The United States Ramps Up Severe Economic Sanctions on Russia and Export Controls

The United States and the rest of the world are ramping up severe economic sanctions and export controls in response to the Russian invasion of Ukraine. This is an evolving situation, and it is important to monitor the evolving sanctions to ensure compliance with United States and global sanctions, as well as to understand the updated export controls. The imposed sanctions consist of two parts: (i) extreme financial sanctions ranging from specific individuals to Russian financial institutions, and (ii) export controls designed to deny Russia from importing advanced technologies in the Russian defense, aviation and maritime sectors.

Economic Sanctions

The increase in severe economic sanctions against Russia demonstrates a material escalation by the United States government. The economic sanctions are designed to isolate Russia from global markets and the global financial system. The financial sanctions target all ten of Russia’s largest financial institutions. The sanctions range from (i) a full blocking, (ii) sanctions eliminating or affecting the ability to process United States dollar payments, and (iii) debt and equity restrictions. The sanctions were imposed pursuant to E.O. 14024 from April 2021, which authorizes sanctions against Russia for violating international law, such as respect for the territorial integrity of sovereign states. 

Notable financial sanctions include:

  • On February 28, the United States Treasury Department announced it will immobilize Russian Central Bank assets that are held in the United States and impose sanctions on the Russian Direct Investment Fund. As a result of the sanctions, Americans are barred from taking part in any transactions involving the Russian Central Bank, Russia’s National Wealth Fund, or the Russian Ministry of Finance.
  • On February 26, the European Commission, Britain, Canada, France, Germany, Italy, and the United States said they would remove select Russian banks from the SWIFT financial messaging system. This will effectively bar Russia from international transactions and impose new restrictions limiting the Russian Central Bank from using its large international reserves to sidestep sanctions.
  • On February 24, the United States government sanctioned Sberbank and 25 subsidiaries, restricting Sberbank’s access to United States dollar transactions. The Office of Foreign Assets Control (“OFAC”) issued Directive 2 under E.O. 14024, “Prohibitions Related to Correspondent or Payable-Through Accounts and Processing of Transactions Involving Certain Foreign Financial Institutions” (the “CAPTA Directive”). The prohibitions of the CAPTA Directive take effect at 12:01 am eastern daylight time on March 26, 2022.
  • On February 24, the United States designated VTB Bank and 20 subsidiaries as Specially Designated Nationals and Blocked Persons (“SDNs”). The Unites States also designated Bank Otkritie, Sovcombank OJSC, and Novikombank, as well as thirty-four of their subsidiaries as SDNs. This sanction requires United States persons to freeze VTB Bank’s assets and prohibits dealings with them. All entities owned fifty percent or more, directly or indirectly, by VTB Banks are subject to blocking.
  • On February 24, The United States and OFAC issued Directive 3 under E.O. 14024, “Prohibitions Related to New Debt and Equity of Certain Russia-related Entities” (the “Entities Directive”). The Entities Directive prohibits transactions and dealings by US persons or within the United States in new debt of longer than fourteen days maturity and new equity of thirteen Russian state-owned enterprises, entities that operate in the financial services sector of the Russian Federation economy, and other entities.
  • On February 24, the United States also designated certain Russian oligarchs, elites, and family members as SDNs, requiring United States persons to freeze their assets and prohibiting United States persons from engaging in dealings with them.

To protect third parties, and limit the damage and unintended consequences on third parties, OFAC has issued eight general licenses authorizing certain transactions related to: (i) international organizations and entities, (ii) agricultural and medical commodities and the COVID-19 pandemic, (iii) overflight and emergency landings, (iv) energy, (v) dealings in certain debt or equity, (vi) derivative contracts, (vii) the wind down of transactions involving certain blocked persons, and (viii) the rejection of transactions involving certain blocked persons.

Export Controls

Effective February 24, 2022, the United States Commerce Department’s Bureau of Industry and Security issued a final rule, “Implementation of Sanctions Against Russia Under the Export Administration Regulations” (“EAR”). This final rule implements new Russia licensing requirements and policies to protect United States national security and foreign policy interests. The increased export controls under the EAR are meant to deny Russia’s ability to import advanced technologies in the defense, aviation, and maritime sectors. The controls are broad and range from items including semiconductors, telecommunications, lasers, navigation, and avionics and maritime technologies. Notably, most exports to Russia are now restricted for military end-uses and end-users, and most of the items on the Commerce Control List now require a license for export to Russia. 

What’s Next?

The Russian invasion of Ukraine and the subsequent sanctions continue to evolve. The economic sanctions and export control measures imposed by the United States government and nations around the globe are significant and will have unprecedented effects. These measures will require both United States and non-United States companies to carefully review the range of practical and legal considerations when considering their current and future business activities related to Russia.

We will continue to monitor the situation, and KMK Law is available to assist you in ensuring compliance with United States sanctions and to provide advice regarding the evolving sanctions and export controls.

KMK Law articles and blog posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. The laws/regulations and interpretations thereof are evolving and subject to change. Although we will attempt to update articles/blog posts for material changes, the article/post may not reflect changes in laws/regulations or guidance issued after the date the article/post was published. Please consult with counsel of your choice regarding any specific questions you may have.

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