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April 13, 2022

Stroock Client Alert

By: Chris Griner, Shannon Reaves, Tom Firestone, Christopher R. Brewster, Gregory Jaeger, Andrew J. Astuno, Erin Bruce Iacobucci

During the week of April 4, 2022, the White House and the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”) announced sweeping new sanctions on Russia including:

  • a prohibition on new investment in Russia;
  • blocking sanctions on two of Russia’s largest banks;
  • sanctions against two major Russian state-owned enterprises;
  • legislation codifying into law a prohibition on the importation of gas, oil and coal from Russia and suspending normal trade relations with Russia and Belarus; and
  • sanctions against the two adult daughters of President Putin and the wife and daughter of Foreign Minister Sergey Lavrov. 

At the same time, the Russian Duma (parliament) began considering new measures that would criminalize compliance with foreign sanctions; allow the seizure of assets from companies and individuals from so-called “unfriendly states”; and allow for the introduction of “external administration” in foreign companies that have announced that they are leaving the Russian market.

The new U.S. measures, and the threatened Russian countermeasures, suggest that Russia and the United States are moving towards a full, de facto, if not de jure, bilateral trade embargo.  Given the rapidly developing and complex situation, companies should work closely with qualified counsel on a regular basis to stay abreast of all developments, ensure compliance with all relevant sanctions, and protect their operations and employees in Russia.  

It is important to note that U.S. trade sanctions reach indirect as well as direct transactions. The “facilitation” of sanctioned trade is prohibited (even if the transaction is legal where it occurs); that foreign branch offices of U.S. companies are “U.S. persons” for purposes of the sanctions; and that all U.S. persons are required to comply with U.S. trade sanctions, wherever they reside or work.  Also, foreign persons are treated as “U.S. persons” while in the United States, and that “work-arounds” can be prosecuted as evasion. 

Violations carry civil and criminal penalties.  There are also ancillary penalties, ranging from reputational damage to debarment as an exporter or government contractor.  In addition, foreign investors that engage in international transactions that would be illegal under U.S. law – even if otherwise legal – can jeopardize the chance that their U.S. acquisitions and investments will pass muster before the Committee on Foreign Investment in the United States. 

For all of these reasons, U.S. businesses with any kind of global presence must stay abreast of sanctions developments and revise and enhance their compliance programs as needed to prevent violations. 

New U.S. Sanctions

Executive Order Prohibiting New Investment in Russia

On April 6, 2022, President Biden signed the latest in a series of Executive Orders (“E.O.”) sanctioning Russia for its invasion of Ukraine.[1]  The April 6 E.O. prohibits:

  1. new investment in the Russian Federation by a United States person, wherever located
  2. the exportation, re-exportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any category of services as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, to any person located in the Russian Federation; and
  3. any approval, financing, facilitation, or guarantee by a United States person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited by this section if performed by a United States person or within the United States.[2] (emphasis added)

The Executive Order does not define the term “investment.” However, OFAC has previously provided guidance on its interpretation of “investment” as used in the Countering America’s Adversaries Through Sanctions Act (“CAATSA”).  Specifically, OFAC FAQ 540 states:    

For purposes of implementing section 233 of CAATSA, OFAC will interpret the term “investment” broadly as a transaction that constitutes a commitment or contribution of funds or other assets or a loan or other extension of credit to an enterprise. For purposes of this interpretation, a loan or extension of credit is any transfer or extension of funds or credit on the basis of an obligation to repay, or any assumption or guarantee of the obligation of another to repay an extension of funds or credit, including: overdrafts, currency swaps, purchases of debt securities issued by the Government of Russia, purchases of a loan made by another person, sales of financial assets subject to an agreement to repurchase, renewals or refinancings whereby funds or credits are transferred or extended to a borrower or recipient described in the provision, the issuance of standby letters of credit, and drawdowns on existing lines of credit.[3]

The same interpretation will presumably apply with respect to the April 6 Executive Order. 

The Executive Order defines “U.S. person” as “any United States citizen, lawful permanent resident, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States” without specific reference to foreign subsidiaries or other U.S.-controlled entities located in foreign jurisdictions.[4]  However, it also states that [a]ny transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of the prohibitions set forth in this order is prohibited and that “a]ny conspiracy formed to violate any of the prohibitions set forth in this order is prohibited.”[5]  Accordingly, new investments into Russia by foreign subsidiaries of U.S. companies should be treated with extreme caution and should be assessed in close consultation with qualified counsel.  Further, as noted above, the facilitation of prohibited trade with Russia, including, but not limited to, transactions by foreign subsidiaries and affiliates, is prohibited.

In announcing the Executive Order, the White House stated that the sanctions imposed prior to April 6 were already having a significant impact on the Russian economy, and noted, approvingly, the exodus of 600 private sectors companies from the Russian market.  The White House promised that “[a]s long as Russia continues its brutal assault on Ukraine, we will stand unified with our allies and partners in imposing additional costs on Russia for its actions.”[6] The statement presages further sanctions.

Sberbank and Alfa Blocking Sanctions

On April 5, OFAC imposed full blocking sanctions on Public Joint Stock Company Sberbank of Russia (“Sberbank”) and Joint Stock Company Alfa-Bank (“Alfa”).[7]  In announcing the sanctions, OFAC explained that:

Sberbank … is uniquely important to the Russian Federation economy, holding about a third of all bank assets in Russia.  Sberbank is the largest financial institution in Russia and is majority-owned by the Government of the Russian Federation.  It holds the largest market share of savings deposits in the country, is the main creditor of the Russian economy, and is deemed by the GoR to be a systematically important financial institution.[8]

OFAC also noted that Alfa is Russia’s largest privately owned financial institution and Russia’s fourth-largest financial institution overall and has been designated for operating in the financial services sector of the Russian economy.[9]

As a result of OFAC’s latest actions, both banks are now subject to full blocking sanctions, which go beyond the prior, limited restrictions on both entities.[10]  Now, U.S. persons, wherever located, are prohibited from dealing with either bank without specific authorization from OFAC.  OFAC also designated 42 Sberbank subsidiaries, six Alfa subsidiaries and five vessels owned by Alfa’s subsidiary, Alfa-Lizing.[11]   

Simultaneous with the announcement of the blocking sanctions, OFAC also issued and/or amended the following six General Licenses (“GL”s) authorizing, with certain exceptions, the wind-down of transactions involving Sberbank and Alfa for a limited period of time:

  • GL 22 which authorizes all transactions ordinarily incident and necessary to wind down transactions involving Sberbank until 12:0 a.m. ET on April 13, 2022;[12]
  • GL 23 which authorizes all transactions ordinarily incident and necessary to wind down transactions involving Alfa until 12:01 a.m. ET May 6, 2022;[13] 
  • GL 8B which authorizes energy related transactions involving Sberbank or Alfa through 12:01 a.m. ET June 24, 2022;[14]
  • GL 9B which authorizes, until 12:01 a.m. ET on June 30, 2022 dealings in debt or equity issued by Alfa prior to April 6, 2022;[15]
  • GL 10B which authorizes, until 12:01 a.m. ET on June 30, 2022 dealings in derivative contracts involving Alfa entered into prior to April 6, 2022;[16]
  • GL 21 which authorizes all transactions ordinarily incident and necessary to wind down transactions involving Sberbank CIB USA, Inc. until 12:01 a.m. ET on June 7, 2022[17];

On April 12, 2022, OFAC issued GL 26, which authorizes (with certain exceptions) all transactions ordinarily incident and necessary to the wind down of transactions involving Joint Stock Company SB Sberbank Kazakhstan or Sberbank Europe AG (collectively, “the blocked Sberbank subsidiaries”), or any entity in which the blocked Sberbank subsidiaries own, directly or indirectly, a 50 percent or greater interest, that are prohibited by Executive Order (“E.O.”) 14024 are authorized through 12:01 a.m. Eastern Daylight Time, July 12, 2022.[18]

Sanctions Against Major Russian State-Owned Enterprises – Diamonds and Shipbuilding

On April 7, 2022, OFAC also designated Alrosa, a Russian state-owned enterprise and the world’s largest diamond mining company, which is also responsible for 90 percent of Russia’s diamond mining capacity and redesignated Joint Stock Company United Shipbuilding Corporation (“USC”), a Russian state-owned enterprise that develops and constructs the majority of Russia’s military warships including, according to OFAC, many of those used in the war in Ukraine.[19]  At the same time, OFAC issued GL 24 authorizing the transactions ordinarily incident and necessary to wind down transactions involving Alrosa (or entities owned 50 percent or more by Alrosa) through 12:01 a.m. ET on May 7, 2022.[20]  As a result of the April 7 announcement, all property and interests in property of Alrosa and USC, and all entities that are owned, directly or indirectly, 50% or more by either of them, that are in the United States or in the possession of U.S. persons are blocked and must be reported to OFAC.

Legislation on Oil, Gas and Coal Imports and Suspension of Normal Trade Relations

On April 8, 2022, President Biden signed (i) the “Ending Importation of Russian Coal Act” (P.L. 117-109; H.R. 6968)[21] and (ii) the “Suspending Normal Trade Relations with Russia and Belarus Act” (P.L. 117-110; H.R. 7108).[22] In an extraordinary show of unity, each bill passed by overwhelming majorities, with H.R. 6968 passing the House 413-9 and H.R. 7108 passing 420-3, and both bills passing the Senate by unanimous roll call votes, 100-0.

H.R. 6968 codifies President Biden’s March 8, Executive Order banning the importation of Russian oil, liquefied natural gas, and coal.  It also authorizes the President to overturn the ban upon certification to Congress  that Russia (a) has reached an agreement with Ukraine to withdraw Russian troops and cease military hostilities in Ukraine; (b) Russia poses no immediate military threat of aggression to any NATO member; and (c) recognizes the right of Ukrainians to independently and freely choose their own government.[23] Notably, any certification by the President that would justify lifting the ban could be rejected by Congress via a joint resolution of disapproval.

H.R. 7108 removes Russia’s and Belarus’ Normal Trade Relation (“NTR”) status, imposes certain tariffs on products from Russia and Belarus, and authorizes the President to impose further tariff increases on their products.  It also allows the President to restore normal trade relations with Russia and Belarus and remove the new tariffs upon certification to Congress (subject, again, to Congressional approval) that Russia or Belarus (or both) (a) has reached an agreement relating to the respective withdrawal of Russian or Belarusian forces from Ukraine (or both, if applicable) and cessation of military hostilities that is accepted by the free and independent government of Ukraine; (b) poses no immediate military threat of aggression to any NATO member; and (c) recognizes the right of the people of Ukraine to independently and freely choose their own government.[24]  

“Blocking Sanctions” Imposed on Additional Russian Elites and Family Members

On April 6, the White House and OFAC also announced full blocking sanctions on certain members of the Russian elite and their family members.[25]  Those sanctioned include Putin’s adult daughters and Foreign Minister Sergey Lavrov’s wife, and daughter.[26]  As a result, all property and interests in property of any of the blocked persons, and all entities that are owned, directly or indirectly, 50 percent or more, by any of them, that are in the United States or in the possession of U.S. persons are blocked and must be reported to OFAC.

Possible Russian Countermeasures

As the United States expanded its sanctions against Russia, Russia began considering extraordinary counter measures, including criminal liability for those who comply with foreign sanctions, the seizure of foreign assets without judicial process or compensation, and the imposition of external administration in foreign companies that have announced that they are exiting from Russia.    

Criminal Liability for Compliance With Foreign Sanctions

On April 4, the Duma began consideration of a bill that would make it a crime for anyone who has a managerial function in a commercial or other organization to use their position in the interests of complying with foreign sanctions.  Violations would be punishable by up to 10 years’ incarceration.[27]  The exact scope of the bill is not clear.  An accompanying “explanatory note” states that the imposition of sanctions is generally a matter for foreign governments and their officials, but then notes that “if somebody inside the Russian Federation decides to limit the rights and freedoms of Russian citizens, legal entities, institutions or organizations, then such people should be subject to criminal liability.” The reference to “somebody inside the Russian Federation” suggests that the law would apply to foreigners in Russia as well as Russian citizens.  In short, if the bill passes in its current form, it appears that a Russia-based employee of an international company, regardless of citizenship, who declines a transaction with a sanctioned entity in order to avoid violating foreign sanctions, could be prosecuted and imprisoned for up to 10 years.

Seizure of Foreign Assets

On April 8, the Duma began consideration of a bill that would allow the Russian government to seize property that (a) was in Russia prior to February 24, 2022 and (b) belongs to foreign governments or to foreign individuals connected with foreign governments(as well as their beneficiaries and persons under their control) that commit “unfriendly acts” (an undefined term) in relation to the Russian Federation, Russian legal entities, and Russian persons.  Although the bill refers to individuals “connected with foreign governments,” the context suggests that it would apply to private individuals and companies from “unfriendly” states regardless of whether they have any formal government affiliation. The bill also defines “property” broadly to include real estate, money, bank deposits, securities and “other property.”  It also provides that there will be no compensation for such seizures and that local government agencies will have broad discretion to effectuate such seizures, but provides no other details about the rights of property holders or the legal process by which their property will be seized.

“External Administration”

On April 12, the Duma also began considering a bill that would allow for the introduction of “external administration” (similar to a bankruptcy trustee) in the Russian operations of foreign companies that have decided to exit the Russian market.[28]  According to the press service of the United Russia party (which drafted the bill and is sponsoring it in the Duma), the initiative affects companies that have decided to leave the Russian market “without obvious economic reasons, based on anti-Russian attitudes in Europe and the United States.”[29]  The bill provides that the external administrator will be appointed by an inter-agency commission led by the Ministry of Economic Development, pursuant to a court order.  Other details of the bill will be analyzed in a separate client alert.           

It is difficult to assess the prospects for passage of these bills.  Similar proposals have failed in the past and the local business community, including both Russian and foreign businesses, is lobbying against both bills through business associations.  However, the current Russian political climate may well prove propitious for the bills’ success.  

Conclusion

As the U.S. ramps up its sanctions and Russia considers extraordinary responses, businesses should, together with qualified counsel, carefully review their Russia operations and assess whether continuing them is practical, or even possible, in light of the measures both countries are taking.  Businesses should take special care to protect their Russian employees against possible retaliation for compliance with foreign sanctions and should, in particular:

  • ensure that all officers, directors, and employees, especially personnel involved in international transactions and foreign branch office employees, are fully informed on trade sanctions and have ready access to guidance from compliance staff when and if questions arise;
  • ensure that foreign subsidiaries and affiliates, wherever located, have appropriate compliance programs in place and fully understand the prohibitions imposed by U.S. trade sanctions on U.S. persons – including U.S. persons who may work for a foreign entity;
  • stay in close contact with local teams in Russia about potential developments and Russian legislation and work with them to develop contingency plans based on different possible scenarios;
  • keep Russian-based teams informed about the company’s intentions so that these employees do not learn of the company’s plans from outside sources;
  • although full compliance with U.S. law is paramount, in order to help maintain all available defenses against possible Russian prosecution, it is prudent to document the commercial rationale (separate from the sanctions) for business decisions that implicate international sanctions (including but not limited to U.S. sanctions);
  • consider transferring decision making powers outside of Russia and;
  • consider relocating managerial personnel outside of Russia.

Finally, the United States is not the only country that has issued sanctions against Russia.  Companies with international operations must also be mindful of local laws, rules, and regulations that may impose different requirements than what is required under U.S. law.  Moreover, as noted above, Russian retaliatory sanctions, if enacted, could prohibit compliance with non-U.S. as well as U.S. sanctions against Russia.  Companies subject to foreign laws and regulations should also consult with qualified local counsel.  

For more information, please contact any of the authors of this alert.


[1] The White House, Executive Order, April 6, 2022, “Prohibiting New Investment in and Certain Services to the Russian Federation in Response to Continued Russian Federation Aggression,” available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2022/04/06/prohibiting-new-investment-in-and-certain-services-to-the-russian-federation-in-response-to-continued-russian-federation-aggression/. (“April 6 E.O.”).

[2] Id. at Section 1(a).

[3] U.S. Department of the Treasury, Office of Foreign Assets Control, Sanctions Programs and Information, Ukraine-/Russia-Related Sanctions, Frequently Asked Questions, “OFAC FAQ 540,” available at: https://home.treasury.gov/policy-issues/financial-sanctions/faqs/540.

[4] April 6 E.O. at Sec. 4. (c).

[5] Id. at Sec. 2. (b).

[6] The White House, Statements and Releases, April 6, 2022, “FACT SHEET: United States, G7 and EU Impose Severe and Immediate Costs on Russia,” available at: https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/06/fact-sheet-united-states-g7-and-eu-impose-severe-and-immediate-costs-on-russia/. (“April 6 Fact Sheet”).

[7] U.S. Department of the Treasury, Press Releases, April 6, 2022, “U.S. Treasury Escalates Sanctions on Russia for Its Atrocities in Ukraine,” available at: https://home.treasury.gov/news/press-releases/jy0705, (“Treasury April 6 Press Release”).

[8] Id.

[9] Id.

[10] See U.S. Department of the Treasury, Press Releases, February 24, 2022, “U.S. Treasury Announces Unprecedented & Expansive Sanctions Against Russia, Imposing Swift and Severe Economic Costs,” available at: https://home.treasury.gov/news/press-releases/jy0608.

[11] See Treasury April 6 Press Release.

[12] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 22, April 6, 2022, available at: https://home.treasury.gov/system/files/126/russia_gl22.pdf. (“GL 22”).

[13] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 23, April 6, 2022, available at: https://home.treasury.gov/system/files/126/russia_gl23.pdf. (“GL 23”).

[14] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 8B, April 6, 2022, available at: https://home.treasury.gov/system/files/126/russia_gl8b.pdf. (“GL 8B”).

[15] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 9B, April 6, 2022, available at: https://home.treasury.gov/system/files/126/russia_gl9b.pdf. (“GL 9B”).

[16] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 10B, April 6, 2022, available at: https://home.treasury.gov/system/files/126/russia_gl10b.pdf. (“GL 10B”).

[17] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 21, April 6, 2022, available at: https://home.treasury.gov/system/files/126/russia_gl21.pdf. (“GL 21”).

[18] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 26, April 12, 2022, available at: https://home.treasury.gov/system/files/126/russia_gl26.pdf. (“GL 26”).

[19] U.S. Department of the Treasury, Press Releases, April 7, 2022, “The United States Sanctions Major Russian State-Owned Enterprises,” available at: https://home.treasury.gov/news/press-releases/jy0707.

[20] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 24, April 7, 2022,  https://home.treasury.gov/system/files/126/russia_gl24.pdf. (“GL 24”).

[21] P.L. 117-109; H.R. 6968, available at: https://www.congress.gov/bill/117th-congress/house-bill/6968/text?q=%7B%22search%22%3A%5B%22hr6968%22%2C%22hr6968%22%5D%7D&r=1&s=1.

[22] P.L. 117-110; H.R. 7108, available at: https://www.congress.gov/bill/117th-congress/house-bill/7108/text?q=%7B%22search%22%3A%5B%22hr7108%22%2C%22hr7108%22%5D%7D&r=1&s=2.

[23] P.L. 117-109; H.R. 6968.

[24] P.L. 117-110; H.R. 7108.

[25] April 6 Fact Sheet.

[26] Treasury April 6 Press Release.

[27]  Gazeta.Ru, “A draft law on criminal liability for the implementation of anti-Russian sanctions has been submitted to the State Duma,” April 4, 2022, (translated from Russian), available at: https://www.gazeta.ru/social/news/2022/04/04/17521537.shtml.

[28] Vedomosti, “A draft law on external administration in foreign companies was submitted to the State Duma,” (translated from Russian), April 12, 2022, available at: https://urldefense.com/v3/__https://www.vedomosti.ru/business/news/2022/04/12/917725-zakonoproekt-vneshnei-administratsii__;!!N5JjT8_g!dKC3U7FTRmTn7im3vIf__YQKA9cPUKLPBgSoUbfOjbdEsGPYeqvQuzOtgeXQlyxVp2qiBeGrWzvqrvSsCAcKWaqcyldN$ [vedomosti[.]ru].

[29] Id.

 

April 13, 2022

Stroock Client Alert

By: Chris Griner, Shannon Reaves, Tom Firestone, Christopher R. Brewster, Gregory Jaeger, Andrew J. Astuno, Erin Bruce Iacobucci

During the week of April 4, 2022, the White House and the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”) announced sweeping new sanctions on Russia including:

  • a prohibition on new investment in Russia;
  • blocking sanctions on two of Russia’s largest banks;
  • sanctions against two major Russian state-owned enterprises;
  • legislation codifying into law a prohibition on the importation of gas, oil and coal from Russia and suspending normal trade relations with Russia and Belarus; and
  • sanctions against the two adult daughters of President Putin and the wife and daughter of Foreign Minister Sergey Lavrov. 

At the same time, the Russian Duma (parliament) began considering new measures that would criminalize compliance with foreign sanctions; allow the seizure of assets from companies and individuals from so-called “unfriendly states”; and allow for the introduction of “external administration” in foreign companies that have announced that they are leaving the Russian market.

The new U.S. measures, and the threatened Russian countermeasures, suggest that Russia and the United States are moving towards a full, de facto, if not de jure, bilateral trade embargo.  Given the rapidly developing and complex situation, companies should work closely with qualified counsel on a regular basis to stay abreast of all developments, ensure compliance with all relevant sanctions, and protect their operations and employees in Russia.  

It is important to note that U.S. trade sanctions reach indirect as well as direct transactions. The “facilitation” of sanctioned trade is prohibited (even if the transaction is legal where it occurs); that foreign branch offices of U.S. companies are “U.S. persons” for purposes of the sanctions; and that all U.S. persons are required to comply with U.S. trade sanctions, wherever they reside or work.  Also, foreign persons are treated as “U.S. persons” while in the United States, and that “work-arounds” can be prosecuted as evasion. 

Violations carry civil and criminal penalties.  There are also ancillary penalties, ranging from reputational damage to debarment as an exporter or government contractor.  In addition, foreign investors that engage in international transactions that would be illegal under U.S. law – even if otherwise legal – can jeopardize the chance that their U.S. acquisitions and investments will pass muster before the Committee on Foreign Investment in the United States. 

For all of these reasons, U.S. businesses with any kind of global presence must stay abreast of sanctions developments and revise and enhance their compliance programs as needed to prevent violations. 

New U.S. Sanctions

Executive Order Prohibiting New Investment in Russia

On April 6, 2022, President Biden signed the latest in a series of Executive Orders (“E.O.”) sanctioning Russia for its invasion of Ukraine.[1]  The April 6 E.O. prohibits:

  1. new investment in the Russian Federation by a United States person, wherever located
  2. the exportation, re-exportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any category of services as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, to any person located in the Russian Federation; and
  3. any approval, financing, facilitation, or guarantee by a United States person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited by this section if performed by a United States person or within the United States.[2] (emphasis added)

The Executive Order does not define the term “investment.” However, OFAC has previously provided guidance on its interpretation of “investment” as used in the Countering America’s Adversaries Through Sanctions Act (“CAATSA”).  Specifically, OFAC FAQ 540 states:    

For purposes of implementing section 233 of CAATSA, OFAC will interpret the term “investment” broadly as a transaction that constitutes a commitment or contribution of funds or other assets or a loan or other extension of credit to an enterprise. For purposes of this interpretation, a loan or extension of credit is any transfer or extension of funds or credit on the basis of an obligation to repay, or any assumption or guarantee of the obligation of another to repay an extension of funds or credit, including: overdrafts, currency swaps, purchases of debt securities issued by the Government of Russia, purchases of a loan made by another person, sales of financial assets subject to an agreement to repurchase, renewals or refinancings whereby funds or credits are transferred or extended to a borrower or recipient described in the provision, the issuance of standby letters of credit, and drawdowns on existing lines of credit.[3]

The same interpretation will presumably apply with respect to the April 6 Executive Order. 

The Executive Order defines “U.S. person” as “any United States citizen, lawful permanent resident, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States” without specific reference to foreign subsidiaries or other U.S.-controlled entities located in foreign jurisdictions.[4]  However, it also states that [a]ny transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of the prohibitions set forth in this order is prohibited and that “a]ny conspiracy formed to violate any of the prohibitions set forth in this order is prohibited.”[5]  Accordingly, new investments into Russia by foreign subsidiaries of U.S. companies should be treated with extreme caution and should be assessed in close consultation with qualified counsel.  Further, as noted above, the facilitation of prohibited trade with Russia, including, but not limited to, transactions by foreign subsidiaries and affiliates, is prohibited.

In announcing the Executive Order, the White House stated that the sanctions imposed prior to April 6 were already having a significant impact on the Russian economy, and noted, approvingly, the exodus of 600 private sectors companies from the Russian market.  The White House promised that “[a]s long as Russia continues its brutal assault on Ukraine, we will stand unified with our allies and partners in imposing additional costs on Russia for its actions.”[6] The statement presages further sanctions.

Sberbank and Alfa Blocking Sanctions

On April 5, OFAC imposed full blocking sanctions on Public Joint Stock Company Sberbank of Russia (“Sberbank”) and Joint Stock Company Alfa-Bank (“Alfa”).[7]  In announcing the sanctions, OFAC explained that:

Sberbank … is uniquely important to the Russian Federation economy, holding about a third of all bank assets in Russia.  Sberbank is the largest financial institution in Russia and is majority-owned by the Government of the Russian Federation.  It holds the largest market share of savings deposits in the country, is the main creditor of the Russian economy, and is deemed by the GoR to be a systematically important financial institution.[8]

OFAC also noted that Alfa is Russia’s largest privately owned financial institution and Russia’s fourth-largest financial institution overall and has been designated for operating in the financial services sector of the Russian economy.[9]

As a result of OFAC’s latest actions, both banks are now subject to full blocking sanctions, which go beyond the prior, limited restrictions on both entities.[10]  Now, U.S. persons, wherever located, are prohibited from dealing with either bank without specific authorization from OFAC.  OFAC also designated 42 Sberbank subsidiaries, six Alfa subsidiaries and five vessels owned by Alfa’s subsidiary, Alfa-Lizing.[11]   

Simultaneous with the announcement of the blocking sanctions, OFAC also issued and/or amended the following six General Licenses (“GL”s) authorizing, with certain exceptions, the wind-down of transactions involving Sberbank and Alfa for a limited period of time:

  • GL 22 which authorizes all transactions ordinarily incident and necessary to wind down transactions involving Sberbank until 12:0 a.m. ET on April 13, 2022;[12]
  • GL 23 which authorizes all transactions ordinarily incident and necessary to wind down transactions involving Alfa until 12:01 a.m. ET May 6, 2022;[13] 
  • GL 8B which authorizes energy related transactions involving Sberbank or Alfa through 12:01 a.m. ET June 24, 2022;[14]
  • GL 9B which authorizes, until 12:01 a.m. ET on June 30, 2022 dealings in debt or equity issued by Alfa prior to April 6, 2022;[15]
  • GL 10B which authorizes, until 12:01 a.m. ET on June 30, 2022 dealings in derivative contracts involving Alfa entered into prior to April 6, 2022;[16]
  • GL 21 which authorizes all transactions ordinarily incident and necessary to wind down transactions involving Sberbank CIB USA, Inc. until 12:01 a.m. ET on June 7, 2022[17];

On April 12, 2022, OFAC issued GL 26, which authorizes (with certain exceptions) all transactions ordinarily incident and necessary to the wind down of transactions involving Joint Stock Company SB Sberbank Kazakhstan or Sberbank Europe AG (collectively, “the blocked Sberbank subsidiaries”), or any entity in which the blocked Sberbank subsidiaries own, directly or indirectly, a 50 percent or greater interest, that are prohibited by Executive Order (“E.O.”) 14024 are authorized through 12:01 a.m. Eastern Daylight Time, July 12, 2022.[18]

Sanctions Against Major Russian State-Owned Enterprises – Diamonds and Shipbuilding

On April 7, 2022, OFAC also designated Alrosa, a Russian state-owned enterprise and the world’s largest diamond mining company, which is also responsible for 90 percent of Russia’s diamond mining capacity and redesignated Joint Stock Company United Shipbuilding Corporation (“USC”), a Russian state-owned enterprise that develops and constructs the majority of Russia’s military warships including, according to OFAC, many of those used in the war in Ukraine.[19]  At the same time, OFAC issued GL 24 authorizing the transactions ordinarily incident and necessary to wind down transactions involving Alrosa (or entities owned 50 percent or more by Alrosa) through 12:01 a.m. ET on May 7, 2022.[20]  As a result of the April 7 announcement, all property and interests in property of Alrosa and USC, and all entities that are owned, directly or indirectly, 50% or more by either of them, that are in the United States or in the possession of U.S. persons are blocked and must be reported to OFAC.

Legislation on Oil, Gas and Coal Imports and Suspension of Normal Trade Relations

On April 8, 2022, President Biden signed (i) the “Ending Importation of Russian Coal Act” (P.L. 117-109; H.R. 6968)[21] and (ii) the “Suspending Normal Trade Relations with Russia and Belarus Act” (P.L. 117-110; H.R. 7108).[22] In an extraordinary show of unity, each bill passed by overwhelming majorities, with H.R. 6968 passing the House 413-9 and H.R. 7108 passing 420-3, and both bills passing the Senate by unanimous roll call votes, 100-0.

H.R. 6968 codifies President Biden’s March 8, Executive Order banning the importation of Russian oil, liquefied natural gas, and coal.  It also authorizes the President to overturn the ban upon certification to Congress  that Russia (a) has reached an agreement with Ukraine to withdraw Russian troops and cease military hostilities in Ukraine; (b) Russia poses no immediate military threat of aggression to any NATO member; and (c) recognizes the right of Ukrainians to independently and freely choose their own government.[23] Notably, any certification by the President that would justify lifting the ban could be rejected by Congress via a joint resolution of disapproval.

H.R. 7108 removes Russia’s and Belarus’ Normal Trade Relation (“NTR”) status, imposes certain tariffs on products from Russia and Belarus, and authorizes the President to impose further tariff increases on their products.  It also allows the President to restore normal trade relations with Russia and Belarus and remove the new tariffs upon certification to Congress (subject, again, to Congressional approval) that Russia or Belarus (or both) (a) has reached an agreement relating to the respective withdrawal of Russian or Belarusian forces from Ukraine (or both, if applicable) and cessation of military hostilities that is accepted by the free and independent government of Ukraine; (b) poses no immediate military threat of aggression to any NATO member; and (c) recognizes the right of the people of Ukraine to independently and freely choose their own government.[24]  

“Blocking Sanctions” Imposed on Additional Russian Elites and Family Members

On April 6, the White House and OFAC also announced full blocking sanctions on certain members of the Russian elite and their family members.[25]  Those sanctioned include Putin’s adult daughters and Foreign Minister Sergey Lavrov’s wife, and daughter.[26]  As a result, all property and interests in property of any of the blocked persons, and all entities that are owned, directly or indirectly, 50 percent or more, by any of them, that are in the United States or in the possession of U.S. persons are blocked and must be reported to OFAC.

Possible Russian Countermeasures

As the United States expanded its sanctions against Russia, Russia began considering extraordinary counter measures, including criminal liability for those who comply with foreign sanctions, the seizure of foreign assets without judicial process or compensation, and the imposition of external administration in foreign companies that have announced that they are exiting from Russia.    

Criminal Liability for Compliance With Foreign Sanctions

On April 4, the Duma began consideration of a bill that would make it a crime for anyone who has a managerial function in a commercial or other organization to use their position in the interests of complying with foreign sanctions.  Violations would be punishable by up to 10 years’ incarceration.[27]  The exact scope of the bill is not clear.  An accompanying “explanatory note” states that the imposition of sanctions is generally a matter for foreign governments and their officials, but then notes that “if somebody inside the Russian Federation decides to limit the rights and freedoms of Russian citizens, legal entities, institutions or organizations, then such people should be subject to criminal liability.” The reference to “somebody inside the Russian Federation” suggests that the law would apply to foreigners in Russia as well as Russian citizens.  In short, if the bill passes in its current form, it appears that a Russia-based employee of an international company, regardless of citizenship, who declines a transaction with a sanctioned entity in order to avoid violating foreign sanctions, could be prosecuted and imprisoned for up to 10 years.

Seizure of Foreign Assets

On April 8, the Duma began consideration of a bill that would allow the Russian government to seize property that (a) was in Russia prior to February 24, 2022 and (b) belongs to foreign governments or to foreign individuals connected with foreign governments(as well as their beneficiaries and persons under their control) that commit “unfriendly acts” (an undefined term) in relation to the Russian Federation, Russian legal entities, and Russian persons.  Although the bill refers to individuals “connected with foreign governments,” the context suggests that it would apply to private individuals and companies from “unfriendly” states regardless of whether they have any formal government affiliation. The bill also defines “property” broadly to include real estate, money, bank deposits, securities and “other property.”  It also provides that there will be no compensation for such seizures and that local government agencies will have broad discretion to effectuate such seizures, but provides no other details about the rights of property holders or the legal process by which their property will be seized.

“External Administration”

On April 12, the Duma also began considering a bill that would allow for the introduction of “external administration” (similar to a bankruptcy trustee) in the Russian operations of foreign companies that have decided to exit the Russian market.[28]  According to the press service of the United Russia party (which drafted the bill and is sponsoring it in the Duma), the initiative affects companies that have decided to leave the Russian market “without obvious economic reasons, based on anti-Russian attitudes in Europe and the United States.”[29]  The bill provides that the external administrator will be appointed by an inter-agency commission led by the Ministry of Economic Development, pursuant to a court order.  Other details of the bill will be analyzed in a separate client alert.           

It is difficult to assess the prospects for passage of these bills.  Similar proposals have failed in the past and the local business community, including both Russian and foreign businesses, is lobbying against both bills through business associations.  However, the current Russian political climate may well prove propitious for the bills’ success.  

Conclusion

As the U.S. ramps up its sanctions and Russia considers extraordinary responses, businesses should, together with qualified counsel, carefully review their Russia operations and assess whether continuing them is practical, or even possible, in light of the measures both countries are taking.  Businesses should take special care to protect their Russian employees against possible retaliation for compliance with foreign sanctions and should, in particular:

  • ensure that all officers, directors, and employees, especially personnel involved in international transactions and foreign branch office employees, are fully informed on trade sanctions and have ready access to guidance from compliance staff when and if questions arise;
  • ensure that foreign subsidiaries and affiliates, wherever located, have appropriate compliance programs in place and fully understand the prohibitions imposed by U.S. trade sanctions on U.S. persons – including U.S. persons who may work for a foreign entity;
  • stay in close contact with local teams in Russia about potential developments and Russian legislation and work with them to develop contingency plans based on different possible scenarios;
  • keep Russian-based teams informed about the company’s intentions so that these employees do not learn of the company’s plans from outside sources;
  • although full compliance with U.S. law is paramount, in order to help maintain all available defenses against possible Russian prosecution, it is prudent to document the commercial rationale (separate from the sanctions) for business decisions that implicate international sanctions (including but not limited to U.S. sanctions);
  • consider transferring decision making powers outside of Russia and;
  • consider relocating managerial personnel outside of Russia.

Finally, the United States is not the only country that has issued sanctions against Russia.  Companies with international operations must also be mindful of local laws, rules, and regulations that may impose different requirements than what is required under U.S. law.  Moreover, as noted above, Russian retaliatory sanctions, if enacted, could prohibit compliance with non-U.S. as well as U.S. sanctions against Russia.  Companies subject to foreign laws and regulations should also consult with qualified local counsel.  

For more information, please contact any of the authors of this alert.


[1] The White House, Executive Order, April 6, 2022, “Prohibiting New Investment in and Certain Services to the Russian Federation in Response to Continued Russian Federation Aggression,” available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2022/04/06/prohibiting-new-investment-in-and-certain-services-to-the-russian-federation-in-response-to-continued-russian-federation-aggression/. (“April 6 E.O.”).

[2] Id. at Section 1(a).

[3] U.S. Department of the Treasury, Office of Foreign Assets Control, Sanctions Programs and Information, Ukraine-/Russia-Related Sanctions, Frequently Asked Questions, “OFAC FAQ 540,” available at: https://home.treasury.gov/policy-issues/financial-sanctions/faqs/540.

[4] April 6 E.O. at Sec. 4. (c).

[5] Id. at Sec. 2. (b).

[6] The White House, Statements and Releases, April 6, 2022, “FACT SHEET: United States, G7 and EU Impose Severe and Immediate Costs on Russia,” available at: https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/06/fact-sheet-united-states-g7-and-eu-impose-severe-and-immediate-costs-on-russia/. (“April 6 Fact Sheet”).

[7] U.S. Department of the Treasury, Press Releases, April 6, 2022, “U.S. Treasury Escalates Sanctions on Russia for Its Atrocities in Ukraine,” available at: https://home.treasury.gov/news/press-releases/jy0705, (“Treasury April 6 Press Release”).

[8] Id.

[9] Id.

[10] See U.S. Department of the Treasury, Press Releases, February 24, 2022, “U.S. Treasury Announces Unprecedented & Expansive Sanctions Against Russia, Imposing Swift and Severe Economic Costs,” available at: https://home.treasury.gov/news/press-releases/jy0608.

[11] See Treasury April 6 Press Release.

[12] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 22, April 6, 2022, available at: https://home.treasury.gov/system/files/126/russia_gl22.pdf. (“GL 22”).

[13] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 23, April 6, 2022, available at: https://home.treasury.gov/system/files/126/russia_gl23.pdf. (“GL 23”).

[14] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 8B, April 6, 2022, available at: https://home.treasury.gov/system/files/126/russia_gl8b.pdf. (“GL 8B”).

[15] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 9B, April 6, 2022, available at: https://home.treasury.gov/system/files/126/russia_gl9b.pdf. (“GL 9B”).

[16] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 10B, April 6, 2022, available at: https://home.treasury.gov/system/files/126/russia_gl10b.pdf. (“GL 10B”).

[17] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 21, April 6, 2022, available at: https://home.treasury.gov/system/files/126/russia_gl21.pdf. (“GL 21”).

[18] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 26, April 12, 2022, available at: https://home.treasury.gov/system/files/126/russia_gl26.pdf. (“GL 26”).

[19] U.S. Department of the Treasury, Press Releases, April 7, 2022, “The United States Sanctions Major Russian State-Owned Enterprises,” available at: https://home.treasury.gov/news/press-releases/jy0707.

[20] U.S. Department of the Treasury, Office of Foreign Assets Control, Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587, General License No. 24, April 7, 2022,  https://home.treasury.gov/system/files/126/russia_gl24.pdf. (“GL 24”).

[21] P.L. 117-109; H.R. 6968, available at: https://www.congress.gov/bill/117th-congress/house-bill/6968/text?q=%7B%22search%22%3A%5B%22hr6968%22%2C%22hr6968%22%5D%7D&r=1&s=1.

[22] P.L. 117-110; H.R. 7108, available at: https://www.congress.gov/bill/117th-congress/house-bill/7108/text?q=%7B%22search%22%3A%5B%22hr7108%22%2C%22hr7108%22%5D%7D&r=1&s=2.

[23] P.L. 117-109; H.R. 6968.

[24] P.L. 117-110; H.R. 7108.

[25] April 6 Fact Sheet.

[26] Treasury April 6 Press Release.

[27]  Gazeta.Ru, “A draft law on criminal liability for the implementation of anti-Russian sanctions has been submitted to the State Duma,” April 4, 2022, (translated from Russian), available at: https://www.gazeta.ru/social/news/2022/04/04/17521537.shtml.

[28] Vedomosti, “A draft law on external administration in foreign companies was submitted to the State Duma,” (translated from Russian), April 12, 2022, available at: https://urldefense.com/v3/__https://www.vedomosti.ru/business/news/2022/04/12/917725-zakonoproekt-vneshnei-administratsii__;!!N5JjT8_g!dKC3U7FTRmTn7im3vIf__YQKA9cPUKLPBgSoUbfOjbdEsGPYeqvQuzOtgeXQlyxVp2qiBeGrWzvqrvSsCAcKWaqcyldN$ [vedomosti[.]ru].

[29] Id.