Sanctions Tracker – U.S., U.K., and E.U. Responses to Situation in Ukraine

We previously discussed sanctions measures that have been proposed in several jurisdictions as a potential response to any prospective Russian military incursion into Ukraine on February 4, February 11, February 23, and February 24. This post provides an update regarding recent Ukraine-related sanctions measures in the United States, United Kingdom and European Union.

United States

On February 24, 2022, the U.S. government imposed several sanctions measures related to the situation in Ukraine, including: (i) designating several major Russian banks as SDNs; (ii) implementing non-blocking restrictions on additional Russian banks; (iii) implementing capital markets restrictions on certain Russian state-owned and private companies; (iv) designating additional Russian elites as SDNs; and (v) implementing far-reaching export control restrictions. An Office of Foreign Assets Control (“OFAC”) press release is available here. A Commerce Department press release is available here. A White House press release is available here.

These restrictions will have broad implications for both U.S. and non-U.S. companies conducting business in or with Russia. For example, non-U.S. persons would risk violating U.S. secondary sanctions by engaging in transactions with the individuals and entities subject to these new restrictions, pursuant to Countering America’s Adversaries Through Sanctions Act (“CAATSA”) § 228.

Designation of Several Major Russian Banks as SDNs

On February 24, 2022, OFAC designated the following banks on its Specially Designated Nationals and Blocked Persons (“SDN”) List: (i) VTB Bank (“VTB”); (ii) Public Joint Stock Company Bank Financial Corporation Otkritie (“Otkritie”); (iii) Open Joint Stock Company Sovcombank (“Sovcombank”); and (iv) Joint Stock Commercial Bank Novikombank (“Novikombank”). According to OFAC, it designated these banks pursuant to Executive Order (“E.O.”) 14024, which “authorizes sanctions against Russia for its harmful foreign activities . . . .” In addition, OFAC also designated 20 VTB subsidiaries, 12 Otkritie subsidiaries, and 22 Sovcombank subsidiaries.

FAQ 975 explains that Russia General License (“GL”) 3 authorizes a wind-down period of 30 days for transactions involving VEB, and Russia GL 11 authorizes a wind-down period of 30 days for transactions involving VTB, Otkritie, or Sovcombank.

These sanctions measures freeze any of these banks’ assets touching the U.S. financial system and prohibit U.S. persons from dealing with them. Furthermore, FAQ 980 clarifies that dealings with these institutions are secondarily sanctionable for non-U.S. persons.

Non-Blocking Sanctions on Additional Russian Banks

On the same day, OFAC issued Directive 2 pursuant to E.O. 14024, which generally prohibits U.S. financial institutions from: (i) opening or maintaining a correspondent account or payable-through account for or on behalf of foreign financial institutions subject to Directive 2 restrictions; and (ii) processing a transaction involving foreign financial institutions subject to Directive 2 restrictions.

FAQ 969 explains that OFAC’s 50% Rule applies to Directive 2 restrictions. In addition, FAQ 970 clarifies that the Directive 2 restrictions “apply to a U.S. financial institution’s opening or maintaining of a correspondent account or payable-through account . . . wherever located outside of the United States . . . .” Finally, according to FAQ 971, these prohibitions “apply with respect to any currency,” rather than just U.S. dollars.

The Annex to Directive 2 identifies 25 Russian financial institutions as subject to Directive 2 restrictions, including Sberbank and several of its subsidiaries. Although these sanctions measures are not full blocking restrictions, U.S. banks are required to reject any transaction involving the identified 25 financial institutions, and to close correspondent and/or payable-through accounts. However, the restrictions applicable to these 25 entities do not take effect until March 26, 2022.

Capital Markets Restrictions On 13 Russian State-Owned and Private Companies

OFAC also issued Directive 3 pursuant to E.O. 14024, which prohibits transactions and dealings by U.S. persons or within the United States in new debt of longer than 14 days maturity and new equity of certain Russian state-owned enterprises, entities that operate in the financial services sector of the Russian Federation economy, and other entities subject to Directive 3 restrictions. FAQ 985 clarifies that OFAC’s 50% Rule applies to Directive 3 restrictions, meaning that they apply to direct or indirect subsidiaries of the listed entities.

The Annex to Directive 3 identifies 13 major Russian state-owned and private companies as subject to Directive 3 restrictions, including PJSC Gazprom and Sberbank. The restrictions applicable to these 13 entities take effect on March 26, 2022.

Designation of Additional Individuals as SDNs

On February 24, 2024, OFAC also designated 10 “Russian elites” as SDNs pursuant to E.O. 14024, for either “being or having been leaders, officials, senior executive officers, or members of the board of directors of” the Government of Russia or “for being the spouse or adult child of” such an individual. According to OFAC, the designations “target influential Russians in Putin’s inner circle and in elite positions of power within the Russian state.”

On the same day, OFAC designated 24 Belarusian individuals and entities, “due to Belarus’s support for, and facilitation of, the invasion.” The designations include two significant Belarusian state-owned banks, nine defense firms, and seven regime-connected official and elites.

These restrictions take immediate effect, with no wind-down period.

Applicable General Licenses

Concurrent with its issuance of these sanctions measures, OFAC also issued the following GLs:

• Russia GL 5 authorizes “official business” of certain international organizations and entities, including the United Nations, the International Centre for Settlement of Investment Disputes, the Multilateral Investment Guarantee Agency, and the Red Cross.
• Russia GL 6 authorizes certain transactions related to the exportation or reexportation of agricultural commodities, medicine, medical devices, replacement parts and components, or software updates, or the COVID-19 pandemic.
• Russia GL 7 authorizes certain overflight payments, emergency landings, and air ambulance services.
• Russia GL 8 authorizes, until June 24, 2022, certain transactions that “are related to energy” with the following entities: (i) VEB; (ii) Otkritie; (iii) Sovcombank; (iv) Sberbank; (v) VTB; and (vi) any entity in which one or more of the aforementioned entities own, directly or indirectly, individually or in the aggregate, a 50% or greater interest.
• Russia GL 9 authorizes, until May 25, 2022, certain transactions that “are ordinarily incident and necessary to dealings in debt or equity” of the following entities: (i) VEB; (ii) Otkritie; (iii) Sovcombank; (iv) Sberbank; (v) VTB; and (vi) any entity in which one or more of the aforementioned entities own, directly or indirectly, individually or in the aggregate, a 50% or greater interest. To be authorized by Russia GL 9, any divestment or transfer of, or facilitation of divestment or transfer of, such debt or equity must be to a non-U.S. person.
• Russia GL 10 authorizes, until May 25, 2022, certain transactions that are “ordinarily incident and necessary to the wind down of derivative contracts.” To be authorized by Russia GL 10, the transaction must include one of the following entities, or be linked to the debt or equity of such an entity: (i) VEB; (ii) Otkritie; (iii) Sovcombank; (iv) Sberbank; (v) VTB; or (vi) any entity in which one or more of the aforementioned entities own, directly or indirectly, individually or in the aggregate, a 50% or greater interest.
• Russia GL 11 authorizes the wind-down, until March 26, 2022, of transactions with the following entities: (i) Otkritie; (ii) Sovcombank; (iii) VTB; and (iv) any entity in which one or more of the aforementioned entities own, directly or indirectly, individually or in the aggregate, a 50% or greater interest.
• Russia GL 12 authorizes U.S. persons, until March 26, 2022, to reject all transactions prohibited by E.O. 14024, with the following entities: (i) Otkritie; (ii) Sovcombank; (iii) VTB; and (iv) any entity in which one or more of the aforementioned entities own, directly or indirectly, individually or in the aggregate, a 50% or greater interest.

OFAC also issued two Belarus-related GLs:

• Belarus GL 6 authorizes “official business” of the U.S. Government by employees, grantees, or contractors.
• Belarus GL 7 authorizes “official business” of certain international organizations and entities, including the United Nations, the International Centre for Settlement of Investment Disputes, the Multilateral Investment Guarantee Agency, and the Red Cross.

Absent the authorizations outlined in these GLs, these transactions would be prohibited by the sanctions restrictions described above.

Export Control Restrictions

On February 24, 2022, the Bureau of Industry and Security (“BIS”) of the U.S. Department of Commerce issued a final rule entitled “Implementation of Sanctions Against Russia Under the Export Administration Regulations (EAR)” (the “Final Rule”). The Final Rule marks a significant and expansive use of U.S. export controls. It is designed to target the Russian defense, aerospace, and maritime sectors and generally to impair the ability of government and commercial actors in the country’s core industrial sectors from accessing key technologies. The Final Rule also adds 47 Russia entities to the Entity List, which include 45 entities transferred from the Military End User List and two newly-designated entities. In its press release accompanying the Final Rule, BIS noted that the new measures are the “most comprehensive” measures implemented by the United States to target any single nation. The Final Rule became effective upon its release today but will not be published in the Federal Register until March 3, 2022.

The key elements of the Final Rule include: (i) and expansion of the Foreign Direct Product Rule; and (ii) and expansion of licensing requirements and revision of the standard of review for license applications related to Russia, summarized below.

A. Expansion of the Foreign Direct Product Rule

The Final Rule includes two significant expansions of the so-called Foreign Direct Product Rule (the “FDP Rule”), as described below. However, an important carve-out to both the Russia FDP Rule and the Russia-MEU FDP Rule is exclusion for certain “partner” countries that are adopting or have expressed an intent to U.S. authorities to adopt substantially similar export control measures to those described below. The “partner” countries identified to date, which will not be subject to the rules below, are: Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, New Zealand, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.

The two new FDP Rules are the following:

The Russia FDP Rule (15 C.F.R. § 734.9(f)). The FDP Rule is an existing rule under the EAR that expands the reach of U.S. export controls to encompass items produced outside the United States that are the “direct product” of certain controlled “technology” or “software,” or are produced by a plant or “major component” of a plant that itself is a “direct product” of certain controlled “technology” or “software.” As implemented by the Final Rule, the Russia FDP Rule expands the FDP Rule to target the whole of Russia.  Paragraph (f)(1) describes the product scope of the Russia FDP Rule: the items subject to the Rule include any technology or software (product groups D and E) in Categories 3, 4, 5, 6, 7, 8, or 9 of the Commerce Control List (“CCL”), apart from items classified as EAR99. The listed CCL Categories cover Electronics, Computers, Telecommunications, Information Security, Sensors and Lasers, Navigation and Avionics, Marine, and Aerospace and Propulsion. Paragraph (f)(2) describes the destination scope of the Rule: it only applies if there is “knowledge” that the item is destined to Russia, or will be incorporated into, or used in the “production” or “development” of any “part,” “component,” or “equipment” not designated EAR99 and produced in or destined to Russia.

The Russia-Military End User (Russia-MEU) FDP Rule (15 C.F.R. § 734.9(g)). The MEU List is an existing list of “military end users” under the EAR that are subject to enhanced export restrictions and licensing requirements. The Russia-MEU FDP Rule expands upon the new Russia FDP Rule (described above) for MEUs.  The Russia-MEU FDP Rule expands the product scope of the Russia FDP Rule as follows: it applies to technology and software (product groups D and E) in any Category of the CCL. It expands the destination scope of the Russia FDP Rule as follows: it only applies if there is “knowledge” that the item will be incorporated into, or used in the “production” or “development” of any “part,” “component,” or “equipment” produced, purchased, or ordered by any entity with a “footnote 3” designation in the license requirement column of the Entity List.  A total of 47 Russian entities were transferred from the MEU List to the Entity List (and designated with footnote 3) as a result of the Final Rule. Footnote 3 reads as follows: “For this entity, ‘items subject to the EAR’ includes foreign-produced items that are subject to the EAR under § 734.9(g) of the EAR. See §§ 746.8 and 744.21 of the EAR for related license requirements, license review policy, and restrictions on license exceptions.”

Notably, the Russia-MEU FDP Rule applies to items classified as EAR99, the default classification under the EAR that includes a wide range of common commercial goods.  The Final Rule expands restrictions on Russian ‘military end users’ and ‘military end uses’ cover all items subject to the EAR with narrow exceptions for: (i) food and medicine designated as EAR99; and (ii) items classified as Export Control Classification Numbers (“ECCNs”) 5A992.c or 5D992.c, provided they are not intended for Russian “government end users” or Russian state-owned enterprises.

B. Expansion of licensing requirements and standard of review for license applications involving Russia

The Final Rule imposes licensing requirements and a stricter standard of review for license applications for a wide range of items subject to the EAR.

New license requirements for Russia (15 C.F.R. § 746.8(a)(1)). The Final Rule imposes a sweeping licensing requirement on all items classified in Categories 3, 4, 5, 6, 7, 8, or 9 of the CCL. These new requirements, which encompass at least 58 ECCNs that did not previously require a license to Russia, are designed to “significantly limit Russia’s ability to obtain items it is not able to produce.” BIS estimates will result in 350 additional license applications being submitted annually, suggesting that, apart from the stricter standard of review (discussed below), parties should expect the possibility of significant delays if a license is required for a Russia-related export. Notably, however, the new licensing requirements do not include deemed exports and deemed reexports. The carve out would appear to spare companies with Russian national employees from the enhanced licensing regime, since “deemed” exports and reexports may be triggered, for example, by granting a non-U.S. national “access” to controlled technology or software.

New “policy of denial” standard of review for license applications (15 C.F.R. § 746.8(b)). The Licensing Policy in the Final Rule states that license applications for the  export, reexport or transfer (in country) of items that require a license under the new licensing requirements described above or the Russia FDP Rule will be reviewed, with certain limited exceptions, under a “policy of denial.” License applications for items subject to the Russia-MEU FDP Rule are not subject to any exceptions. The exceptions will be evaluated on a case-by-case basis. For commercial parties, the most relevant is a limited exception for companies operating in Russia that are: (1) wholly-owned U.S. subsidiaries; (2) foreign subsidiaries of U.S. companies that are joint ventures with other U.S. companies, (3) joint ventures of U.S. companies with companies headquartered in Country Group A:5 and A:6, (4) wholly-owned subsidiaries of companies headquartered in Country Group A:5 and A:6, or (5) joint ventures of companies headquartered in Country Group A:5 and A:6 with other companies headquartered in Country Groups A:5 and A:6.  The exception does not apply if the company is headquartered in Russia.

Limited number of license exceptions may be available (15 C.F.R. § 746.8(c)). The Final Rule states that for any items subject to the Russia-MEU FDP Rule, no license exceptions are available. However, for items subject to the Russia FDP Rule or otherwise subject to the enhanced licensing requirements described above (Section 746.8(a)(1)), certain exceptions may still be available for the following license exceptions: TMP; GOV; TSU; BAG; AVS; ENC; and CCD.

United Kingdom

New U.K. asset freeze designations

U.K. Prime Minister Boris Johnson announced a further package of sanctions measures in respect of Russia in a statement to the House of Commons on February 24, and shortly afterwards 5 individuals and 6 entities were designated by the U.K. government.

The entities designated are: 1) JSC Research and Production Corporation Uralvagonzavod; 2) PJSC United Aircraft Corporation; 3)  PJSC United Shipbuilding Corporation; 4) State Corporation for the Promotion of the Development, Manufacture and Export of High Technology Products “Rostec”; 5) Tactical Missiles Corporation Joint Stock Company; and 6) VTB Bank.

The individuals designated include the Deputy President and Chairman of the Management Board of VTB Bank, the chair/CEO of Promsvyazbank, the chair of the Novikombank Board and the Deputy Chairman of the Management Board of PAO SIBUR Holding, as well as the Director General of United Aircraft Corporation.

By contrast to some of the parallel U.S. designations, there is no 'wind down' or similar transitional period or licensing ground. Whilst it remains possible that such relief might be introduced, as things stand these designations have immediate effect.

New U.K. measures Announced (Legislation Pending)

The additional sanctions measures which were announced, but which have not yet come into force, include:

• Asset freezes on more than 100 additional entities and individuals (in addition to the recent designations which have been implemented and the designation of the members of the Duma and the Federation Council which has been announced but is not yet in force);
• Further financial measures to target the Russian financial sector, to prevent Russian banks from accessing sterling and clearing payments through the UK. In a separate statement by the Foreign Secretary Liz Truss, it was announced that Russian bank assets in the U.K. will be frozen in order to prohibit access by the Russian banking system to U.K. financial markets. As at the time of this post, only six Russian banks have been made subject to the recent asset freeze measures, namely VTB Bank, Bank Rossiya, Black Sea Bank for Development and Reconstructions, IS Bank, Genbank, and Promsvyazbank. It is not yet clear which additional Russian banks will be targeted in this new package of measures.
• A prohibition on Aeroflot from operating in the U.K. (in response, Russia has closed its airspace to British airlines);
• Measures to prevent Russian state-owned and key strategic private companies from raising finance on the U.K. financial markets;
• Further trade restrictions and export controls similar to those being implemented by the U.S. (see above), including the immediate suspension of all dual-use export licences to Russia and new legislation to be introduced early next week which will prohibit the export of all dual-use items to Russia, including equipment and technology for use in sectors including electronics, telecommunications and aerospace. This ban will be wider in scope than the current prohibitions on exports of dual-use items listed in Annex I to Council Regulation 428/2009 (as retained by the European Union (Withdrawal) Act 2018) and is intended to “constrain Russia's military-industrial and technological capabilities”; and
• Restrictions on the amount of money Russian nationals can deposit into U.K. bank accounts.

Johnson also announced that further sanctions on Belarus will also be introduced in light of that country’s role in the developments in Ukraine. Details of these sanctions have not yet been published.

Legislation to bring some or all of the above into effect is expected “early next week”.

According to Johnson’s speech, the U.K. will also bring forward the introduction of certain elements of the Economic Crime Bill in respect of unexplained wealth orders, which are to be introduced to the House of Commons before Easter. It was also announced that a new “Kleptocracy Cell” will be created in the National Crime Agency to target sanctions evasion and identify “corrupt Russian assets hidden in the UK”. These measures, along with other potential reforms to the U.K.’s economic crime enforcement landscape which were already being considered prior to the current crisis, are likely to have an impact in the medium to long term, rather than in the immediate future.

Separately, the U.K. has said that it continues to work with allies in respect of potentially excluding Russia from the SWIFT payment system, although this is not a measure that was approved at an extraordinary meeting of the European Council on February 24 (see below).

European Union

Additional E.U. Sanctions Announced (Legislation Pending)

Following an extraordinary meeting of the European Council on Thursday evening (February 24), the European Council has agreed to a further package of sanctions measures which cover the financial sector, the energy and transport sectors, dual-use goods as well as export control and export financing. Further measures in respect of travel restrictions and additional listings of Russian individuals, as well as new listing criteria, were also agreed.

Further details of these measures are not yet available but the European Council has indicated that they are intended to “impose massive and severe consequences on Russia”, and European Commission President Ursula von der Leyen has indicated that the new sanctions will cover “70% of the Russian banking market” and will be designed to increase Russia's borrowing costs, amongst other things. The restrictive measures will also be designed to target the oil (particularly in respect of upgrading oil refineries) and aerospace industries, whilst also limiting Russia's access to certain technologies, such as semi-conductors or cutting-edge technologies. At the time of writing, press reports indicate that draft proposals for a further round of E.U. sanctions are to be approved later this afternoon (February 25).

The European Council, as the U.K., has also announced that it will adopt further restrictions in respect of Belarus, although no further details on these sanctions have been provided yet.

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