of energy-related and luxury goods to Russia, as well as a selective ban on the export of infrastructure-related goods to non-government-controlled Ukrainian territory.
From an import perspective, the Regulations also forbid a UK person from acquiring arms and related material, as well as iron and steel products that are consigned from, or originate in, the Russian Federation. These restrictions also apply to the import of any goods that originate from non-government-controlled Ukrainian territory.
EU Sanctions Activity
Sanctions activity in the EU has largely paralleled that of the United States and the United Kingdom with the use of blocking sanctions, transactional prohibitions, and trade controls to punish the Russian government for its Ukraine aggression. As of April 8, 2022, the EU has imposed the following broad economic prohibitions with respect to the conduct of EU citizens vis-à-vis Russia:
- Trading in arms;
- Public financing or financial assistance for trade with, and investment in, the Russian Federation;
- Investment in, and contributions to, projects co-financed by the Russian Direct Investment Fund;
- New investments in the energy sector;
- Financing of the Russian government and Central Bank as well as all transactions related to the management of the Central Bank’s reserves and assets;
- Financial interactions with certain Russian institutions, including financial rating services and the provision of banknotes and sale of securities to those institutions;
- High-value crypto and trust services.
Moreover, since Russia’s annexation of Crimea in 2014, the EU has acted swiftly to designate nearly 1093 Russian individuals and 80 institutions as economically sanctioned parties on an individual basis. Practically speaking, designated individuals and institutions are subject to both asset freezes and travel bans that prohibit them from transiting EU member states.
The EU’s economic sanctions activity has been supplemented by the imposition of stringent trade controls with respect to EU-origin commodities. Currently, the EU prohibits the following exports from any EU member state to Russia:
- Dual-use goods as well as advanced technology that contributes to Russia’s defense and security capabilities;
- Quantum computing, advanced semiconductors, sensitive machinery, transportation capabilities and chemicals;
- Goods for use in the oil industry;
- Maritime navigation equipment; and
- Luxury goods.
The EU’s selective export ban is bolstered by a ban on imports from Russia to any EU member state of the following items:
- Iron and steel;
- Cement, rubber products, wood, spirits, liquors, and high-end seafood.
Perhaps most significantly, the EU has also acted to decouple a select number of Russian financial institutions from the SWIFT messaging system—constraining the entities’ collective ability to efficiently process financial transactions.
Announced on March 1, 2022, Regulation (EU) No. 833/2014 (concerning restrictive measures in view of Russia’s actions destabilizing the situation in Ukraine) makes it illegal to provide “specialized financial messaging services” used to exchange financial data to the legal persons, entities or bodies listed in Annex XIV. These entities currently include:
- Bank Otkritie;
- Bank Rossiya;
- Vnesheconombank (“VEB”); and (7) VTB Bank.
Key Takeaways for Compliance Professionals
Multijurisdictional companies face considerable—and seemingly insurmountable—challenges when implementing a risk mitigation strategy that takes into account the intricacies of overlapping sanctions activity. Nonetheless, compliance professionals are urged to adopt a nuanced approach to risk assessment and mitigation in the sanctions space that focuses on the organization’s overall exposure to Russia, Belarus, and Ukraine, and adopts proportionate measures to prevent infractions of applicable regulations.
Generally speaking, an organization with greater exposure to the affected nations will need to invest more time and resources into preventing sanctions violations than an organization with less exposure to the affected nations. As always, third party due diligence is a fundamental component of ensuring that the organization avoids conducting business with sanctioned entities or individuals. To that end, organizations are encouraged to assess their current third-party screening capabilities and to bolster those capabilities as their risk profile warrants.
By being proactive about sanctions compliance, organizations can minimize the risk that they will become a test case for zealous government officials intent on upholding both the letter and spirit of sanctions regulations.