Western Countries Issue Coordinated Sanctions Following Russia’s Actions in Ukrainian Territories

February 22, 2022

Executive Summary

  • Western countries have issued new measures in response to Russia’s recognition of the so-called Donetsk and Luhansk Peoples’ Republics (“DNR” and “LNR”; collectively, the “DNR/LNR Regions”) as independent states and the movement of Russian troops into the DNR/LNR Regions.
  • The U.S. Government announced new sanctions on Russia on February 22 that include adding two Russian banks and their subsidiaries to the List of Specially Designated Nationals (“SDN List”) and prohibit U.S. persons from dealing in new sovereign bonds issued by the Russian government after March 1, 2022. The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) also issued general licenses authorizing the wind down of certain activities involving these sanctioned parties.
  • The U.S. actions followed sanctions announced by the Biden Administration on February 21 that prohibit new investments in the DNR/LNR Regions as well as trade in goods, services, and technologies with the DNR/LNR Regions. OFAC also issued general licenses authorizing a wind down period for activities involving the DNR/LNR Regions.
  • The European Union announced, but has not yet issued, sanctions on Russia that would add officials and politicians to blacklists, ban trading in Russian state bonds, and target trade with separatist entities.
  • The United Kingdom announced a series of sanctions against Russia, imposing asset freezes on five Russian banks and three high net worth individuals although a number of the banks and individuals are already subject to U.S. sanctions.
  • Germany announced measures to halt approval of the Nord Stream 2 natural gas pipeline, the much-disputed $11 billion undersea pipeline connecting Russia with Germany.

Russia’s Actions

On February 21, 2022, Russian President Vladimir Putin signed two executive orders recognizing the DNR/LNR Regions as “sovereign and independent states.” Russian troops (so-called “peacekeepers”) then moved into the DNR/LNR Regions, which the United States, United Kingdom, and European Union denounced as an invasion of Ukraine.

US Export Controls and Sanctions

In response to the movement of troops into the DNR/LNR Regions, President Biden on February 22, 2022, announced additional sanctions against Russia. These include:

  • SDN Listings: OFAC added two financial institutions – the Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (“VEB”) and Promsvyazbank Public Joint Stock Company (“PSB”), along with 42 of their subsidiaries – to the SDN List. As a result, these entities are subject to full U.S. blocking sanctions, and U.S. persons generally are prohibited from engaging in any transactions or dealings with these entities and must freeze any assets of these entities under the possession or control of U.S. persons.
    • At the same time, OFAC issued Russia General License 3, which authorizes U.S. persons to engage in all activities necessary to wind down transactions with VEB and its subsidiaries until March 24, 2022.
    • Notably, no wind down license was issued with respect to PSB or its subsidiaries, presumably because PSB is a captive bank of the Russian defense industry. U.S. persons are prohibited from engaging in any dealings with these entities effective immediately, and all property and interests in property of these entities under U.S. possession or control must be blocked.
    • OFAC also announced the addition of three individuals described as “elites and families close to Putin” – Denis Bortnikov, Petr Fradkov, and Vladimir Kiriyenko – to the SDN List. Each of the three sanctioned persons are sons of current SDNs. OFAC did not issue a wind down license regarding these individuals.
  • The United States also escalated sanctions on dealings in Russia’s sovereign debt. Specifically, OFAC issued Russia-related Directive 1A under Executive Order 14042 which prohibits U.S. persons from any dealings (in the primary or secondary markets) related to new sovereign debt 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.
    •  Directive 1A amends and supersedes Directive 1 under E.O. 14042 – previously, U.S. financial institutions were prohibited from purchasing new Russian sovereign debt in the primary market, but U.S. persons were not prohibited from any secondary market purchases of new Russian sovereign debt. The new sanctions prohibit any primary or secondary market dealings in Russian sovereign debt issued by the identified agencies after March 1, 2022.
    • These restrictions do not impact holdings of Russian sovereign debt issued prior to March 1, 2022. U.S. persons are permitted to trade such bonds without restrictions. They also do not affect bonds issued by Russian agencies or state-owned enterprises other than those identified in Directive 1A (unless such entities are subject to separate restrictions under other U.S. sanctions). Notably, OFAC issued General License 2, which permits U.S. persons to engage in activities involving VEB or its subsidiaries related to the servicing of Russian sovereign bonds issued before March 1, 2022.

President Biden also stated that the United States had worked with Germany to ensure that the Nord Stream 2 project will not move forward and warned of further sanctions against Russia if it were to continue its escalatory actions in Ukraine.

The new sanctions from February 22 follow other actions already taken by the U.S. Government in response to Russia’s recognition of the DNR/LNR Regions. On February 21, 2022, the Biden Administration issued Executive Order 14065, which expanded the scope of sanctions imposed in 2014 in connection with Russia’s annexation of Crimea to cover the DNR/LNR Regions. The executive order prohibits:

  • New investment in the DNR/LNR Regions;
  • Importing goods, services, or technologies from the DNR/LNR Regions; and
  • Exporting goods, services, or technologies to the DNR/LNR Regions.

In addition, E.O. 14065 authorizes blocking sanctions on persons deemed to operate in the DNR/LNR Regions, including senior leaders of entities operating in the DNR/LNR Regions, owned or controlled by persons blocked pursuant to the executive order, or to have materially supported any person who is blocked pursuant to the executive order. No entities or individuals have been designated under this authority as of the time of this update.

OFAC issued six new general licenses along with E.O. 14065. GL 17 is most notable as it provides for a wind down period until March 23, 2022, for transactions prohibited by the executive order. GL 17 specifically covers activities necessary to divest or transfer to a non-U.S. person any ownership in a pre-February 21, 2022, investment located in the DNR/LNR Regions. The other general licenses exempt from the scope of the executive order all transactions related to the export of agricultural and medical items, the receipt of telecommunications, the transfer of personal remittances, and the continuation of personal internet communications.

The DNR/LNR sanctions imposed under E.O. 14065 have a more limited impact than the measures announced on February 22, 2022. U.S. persons should, however, assess any potential exposure to the DNR/LNR Regions and should wind down any such activities unless they are authorized under one of the general licenses. The U.S. Government is poised to impose additional sanctions in the event of further escalation from Russia. In addition, senators from both political parties are currently working to develop a major sanctions bill (see our OnPoint on the Democrats’ version).

EU Sanctions

The EU has reportedly approved a major package of sanctions against Russia in response to recent developments. The package targets:

  • Those who were involved in the decision to recognize and send troops to the DNR and LNR Regions (including, apparently, members of Russia’s parliament);
  • Banks that are financing Russian military and other operations in those territories;
  • The ability of the Russian state and government to access the EU’s capital and financial markets and services; and
  • Trade and investment in the DNR/LNR Regions, similar to the sanctions imposed with respect to Crimea.

Separately, on February 21, 2022, the EU also adopted restrictive measures, within its existing sanctions framework, against five individuals for their actions in relation to Ukraine. The individuals were members of the State Duma of the Russian Federation, who were elected to represent the Crimean peninsula and the City of Sevastopol, as well as the head and deputy head of the Sevastopol electoral commission.

UK Sanctions

On February 22, 2022, the UK prime minister, Boris Johnson, announced the “first barrage” of UK sanctions on Russia for its recent actions in Ukraine, implementing asset freezes on three high net worth individuals and five banks. Bank Rossiya, Black Sea Bank, Genbank, IS Bank and Promsvyazbank are all subject to asset freezes that prohibit dealing with funds or economic resources owned, held or controlled by these banks, or making funds or economic resources available, directly or indirectly, to or for the benefit of the banks. The high-net worth individuals subject to asset freezes include Gennadiy Timchenko, a major shareholder in Bank Rossiya, and two other individuals, Igor and Boris Rotenberg, who are reportedly close allies of Vladimir Putin. Each of the individuals, and all of the banks except Promsvyazbank, had previously been sanctioned by the United States.

Today’s sanctions are a first step by the UK government and leave scope for more far-reaching sanctions in the near future. The designations of the Rotenbergs, for example, make use of the more far-reaching designation criteria under the Russia (Sanctions) (EU Exit) Regulations 2019, which were amended on February 10, 2022, to include the ability to designate persons who have been involved in “obtaining a benefit from or supporting the Government of Russia.” The banks targeted by today’s measures are smaller financial institutions, and the UK government could, depending on developments in Ukraine, take the decision going forward to extend restrictions to major Russian lenders.

Germany’s Actions

In one of the most significant retaliatory measures taken by the west in response to Russia’s actions, the German Chancellor announced that the government will “reassess” certification of the Nord Stream 2 pipeline. The lack of certification means that the pipeline will not become operational. The Nord Stream 2 project has long been controversial because it would increase Germany’s reliance on Russia for its natural gas supplies, and because it bypasses Ukraine, which was a traditional transit point for Russian gas, making it more vulnerable to a Russian invasion.
The U.S. Government was reluctant to impose such sanctions on the pipeline’s operators notwithstanding Congressional demands as it did not want to be out of lock step with Germany.
The business landscape in Russia continues to change rapidly. Companies should continue to keep abreast of legal developments including U.S., UK, and EU sanctions and export control laws and how they impact their business. As always, Dechert is available to advise on any measures imposed on or by Russia.


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