After the Russian Federation launched a military operation against Ukraine; the US, EU, UK and a number of other countries have begun to impose sweeping economic sanctions against Russia. Those imposed by the United States are among the most economically effective sanctions.
United States Executive Order 14024, which forms the legal basis for further sanctions against the Russian Federation, was signed by Joe Biden on April 15, 2021. On the same day, the United States Treasury Department’s Office of Foreign Assets Control United States
[“OFAC“] published Guideline 1 on blocking assets with respect to certain harmful foreign activities of the Russian government. Directive 1 is replaced by Guideline 1A called “Prohibitions related to certain sovereign debts of the Russian Federation” on February 22, 2022, just after Russia’s decision to recognize 2
de facto republics that declared independence in 2014. Then Russia launched a military invasion of Ukraine. In response to this, the United States took action and OFAC imposed new sanctions by releasing Guideline 2 and Guideline 3.
What is the scope of the sanctions imposed by Directive 1A of February 22, 2022?
The scope of the sanctions imposed on Russia in Directive 1 was expanded with Directive 1A, and the limitations on Russian sovereign debt were extended to cover secondary markets.
According to Directive 1, lending and participation in the primary market for ruble-denominated and non-ruble-denominated bonds issued after June 14, 2021 [by the Central Bank of the Russian Federation,
the National Wealth Fund] is prohibited to US financial institutions. Pursuant to Directive 1A, effective March 1, 2022, U.S. financial institutions are also prohibited from operating in secondary markets with respect to secondary market participation in ruble-denominated or non-ruble-denominated obligations.
Additionally, as noted in the Treasury Department press release, VEB Bank and PSB Bank, both of which are critical to Russia’s defense sector, are not permitted to do business in the United States; these banks have been excluded from the American financial system; all of their assets under US jurisdiction have been frozen; and US citizens and institutions are not permitted to transact with these banks unless authorized by OFAC. All entities, directly or indirectly, 50% or more owned by VEB Bank and PSB Bank are subject to blocking under EO 14024, even if not identified in Directive 1A or the Specially Designated Nationals List and stranded people from OFAC.
The SDN list sanctioned persons has been amended in accordance with these restrictions, and several powerful Russians from Putin’s inner circle, VEB Bank and its subsidiaries, and PSB Bank and its subsidiaries have been added to the list. In addition, the three Russian government bodies named above are now included in the non-SDN sanctions list. After recent events, Russian President Vladimir Putin and Foreign Minister Sergey Lavrov are also added to the list from February 25, 2022.
What is the scope of the sanctions imposed by Directive 2 and Directive 3 of February 24, 2022?
The United States is targeting Russian financial infrastructure with Directive 2 and Directive 3, as stated in the press release issued by OFAC. Directive 2 and Directive 3 included Russia’s largest financial institutions [namely, Sberbank, VTB Bank, Otkritie, Novikombank and
Sovcombank] in its sanctions list. Banks subject to the sanctions carry out daily foreign exchange transactions of approximately USD 46 billion combined, with the USD accounting for 80% of the total.
With the sanctions, OFAC prohibits US financial institutions from doing business with sanctioned persons such as opening or maintaining a correspondent account or a transit account. Directive 2 also prohibits such activities for or on behalf of foreign financial institutions and the processing of a transaction involving foreign financial institutions. These sanctions will be implemented within 30 days, i.e. after March 26.
When all of the sanctions are considered together, it becomes clear that the United States aims to prevent Russian private and public institutions from accessing international capital markets and to keep Russia out of the global financial system. The sanctions are expected to have a huge impact on both Russia and global trade as they target almost 80% of the Russian banking system. Additionally, while said sanctions are not applicable to individuals or entities outside of the United States, non-US institutions should be aware that US sanctions have an impact regardless of borders. In this context, companies and individuals with business ties to Russia should recognize US sanctions as a risk factor and take appropriate precautions.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.