Additional Sanctions on Russia and the Importance of Business Contingency Planning

By Alex J. Brackett, Patrick Rowan, Edwin O. Childs & Elissa Baur on February 23, 2022

Building on Monday’s Executive Order imposing sanctions on the so-called Donetsk and Luhansk People’s Republics (“DNR” and “LNR,” respectively) in Ukraine, the Biden Administration on Tuesday sanctioned two major Russian state-owned financial institutions as well as several individuals with close ties to the Kremlin and imposed additional restrictions on Russian sovereign debt. The sanctions were coordinated with similar penalties announced Tuesday by the European Union and Great Britain. In remarks on Tuesday afternoon, President Biden referred to the measures as the “first tranche of sanctions to impose costs on Russia” for its deployment of troops to the DNR and LNR, noting that the United States will impose additional restrictions if Russia continues to escalate tensions in the region. Today, the Administration moved ahead with additional measures, sanctioning the company charged with building Russia’s Nord Stream 2 natural gas pipeline, as well as the company’s corporate officers.

Financial Institution Blocking Sanctions. Yesterday’s sanctions were enacted pursuant to Executive Order 14024 (“EO 14024”), an April 2021 order that significantly expanded sanctions on Russia for a broad array of harmful foreign activities. As authorized by EO 14024, the Treasury Department added to the Specially Designated Nationals (SDN) list two state-owned 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 across a wide array of sectors. These subsidiaries include other financial firms, electronic component producers, a coal mining company, a sporting activities company, real estate entities, and five Russian-flagged vessels. The VEB holds more than $50 billion in assets and plays a significant role in financing Russia’s national economic development, while the PSB—a $35 billion bank—is critical to financing Russia’s defense sector.

The U.S. blocking sanctions effectively freeze any VEB or PSB assets held in the United States and prevent U.S. entities and individuals from transacting with those institutions or any entity in which they have a 50 percent or greater interest. Some limited transactions will be allowed to continue pursuant to two general licenses that the Office of Foreign Assets Control (“OFAC”) issued in tandem with the sanctions. The first permits transactions with VEB that are incident and necessary to the servicing of bonds issued before March 1, 2022 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance. The second allows for a wind-down of other transactions involving VEB through 12:01 am eastern daylight time on March 24, 2022.

Notably, while the VEB and PSB are significant financial institutions, they are not Russia’s largest. A senior Administration official told the media on Tuesday that, if the invasion proceeds, the United States is prepared to sanction “the very largest Russian financial institutions, including Sperbank and VTB, which collectively hold almost $750 billion in assets.”

Designation of Russian Elites and Their Families. OFAC also announced the designation of several individuals with close ties to the Kremlin as SDNs, along with their family members. These include Aleksandr Vasilievich Bortnikov, the Director of Russian’s Federal Security Service (“FSB”) and his son, Denis Aleksandrovich Bortnikov; Petr Mikhailovich Fradkov, the Chairman and CEO of PSB; and Sergei Vladilenovich Kiriyenko, the First Deputy Chief of Staff of the Presidential Office, and his son, Vladimir Sergeevich Kiriyenko.

The blocking statutes require that all property of the designated individuals in the possession or control of U.S. persons or entities be blocked and reported to OFAC. Additionally, any entities in which those individuals have a 50 percent or greater interest are also blocked, as are all transactions with those individuals that involve U.S. persons or take place within, or transiting, the United States (unless authorized by OFAC). Financial institutions or other persons that engage in transactions or activities with designated individuals may be subject to an OFAC enforcement action.

Sovereign Debt Restrictions. OFAC additionally expanded a directive prohibiting U.S. financial institutions, including their foreign branches, from engaging in certain activities related to Russian sovereign debt, with the aim of increasing Russia’s future financing costs and restricting the country’s means of raising capital. The directive previously prevented U.S financial institutions—as of June 14, 2021— from participating in the primary market for ruble and non-ruble denominated bonds issued by Russia’s Central Bank, National Wealth Fund, or Ministry of Finance, or lending ruble or non-ruble denominated funds to those entities.

The additional restrictions announced yesterday preclude U.S. financial institutions from participating, as of March 1, 2022, in the secondary market for ruble and non-ruble denominated bonds issued after March 1 by those Russian institutions. A senior Administration official described these and yesterday’s European measures as stopping the Kremlin from raising money from the United States and Europe and preventing Russia’s new debt from trading in U.S. or European markets.

Nord Stream 2 AG Sanctions. As part of its Tuesday Russia sanctions package, German Chancellor Olaf Scholz announced his country would halt certification of the Nord Stream 2 natural gas pipeline, which runs from Russia to Germany’s Baltic coast. The pipeline, which was completed last year, was expected to double Russian state-owned energy company Gazprom’s direct gas exports to Germany once certified.

Following Chancellor Scholz’s announcement, President Biden today announced additional sanctions on Nord Stream 2 AG—the company that owns the pipeline—as well as its corporate officer, Matthias Warnig. Both Nord Stream 2 AG and Warnig have been added to OFAC’s SDN list. As with the sanctions against the VEB and PSB, these new sanctions prevent U.S. entities and individuals from transacting with Nord Stream 2 AG or Warnig, or any entity in which they have a 50 percent or greater interest. In conjunction with the new sanctions, OFAC issued a general license permitting U.S. persons to engage in necessary wind down transactions with Nord Stream 2 AG through 12:01 AM eastern standard time on March 2, 2022.

What comes next. The Biden Administration has been very clear that the first two rounds of sanctions issued this week are only an initial tranche to be supplemented with far more severe sanctions should Russia’s invasion of Ukraine proceed. They are notably targeted, and unlikely to have a significant immediate impact on the Russian people or on most Western businesses engaged in commercial activities in Russia. If and when issuance of subsequent sanctions becomes necessary, it is reasonable to expect that they will be designed to impact the Russian economy more broadly—and will thereby be potentially impactful to anyone with a business or financial nexus to Russia. Among other things, they could include further designations of Russian banks and other financial institutions, imposition of potentially strict export controls, potentially significant restrictions on accepting imports of goods or services from Russia, and the designation of larger numbers of individuals and entities as SDNs, all of which administration officials have specifically noted in recent public comments.

Given the potential for further deterioration, Western companies with operations in or significant business or financial connections to Russia would be well advised to engage in contingency planning now if they have not done so already. If you have further questions about the impact of these sanctions, or breadth and capabilities of our practice, please contact the authors of this article.

About McGuireWoods’ Government Investigations & White Collar Litigation Department
McGuireWoods’ Government Investigations & White Collar Litigation Department is a nationally recognized team of more than 80 attorneys representing Fortune 100 and other companies and individuals in civil and criminal investigations and enforcement matters at the federal and state level. The senior team consists of former federal officials, including a former deputy attorney general of the United States, former U.S. attorneys, more than a dozen federal prosecutors and an associate counsel to the president of the United States. Strategically centered in Washington, our Government Investigations & White Collar Litigation Department is recognized as an elite practice, most recently honored by Chambers USA with a highly regarded nationwide ranking for Corporate Crime & Investigations, honored twice as a White Collar Practice Group of the Year by Law360 and consistently ranked among the world’s leading investigations firms in the Global Investigations Review 100 guide to top cross-border investigations practices. The Legal 500 United States, a premier list of the country’s best law firms, also commended McGuireWoods for the “exceptional quality” of its powerhouse white collar litigation practice.