On April 15, 2021, President Biden issued a new Executive Order Blocking Property With Respect To Specified Harmful Foreign Activities Of The Government Of The Russian Federation (the “EO”). The EO does not impose general restrictions on trade involving the US and Russia, but instead adopts a more targeted approach. Specifically, the EO imposes new sanctions on the defense and technology sectors of the Russian economy, bars US financial institutions from primary dealings in new Russian sovereign debt, and is accompanied by a number of designations of individuals and companies in Russia as US “Specially Designated Nationals” subject to sanctions.

Sectoral and Secondary Sanctions

The EO identifies several activities that may now lead to the imposition of blocking sanctions. The EO generally delegates the authority to impose sanctions to the Treasury Department and the State Department, with some exceptions (noted below). This continues a recent trend of delegating sanctions responsibilities to other agencies in addition to, or in conjunction with, OFAC. The new grounds for sanctions designation include:

  • “Operating” in the Technology or Defense Sectors of the Russian Economy: The EO authorizes blocking sanctions on persons determined “to operate or have operated in the technology sector or the defense and related materiel [sic] sector of the Russian Federation Economy.” “Technology sector” and “defense and related material” sector are not defined by the EO or current OFAC or State Department guidance, and thus may capture a wide array of activities (including investments) in the Russian technology and defense sectors. Note that defense-related SSI Entities identified under Directive 3 of EO 13662 are not subject to the prohibitions under the new EO, unless they are specifically sanctioned under the EO. (OFAC FAQ 887.)
  • Additional economic sectors may be named: The EO also authorizes the Treasury Secretary (in consultation with the Secretary of State) to identify additional sectors of the Russian Federation economy that may give rise to blocking sanctions.
  • Disruption of gas or energy supplies to Europe, the Caucasus, or Asia: The EO authorizes blocking sanctions on persons determined to be responsible for or complicit in, or to have directly or indirectly engaged in or attempted to engage in, cutting or disrupting gas or energy supplies to Europe, the Caucasus, or Asia, and to be: (i) a Russian citizen or national; or (ii) an entity organized under the laws of Russia or Russian jurisdiction (including foreign branches). “Cutting or disrupting” are not defined terms.
  • Election interference, cyberattacks, and corruption activities: The EO authorizes blocking sanctions on persons determined to have engaged in a wide array of activities relating to election interference, cyberattacks, and corruption. In sum, the activities include: (i) malicious cyber-enabled activities; (ii) US or other foreign government election interference; (iii) interference with democratic processes in the US and abroad; (iv) transnational corruption; (v) physical harm to US persons or citizens or nationals of US allies and partners; (vi) activities that undermine the peace, security, political stability, or territorial integrity of the US, its allies, or its partners; or (vii) deceptive or structured transactions or dealings to circumvent any US sanctions, including through the use of digital currencies or assets or the use of physical assets.
  • Russian government and government official sanctions: The EO authorizes blocking sanctions on persons determined by the State Department to be leaders, officials, senior executive officers, or members of the board of directors of the Russian government, entities that have engaged in election interference, cyberattacks, and corruption activities, or entities blocked under the EO. Similarly, political subdivisions, agencies, or instrumentalities of the Russian government may be blocked, as well as the spouses or adult children of persons who have been blocked under the EO as Russian government officials, or for election interference, cyberattacks, and corruption activities. The “Government of the Russian Federation” is defined broadly to include “the Government of the Russian Federation, any political subdivision, agency, or instrumentality thereof, including the Central Bank of the Russian Federation, and any person owned, controlled, or directed by, or acting for or on behalf of, the Government of the Russian Federation.” (Emphasis added.)

Sovereign Debt Restrictions

On April 15, the Treasury Department also issued “Directive 1” pursuant to the EO. Directive 1:

  • identifies the Central Bank, the National Wealth Fund, and the Ministry of Finance of the Russian Federation as “political subdivisions, agencies, or instrumentalities” of the Russian government (see above); and
  • prohibits “U.S. financial institutions” from: (i) participation in the primary market for ruble or non-ruble denominated bonds issued after June 14, 2021 by the Central Bank, the National Wealth Fund, or the Ministry of Finance; and (ii) lending ruble or non-ruble denominated funds to the Central Bank, the National Wealth Fund, or the Ministry of Finance.

Under Directive 1, “the term ‘U.S. financial institution’ means any U.S. entity (including its foreign branches) that is engaged in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or other extensions of credit, or purchasing or selling foreign exchange, securities, commodity futures or options, or procuring purchasers and sellers thereof, as principal or agent. The term includes depository institutions, banks, savings banks, trust companies, securities brokers and dealers, futures and options brokers and dealers, forward contract and foreign exchange merchants, securities and commodities exchanges, clearing corporations, investment companies, employee benefit plans, and U.S. holding companies, U.S. affiliates, or U.S. subsidiaries of any of the foregoing. This term includes those branches, offices, and agencies of foreign financial institutions that are located in the United States, but not such institutions’ foreign branches, offices, or agencies.”

The Chemical and Biological Weapons (“CBW”) Act Directive had already prohibited “U.S. banks,” including foreign branches, from: (i) participating in the primary market for non-ruble denominated bonds issued by the Russian sovereign; and (ii) lending non-ruble denominated funds to the Russian sovereign, after August 26, 2019. The prohibitions under Directive 1 are similar to the restrictions under the CBW Act Directive, except that Directive 1 applies more broadly to: (i) “U.S. financial institutions” (as defined above); and (ii) dealings in ruble and non-ruble denominated bonds and funds. (OFAC FAQ 890.)

Note that:

  • Directive 1 does not apply to the secondary market for the bonds identified above. (OFAC FAQ 889.)
  • OFAC’s “50% Rule” does not apply under Directive 1—i.e., the Directive 1 restrictions do not apply to entities owned, directly or indirectly, 50% or more by the Central Bank, the National Wealth Fund, or the Ministry of Finance. (OFAC FAQ 891.)

Accompanying Designations

Along with the new EO, OFAC announced a number of designations of individuals and entities pursuant to the new authorities in the EO and existing US sanctions provisions.

We will continue to monitor developments in this area, and encourage you to subscribe to be kept informed of latest developments. Please contact the authors or your usual Herbert Smith Freehills contacts for more information.

 

Jonathan Cross
Jonathan Cross
Counsel, New York
+1 917 542 7824
Christopher Boyd
Christopher Boyd
Associate, New York
+1 917 542 7821
Brittany Crosby-Banyai
Brittany Crosby-Banyai
Associate, New York
+1 917 542 7837
Christopher Milazzo
Christopher Milazzo
Associate, New York
+1 917 542 7807