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United_States_Imposes_New_Sanctions_Commentary_SO

United States Imposes New Sanctions on Russia

In Short

The Situation: On April 15, 2021, the United States issued a new executive order and related directive imposing additional sanctions on Russia that target dealings in Russian sovereign debt, the technology and defense sectors of the Russian economy, and the Russian government and its agents.

The Result: Expanding on existing sanctions, the United States imposed focused restrictions on participating in certain ruble and non-ruble denominated bond and debt transactions with the Russian government, imposed blocking sanctions on several Russian technology companies, and laid the groundwork for future sanctions. 

Looking Ahead: U.S. financial institutions and companies should carefully review ongoing or prospective dealings in Russian sovereign debt or targeted sectors of the Russian economy in order to ensure compliance with these new sanctions and to prepare themselves for potential additional prohibitions. A White House press release warned that additional technology and software import restrictions may be forthcoming.

On April 15, 2021, the Biden administration issued a broad new executive order and related directive expanding existing restrictions on dealings in Russian sovereign debt and authorizing targeted sanctions on the Russian government, its agents, and key sectors of the Russian economy. Even as the White House proposed a bilateral summit meeting and embraced the goal of a "stable and predictable" U.S.-Russia relationship, the United States imposed increased sanctions on Russia in response to "Russia's continued and growing malign behavior," including: "malicious cyber activities"; interference in U.S. or foreign elections; efforts to undermine U.S. and foreign democratic processes or institutions; "transnational corruption"; targeting of U.S. and foreign nationals; activities that undermine the peace, security, stability, and integrity of the United States and its allies and partners; and dealings designed to circumvent U.S. sanctions ("Targeted Activities"). 

Significantly, the new executive order broadly authorizes the imposition of sanctions on the technology and defense (and related materiel) sectors of the Russian economy. It also authorizes the imposition of sanctions on the Russian government and its agents, with a focus on persons engaged in or facilitating identified "malign behavior." 

Pursuant to the new executive order, the United States has authorized the imposition of targeted (blocking) sanctions—administered and enforced by the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC")—on expansive additional categories of persons, including: 

  • Any person determined to operate in the Russian technology, defense (and related materiel), or "as-yet unidentified" sectors;
  • Any person determined to have engaged in Targeted Activities or serve in leadership positions in entities that have engaged in such actions (as well as their spouses and adult children);
  • Political instrumentalities of the Russian government and persons that serve in leadership positions in Russian government entities (as well as their spouses and adult children) or are owned, controlled, or acting for or on behalf of the Russian government; 
  • Any person determined to have provided material support for, or goods or services in support of, Targeted Activities or persons blocked pursuant to this executive order;
  • Russian individuals and entities ("Russian Persons") that have provided material support for, or goods or services to or in support of, governments that have been sanctioned by the United States; and
  • Russian Persons who have engaged in certain actions relating to "cutting or disrupting gas or energy supplies to Europe, the Caucasus, or Asia."

Such persons will be added to the Specially Designated Nationals and Blocked Persons List ("SDN List"), and as such, U.S. persons are generally prohibited from engaging in transactions with such persons or any entities in which such persons hold, directly or indirectly, a 50% or greater interest, individually or collectively. 

OFAC has already taken action to implement these new sanctions. First, in conjunction with the issuance of the executive order, OFAC imposed sanctions on several Russian technology companies related to their support for efforts to carry out "malicious cyber activities" by, or on behalf of, Russian intelligence services, including supplying services "ranging from providing expertise, to developing tools and infrastructure, to facilitating malicious cyber activities." Second, OFAC has issued a directive that, expanding on existing prohibitions under Executive Order 13883, prohibits U.S. financial institutions from:

  • Participating in the primary bond market for ruble and non-ruble denominated bonds issued by the Central Bank of Russia, National Wealth Fund of Russia, or the Russian Ministry of Finance after June 14, 2021; and 
  • Lending ruble or non-ruble denominated funds to those entities.

These prohibitions are, however, subject to certain key limitations—specifically:

  • U.S. financial institutions are not prohibited from participating in the secondary market for bonds issued by these entities; and
  • The restrictions expressly do not apply to any entity in which the Central Bank of Russia, National Wealth Fund of Russia, or the Russian Ministry of Finance hold, directly or indirectly, a 50% or greater interest, individually or collectively. 

Further, OFAC has clarified that all other activities involving these entities remain permitted, unless prohibited under other sanctions measures. 

A White House fact sheet released with the executive order announced that the Biden administration is evaluating whether to review Russia-linked information and communications technology and services ("ICTS") transactions under Executive Order 13873. In particular, the fact sheet warns of "the risks of using [ICTS] supplied by companies that operate or store user data in Russia or rely on software development or remote technical support by personnel in Russia."

U.S. financial institutions and companies dealing in Russian sovereign debt or the Russian technology sector should carefully review their operations to assess the risks posed by these new sanctions, including ensuring that appropriate screening and due diligence is conducted on customers and business partners. In addition, non-U.S. companies that engage in business with or relating to Russia should review their activities to determine whether such activities could lead to blocking or other restrictions under the secondary sanctions. Given the potential breadth of these sanctions and the groundwork that they lay for future sanctions or reviews of ICTS transactions involving Russia, multinational companies should continue to monitor developments in order to ensure their ongoing compliance.

Three Key Takeaways

  1. The Biden administration's new sanctions impose immediate restrictions concerning entities and individuals that the U.S. government believes played roles in recent problematic activities involving Russia.
  2. The sanctions also implement a new directive limiting the ability of U.S. financial institutions from participating in specified market activities.
  3. Taken as a whole, while coupled with language describing a desire for de-escalation, this new package lays the groundwork for future sanctions, with a particular focus on entities and individuals involved with the Russian government and the technology sector. 

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