As the Russian invasion of Ukraine has escalated over the past few weeks, the United States has responded with increasingly powerful economic sanctions, targeting key sectors of the Russian economy. While there can be little dispute that these sanctions are a core means of implementing the United States' foreign policy objectives with respect to the Russian Federation's military actions, it is equally clear that the dizzying pace of new sanctions have left U.S. companies scrambling to keep up. Within the last week, the U.S. government has adopted blanket bans on importing everything from Russian oil to Russian caviar. Here, we summarize the sanctions and discuss practical advice for companies that are trying to keep up.

The U.S. Sanctions on the Russian Federation

Background of the U.S. Sanctions Regime

There are several U.S. statutes that form the basis of the U.S. sanctions regime, the most foundational of which is the International Emergency Economic Powers Act ("IEEPA"). The IEEPA empowers the President of the United States to take several actions upon a presidential declaration that an "unusual and extraordinary threat... to the national security, foreign policy, or economy of the United States" exists "in whole or substantial part outside the United States." Once the President declares an emergency under the IEEPA, the President typically then issues executive orders laying out a series of prohibitions with respect to the targeted entities. The U.S. Department of Treasury's Office of Foreign Assets Control ("OFAC") then promulgates regulations that implement the President's orders. 

It is important to understand that the IEEPA, the executive orders, and these OFAC regulations typically bar not only direct transactions with banned entities, but also conspiracies, i.e. agreements, or attempts to engage in barred transactions, transactions intended to evade or avoid the regulatory prohibitions, and indirect transactions, such as the re-exportation of goods or services that would otherwise be barred from direct export under U.S. sanctions law. Violations of these executive orders and regulations triggers a violation of the IEEPA, which carries both civil and criminal penalties, as well as forfeiture provisions allowing for the seizure of certain property. Since the IEEPA's passage, the Department of Justice and OFAC have often aggressively pursued sanctions evasion, bringing civil and criminal actions against sanctions evaders, including foreign financial institutions, and even seizing property involved in sanctions evasion, such as vessels used to transport banned North Korean goods.

Even after sanctions are imposed, however, OFAC is empowered to authorize, or "license," transactions through either a general license or a specific license. OFAC adopts general licenses typically when it seeks to carve out certain activities from the reach of a sanctions regime, such as the provision of humanitarian aid or certain web services. On the other hand, an entity seeking to engage in a barred transaction can also apply to OFAC for a specific license, which OFAC decides on a case-by-case basis.

With respect to the Russian Federation, there are generally four buckets of sanctions that are relevant:

  • "SDN" Sanctions: OFAC has the authority to designate certain individuals or entities as "Specially Designated Nationals" or "SDNs." If OFAC designates a person or entity as an SDN, then (1) U.S. persons and companies are forbidden from providing goods or services to the SDN, and (2) no goods or services may be exported from the United States to the SDN.
     
  • Regional Sanctions: Regional sanctions are most easily understood as trade embargos—the President can prohibit U.S. persons or companies from engaging in commercial transactions involving a specific nation or region, can ban exports from the United States to that specified nation or region, and can bar imports into the United States from that specified nation or region.
     
  • Industry-Specific Sanctions: Through industry sanctions, the President can choose to target specific industries in a country for sanctions. OFAC can also designate companies, referred to as "SSIs," within those industries as part of the "Sectoral Sanctions List." Typically an SSI designation does not cut the SSI off from dealing with the United States completely, but does impose significant restrictions on the types of transactions in which U.S. persons and companies are allowed to engage with the SSI. The United States can and has, however, barred whole industries from trading with the U.S. market.
     
  • Correspondent Banking Sanctions: OFAC can also prohibit U.S. financial institutions from offering correspondent banking services to designated foreign financial institutions through correspondent banking sanctions. As a practical matter, once a foreign financial institution loses its ability to maintain correspondent bank accounts with U.S. financial institutions, then that foreign financial institution can no longer facilitate international wire transfers in U.S. dollars.

Significantly, OFAC has also adopted the so-called "50% Rule" with respect to SDN and SSI sanctions. Under this rule, when 50% of an entity is owned either by a single SDN or SSI or a combination of SDNs or SSIs, then the entity will be deemed to be subject to the same restrictions as the SDN or SSI.

Recent Sanctions Involving the Russian Federation and Ukraine

Beginning on February 21, 2022 and continuing through as recently as March 11, 2022, the U.S. has imposed a combination of the aforementioned sanctions on various Russian persons, entities, and industries in response to the Russian invasion. In particular, the United States has adopted, among others, the following sanctions:

  • Regional Sanctions: The United States has imposed regional sanctions against Ukraine, including the following:
    • Prohibiting any new investments by U.S. persons into two Ukrainian regions known as the Donetsk People's Republic (the "DNR") and the Luhansk People's Republic (the "LNR"). 
    • Banning the importation into the United States of any goods, services, or technology from the DNR and the LNR.
    • Barring the exportation by any U.S. persons or from the United States of any goods, services, or technology to the DNR and the LNR.
  • SDN Sanctions: The United States has designated a number of new persons and entities in the Russian Federation, Ukraine, and Belarus as SDNs, including VTB Bank, the second-largest Russian bank, various members of the Russian government, including President Vladimir Putin, and several Russian oligarchs.
  • Industry-Specific Sanctions: The United States has also targeted a number of industries in the Russian Federation through industry-specific sanctions, including the following:
    • Barring U.S. persons and companies from engaging in any transactions with the Central Bank of Russia, the National Wealth Fund of the Russian Federation, and the Russian Ministry of Finance.
    • Requiring U.S. companies to limit new debt issuances to several large Russian companies, including numerous banks and Russian Railways, to a 14-day maturity period.
    • Prohibiting the importation of oil, coal, natural gas, and related products from the Russian Federation into the United States.
    • Barring the importation of fish, seafood, alcoholic beverages, and non-industrial diamonds from the Russian Federation into the United States. 
    • Banning the exporting and re-exporting of luxury goods to the Russian Federation from the United States or by U.S. persons or U.S. companies.
    • Prohibiting transfers of U.S. banknotes to the Russian government or anyone located in the Russian Federation.
  • Correspondent Banking Sanctions: The United States has also imposed correspondent banking sanctions on Public Joint Stock Company Sberbank of Russia, commonly known as SberBank, and several of its subsidiaries, thus requiring U.S. financial institutions to sever their corresponding banking relationships with these Russian banks.

In many cases, OFAC has adopted general licenses permitting a brief period of time for U.S. companies to wind down their business dealings that could be impacted by these sanctions. OFAC has not universally adopted these wind-down licenses, however—for example, the agency has not announced a wind-down period with respect to the export of luxury goods and U.S. banknotes to the Russian Federation, meaning U.S. companies must stop engaging in these types of transactions after the regulation's March 11, 2022 effective date. 

What Companies Should Be Doing

The recent sanctions are broad-reaching and will likely impact every facet of Russian life. While it is tempting to think that the sanctions are really intended to target only certain industries, like the Russian energy or financial sector, the fact of the matter is that DOJ and OFAC will likely seek to enforce these sanctions wherever applicable. For example, recently, DOJ announced criminal charges against a television news producer with Fox News for violating a similar slate of sanctions imposed when the Russian Federation previously invaded Crimea.

These new sanctions will also have a substantial impact on U.S. companies that are trying to grapple with how to operate their business dealings with Russian counterparties while also complying with U.S. sanctions. To take just a few examples, the new sanctions could impact U.S. businesses in the following ways:

  • The prohibitions on the export of U.S. banknotes to the Russian Federation could force financial institutions and currency exchanges, including crypto-currency exchanges, to limit, or even eliminate, services to Russian clients by barring those clients from receiving U.S. dollars, including by withdrawing dollars from their bank or exchange accounts.
  • The prohibitions on the import of Russian seafood and alcohol will impact the hospitality industry, given that hotels and restaurants will no longer be able to import products like vodka and Russian fish delicacies.
  • The prohibitions on exports of luxury goods to the Russian Federation will bar fashion houses, jewelers, and tobacco and alcohol vendors from exporting or re-exporting their luxury items to their Russian clients. 
  • Any company that receives payments from Russian clients in U.S. dollars may soon find that these clients can no longer pay them, as corresponding bank sanctions, SDN designations, and the banning of Russian financial institutions from the SWIFT system make it impossible for more and more Russian banks to conduct U.S. dollar correspondent banking transactions on behalf their Russian clients.

So what should companies do in light of these concerns? We believe that companies need to adopt an approach that addresses short, medium, and long-term concerns.

First, no matter how refined a compliance program a company has in place, U.S. companies need to engage in immediate triage to determine whether they are engaged in any transactions with any new SDNs, SSIs, or prohibited regions or industries. If so, the company will need to take immediate actions to arrange to wind down or modify those dealings as necessary, including potentially determining how best to exit out of already-existing contractual relationships.

Second, U.S. companies need to review their payment arrangements with Russian clients to evaluate the risk of non-payment going forward. Even if transactions with such clients are not barred by sanctions, the non-payment risk may be sufficient for U.S. companies to choose to sever or modify those relationships.

Third, U.S. companies need to update their compliance programs to account for the new sanctions, not simply by adding new SDNs and SSIs to their existing compliance filters, but also reviewing their contracting policies to ensure that the company's contracts and due diligence are as protective as possible. While every business will need to address these issues in the context of their own specific business concerns, we believe that this blueprint will help companies navigate the ever-shifting sanctions landscape. As always, we stand ready to assist you with this process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.