New Sanctions Imposed in Response to Russia’s Incursions in Ukraine, Phase I

To counter Russia’s escalating incursions into Ukraine and threats to its sovereignty, the United States has imposed a series of sanctions on Russian and Ukrainian persons and interests, to be implemented by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). The new sanctions target the so-called Donetsk and Luhansk People’s Republics of Ukraine, certain Russian financial institutions, and certain Russian oligarchs.

For now, the sanctions fall well short of the full suite of sanctions that have been foreshadowed and debated in the U.S. Congress. Commensurate with anticipated, further Russian incursions into Ukraine, additional U.S. sanctions and other U.S. government restrictions on commercial and investment activities involving Russia and Ukraine may follow. The situation is dynamic and parties with interests involving Russia or Ukraine are advised to closely follow expected changes, both in the U.S. and among its allies.

Comprehensive sanctions on the “Donetsk and Luhansk People’s Republics” of Ukraine

On February 21, 2022, President Biden issued Executive Order 14065 prohibiting all new investment, trade, and financing by U.S. persons to, from, or in the “so-called Donetsk People’s Republic (DNR) or Luhansk People’s Republic (LNR) regions” of eastern Ukraine. Similar in scope to the comprehensive sanctions imposed following Russia’s annexation of the Crimea region of Ukraine in 2014, these sanctions respond to President Putin’s recognition of the DNR and LNR as “independent” and the movement of Russian military assets into these regions. 

In summary, the DNR/LNR sanctions prohibit most dealings by U.S. persons in these regions, including:

(i) New investment in the DNR and LNR by a U.S. person, wherever located;

(ii) The importation into the U.S., directly or indirectly, of any goods, services, or technology from the DNR and LNR;

(iii) The exportation, reexportation, sale, or supply, directly or indirectly, of any goods, services, or technology from the U.S., or by a U.S. person, wherever located, to the DNR and LNR; or

(iv) Any approval, financing, facilitation, or guarantee by a U.S. person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited if performed by a U.S. person or within the U.S.

Six contemporaneously issued General Licenses mitigate the impact of the new sanctions on the DNR and LNR in ways that in many respects track other OFAC comprehensive sanctions programs:

• General License No. 17 authorizes transactions ordinarily incident and necessary to the winding down of transactions involving the DNR or LNR, through 12:01 a.m. EST March 23, 2022. This authorization includes the winding down of operations, contracts, or other agreements in effect prior to February 21, 2022 involving the exportation, reexportation, sale, or supply of goods, services, or technology to, or importation of any goods, services, or technology from the DNR or LNR(unlike in other sanctions programs, there is no reporting requirement associated with reliance upon this General License);
  
  
• General License No. 18 authorizes certain exports and reexports of food, medicine, medical devices, and COVID-19 treatments to the DNR and LNR;
  
  
• General License No. 19 authorizes certain transactions ordinarily incident and necessary to the receipt or transmission of telecommunications to and from the DNR or LNR;
  
  
• General License No. 20 authorizes activities by certain international organizations;
  
  
• General License No. 21 authorizes certain personal, non-commercial remittances, and the operation, maintenance, and closure of certain personal accounts; and
  
  
• General License No. 22 authorizes the export of certain services and software incident to the exchange of personal communications over the internet involving the DNR and LNR, including both free and paid services and software.

Home to under 10% of Ukraine’s population, the separatist DNR and LNR regions are described as industrial powerhouses, with heavy mining, coal, and steel production being the regions’ primary industries.

Companies with dealings in the DNR or LNR — whether direct or indirect, whether paid or offered without compensation — should carefully review these sanctions and authorizations to understand how they may impact their business. 

Companies providing software or software-as-a-service (SaaS) to the DNR or LNR will want to understand whether General License No. 22 authorizes their continued dealings, or alternatively how to take advantage of the 30-day wind-down authorization in General License No. 17, including, e.g., how to identify customers located in the DNR or LNR and block unlawful transactions with them. The latter course may prove difficult for internet-based companies (including SaaS providers) to the extent that available geolocation tools and IP address controls are not already set up to block traffic from these regions. In the interim, companies may consider relying on other identifiable information (e.g., city, zip code, phone number) to mitigate potential sanctions-related risks.

Targeted sanctions on Russian financial institutions and oligarchs

Effective February 22, 2022, the U.S. added three individuals, 44 entities and five vessels to the OFAC Specially Designated Nationals and Blocked Persons (SDN List). These additions, accessible here, include among others the fifth largest Russian financial institution Vnesheconombank (VEB), Russia’s military bank Promsvyazbank Public Joint Stock Company (PSB), and 42 of their subsidiaries. (Not yet designated as SDNs are the largest Russian financial institutions Sberbank and VTB, although pending legislation may cause these banks and others to be designated in the near term.)

As with all SDN designations, U.S. persons (i) are barred from engaging in virtually all transactions, whether direct or indirect, involving SDNs or their direct or indirect property interests, and (ii) must block and report to OFAC any such property within their possession or control. Under OFAC’s “50 percent rule,” any entity in which one or more SDNs in the aggregate own a 50% or greater interest must also be treated as an SDN, even if the entity does not separately appear on the SDN List. 

These prohibitions take effect immediately and are not eligible for any wind-down or other authorization.

Prohibitions on involvement with certain sovereign debt of the Russian Federation

Implementing the authority of Executive Order 14024, OFAC has issued an updated Directive 1A. Accordingly, U.S. financial institutions (defined here) are barred:

(1) As of June 14, 2021, from participating in the primary market for ruble or non-ruble denominated bonds issued after June 14, 2021 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;

(2) As of June 14, 2021, from lending ruble or non-ruble denominated funds to the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation; and

(3) As of March 1, 2022, from participating in the secondary market for ruble or non-ruble denominated 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.

Entities determined to be subject to these prohibitions are identified here (noted by inclusion of “Subject to Directive 1a” in the listing). As with other Directive-based, “non-SDN” sanctions designations, U.S. persons are not barred from other transactions with these entities, provided those transactions are not otherwise prohibited by U.S. law. 

If you would like additional information about the issues addressed in this client alert, please contact Rich Matheny or Jacob Osborn, or the Goodwin attorney with whom you typically consult.