New U.S. Sanctions Against Russia Target Sovereign Bonds and Malign Russian Actors

April 15, 2021

On April 15, 2021, the United States imposed new sanctions expanding restrictions on the purchase of certain Russian sovereign debt and other financing instruments and adding numerous Russian entities and individuals to the List of Specially Designated Nationals (“SDN List”). These new sanctions largely were imposed under the authority of a new Executive Order issued by President Biden on April 15, 2021, “Blocking Property with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation” (the “Order”), which provides additional authority for the imposition of sanctions to counter harmful activities of Russia that threaten U.S. national security and foreign policy. 

These measures represent a calculated ratcheting up of the sovereign debt sanctions to encompass Ruble-denominated debt, but still allow U.S financial institutions to purchase sovereign debt in the secondary market for the time being. However, the Order also creates a new basis for sanctioning Russian parties for a variety of other malign acts and specifically includes the possibility of targeting the Russian technology sector for the first time. A Russian Government spokesperson stated that a response is “inevitable,” but any response is more likely to be a tit for tat in terms of diplomatic expulsions rather than imposition of Russian sanctions on U.S. businesses operating in Russia.

New Restrictions on Ruble-Denominated Bonds and Loans Involving the Russian Sovereign

As a result of U.S. sanctions imposed in August 2019 under the Chemical and Biological Weapons Act (“CBW Act”), U.S. financial institutions already are prohibited from participating in the primary market for new non-ruble denominated bonds issued by the Russian sovereign and from lending non-ruble denominated funds to the Russian sovereign (see our prior OnPoint for more details). On April 15, 2021, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued a new Directive 1 under the new Order to expand these restrictions to target ruble-denominated bonds and loans.1 The new measures aim to further deny the Russian Government from accessing U.S. funds, which could have some impact on the Russian economy given that the issuance of ruble-denominated bonds is a significant source of fund raising for the Russian Government.

As of June 14, 2021, U.S. financial institutions will be prohibited 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; or
  • 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

The new directive and Frequently Asked Questions issued by OFAC (see FAQs 886-891) provide additional clarity on the scope of these new sanctions:

  •  “U.S. financial institutions”: Similar to the CBW Act sanctions, the restrictions apply only to “U.S. financial institutions” and not to all “U.S. persons.” The term “U.S. financial institution,” however, is defined broadly to include “any U.S. entity (including its foreign branches) that is engaged in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or other extensions of credit, or purchasing or selling foreign exchange, securities, commodity futures or options, or procuring purchasers and sellers thereof, as principal or agent.”
    • The Directive specifically notes that the term “U.S. financial institutions” includes depository institutions, banks, savings banks, trust companies, securities brokers and dealers, futures and options brokers and dealers, forward contract and foreign exchange merchants, securities and commodities exchanges, clearing corporations, investment companies, employee benefit plans, and U.S. holding companies, U.S. affiliates, or U.S. subsidiaries of any of the foregoing. It also includes U.S. branches, offices, and agencies of non-U.S. financial institutions, but does not extend to non-U.S. branches, offices, or agencies of such non-U.S. financial institutions. 
    • Unlike most other U.S. sanctions programs, the restrictions will not apply to “U.S. persons” more broadly. Therefore, the restrictions do not apply to U.S. citizens or permanent residents who are not employees of “U.S. banks,” including U.S. persons employed by non-U.S. banks. Other U.S. companies that are not considered “U.S. banks” also are not covered by the new restrictions.
  • No effect on Russian state-owned entities: The restrictions apply only to bonds issued by, or loans extended 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. OFAC specifically noted that the so-called “50% Rule” does not apply with respect to these measures and the prohibitions therefore do not apply to any entity that is owned, directly or indirectly, 50 percent or more by one or more of these three entities, whether individually or in the aggregate.  Accordingly, the new restrictions on ruble-denominated bonds and loans will not apply to other Russian government agencies or Russian state-owned enterprises (such as those that are subject to various restrictions under the Sectoral Sanctions Identification List). 
  • No restrictions on secondary market trading: Similar to the CBW Act sanctions, the new restrictions will apply only to participation in the primary market for ruble-denominated or non-ruble denominated bonds issued by the targeted Russian government agencies. U.S. financial institutions (and any other U.S. persons) would not be prohibited from trading such sanctioned bonds in the secondary market. 

Additional Russian Persons Added to the SDN List

OFAC also added numerous Russian entities and individuals to the SDN List due to their alleged involvement in interference in U.S. elections, malign cyber activities, and activities in Crimea. These new SDNs include:

  • Five entities designated for operating in the technology sector of Russia and supporting Russian intelligence services (details available here);
  • Sixteen entities and 16 individuals designated in connection with attempting to influence the 2020 U.S. presidential election at the direction of the Russian Government (details available here); and
  • Three entities and five individuals designated in connection with Russia’s occupation of the Crimea region of Ukraine and human rights abuses against the population (details available here).

U.S. persons now are prohibited from engaging in transactions involving these SDNs or their property or interests in property. Non-U.S. persons also could be at risk for facilitating significant financial or other transactions with these SDNs. We note, however, that while the new designations target numerous individuals and entities, they are not expected to have a broad commercial impact on most U.S. companies as they do not include publicly traded companies or other companies or individuals with a significant presence in the Russian economy. 

The new Order authorizes sanctions against any Russian entity operating in the technology or defense sector of the Russian economy as well as any other sector identified by the U.S. Government in the future.  While the defense sector already was covered under prior executive orders (as well as the financial and energy sectors), the express inclusion of the technology sector – and the specific mention in the Order of the use of digital currencies to evade sanctions – could lead to additional designations of Russian technology companies in the future. The new Order also explicitly targets spouses or adult children of persons sanctioned thereunder which was not a focus of prior executive orders regarding Russia.

Notably, the Crimea-related designations were made in partnership with the European Union, United Kingdom, Canada, and Australia, which is a significant departure from the largely-unilateral actions of the Trump Administration. All other sanctions actions, however – including the new measures on Russian sovereign bonds – are unilateral measures of the United States. While the Biden Administration generally is expected to seek collaborative sanctions actions involving allies, these new measures demonstrate that the U.S. will continue to impose unilateral measures where it deems appropriate. 

* * * * *

All companies that trade in Russian sovereign debt or extend loans to Russian government agencies should closely assess the impact of the new measures on their activities. As with other SDN designations, companies also should assess any direct or indirect exposure to the newly-designated individuals and entities. Please contact the authors listed below if you have any questions.



1) This new Directive 1 under the April 15, 2021 Executive Order should not be confused with Directive 1 of the Sectoral Sanctions Identification List which imposes restrictions on certain new debt or equity of certain Russian financial institutions but which is unaffected by the new measures.

Subscribe to Dechert Updates