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On February 22, 2022, the Office of Foreign Assets Control (OFAC) <a href="https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20220222" target="_blank" rel="noopener">expanded sanctions</a> against Russia through blocking sanctions against two major Russian state-owned financial institutions, additional restrictions on Russian sovereign debt, sanctions on five Putin/Kremlin-connected elites, and the designation of several vessels. This follows the issuance of comprehensive sanctions on the territory recognized by Russia as the &ldquo;independent states&rdquo; of Donetsk People&rsquo;s Republic (DNR) and the Luhansk People&rsquo;s Republic (LNR) (see Update of <a href="https://www.thompsonhinesmartrade.com/2022/02/president-biden-imposes-sanctions-regarding-russias-efforts-to-undermine-ukraine/">February 22, 2022</a>) and the movement of Russian troops into these regions of Ukraine.
Designation of Russian Financial Institutions
OFAC has designated the Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB) and Promsvyazbank Public Joint Stock Company (PSB), along with 42 of their subsidiaries, and placed them on the Specially Designated Nationals (SDN) List. OFAC stated that VEB is crucial to Russia&rsquo;s ability to raise funds and PSB is critical to Russia&rsquo;s defense sector. The OFAC <a href="https://home.treasury.gov/news/press-releases/jy0602" target="_blank" rel="noopener">press release</a> also provided the following on these entities:
<ul>
<li>VEB is one of Russia&rsquo;s top five financial institutions and finances most of Russia&rsquo;s domestic development projects. In partnership with commercial banks, VEB provides financing for large-scale projects to develop the country&rsquo;s infrastructure and industrial production. OFAC also sanctioned 25 of VEB&rsquo;s subsidiaries which represent a wide range of businesses. VEB&rsquo;s designated affiliates include the Eximbank of Russia.</li>
<li>PSB is Russia&rsquo;s eighth largest financial institution and is an important Russian state-owned financial institution. According to OFAC, Russia nationalized PSB in 2018 and &ldquo;repurposed it to finance the defense industry and service large defense contracts as part of a scheme to assist the government in avoiding new sanctions.&rdquo; OFAC notes that PSB currently services nearly 70% of state contracts signed by the Russian Ministry of Defense. OFAC also sanctioned 17 of PSB&rsquo;s subsidiaries, including a variety of companies in the financial, technology, and real estate-related sectors.</li>
</ul>
Designation of Russian Elites
OFAC has also designated and placed on the SDN List certain members of Putin&rsquo;s inner circle &ldquo;believed to be participating in the Russian regime&rsquo;s kleptocracy.&rdquo; These individuals include:
<ul>
<li>Denis Aleksandrovich Bortnikov, a Deputy President of Russian-state owned financial institution VTB Bank Public Joint Stock Company (VTB Bank), and the son of previously designated and SDN-Listed Aleksandr Vasilievich Bortnikov, who is the Director of the Federal Security Service (FSB).</li>
<li>Petr Mikhailovich Fradkov, the Chairman and CEO of PSB, and the son of Mikhail Efimovich Fradkov, former Prime Minister of Russia and former Director of the Russian Foreign Intelligence Service (SVR).</li>
<li>Vladimir Sergeevich Kiriyenko, CEO of VK Group (the parent company of Russia&rsquo;s top social media platform, VKontakte), and the son of Sergei Vladilenovich Kiriyenko, who is the First Deputy Chief of Staff of the Presidential Office.</li>
</ul>
In addition, the aforementioned Aleksandr Vasilievich Bortnikov and Sergei Vladilenovich Kiriyenko have been redesignated pursuant to President Biden&rsquo;s recent Executive Order 14065. OFAC further designated five vessels connected to PSB.
A full list with further identifying details of VEB, PSB and each SDN-listed subsidiary as well as additional personal identifying information on the listed individuals from Putin&rsquo;s inner circle is available <a href="https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20220222" target="_blank" rel="noopener">here</a>. With these designations to the SDN List, all property and interests in property of persons and entities identified above that are in the United States or in the possession or control of U.S. persons (or their foreign branches) are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, individually or in the aggregate, 50% or more by one or more blocked persons are also blocked.
Unless authorized by a general or specific license issued by OFAC, or exempt, all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of blocked persons are generally prohibited. Dealings with blocked persons may also trigger reporting requirements pursuant to 31 C.F.R. &sect;&sect; 501.603 and 501.604.
Sovereign Debt Restrictions
OFAC has also placed restrictions on dealings in Russia&rsquo;s sovereign debt in order to further cut off Russia off from sources of revenue to fund its government or President Putin&rsquo;s priorities. According to OFAC, these restrictions &ldquo;significantly cut off a core way for Russia to raise money. This kind of measure creates a strain on resources for the Russian state and greater risk for its ability to manage its finances.&rdquo; Specifically, OFAC has issued Russia-related <a href="https://home.treasury.gov/system/files/126/russia_directive_1a.pdf" target="_blank" rel="noopener">Directive 1A</a> under EO 14024, &ldquo;Prohibitions Related to Certain Sovereign Debt of the Russian Federation,&rdquo; which amends and supersedes a prior Directive 1 under <a href="https://www.whitehouse.gov/briefing-room/presidential-actions/2021/04/15/executive-order-on-blocking-property-with-respect-to-specified-harmful-foreign-activities-of-the-government-of-the-russian-federation/" target="_blank" rel="noopener">EO 14024</a> issued on April 15, 2021. This superseding Directive extends existing sovereign debt prohibitions to cover participation in the secondary market for bonds issued after March 1, 2022 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.
OFAC General Licenses
Finally, OFAC has issued two general licenses (GLs) to address aspects of these new sanctions and designations. <a href="https://home.treasury.gov/system/files/126/russia_gl2.pdf" target="_blank" rel="noopener">General License 2</a> authorizes certain servicing of bonds involving VEB that are issued prior to March 1, 2022. <a href="https://home.treasury.gov/system/files/126/russia_gl3.pdf" target="_blank" rel="noopener">General License 3</a> authorizes the winding down of transactions involving VEB for transactions prohibited under these new sanctions; all transactions now prohibited that are ordinarily incident and necessary to wind down are authorized until March 24, 2022. No general licenses were issued related to PSB.
OFAC has also issued related FAQs to assist the financial serves sector in compliance matters &ndash; see <a href="https://home.treasury.gov/policy-issues/financial-sanctions/faqs/964" target="_blank" rel="noopener">FAQ 964</a> and <a href="https://home.treasury.gov/policy-issues/financial-sanctions/faqs/965" target="_blank" rel="noopener">FAQ 965</a>. And, as necessary, other Ukraine/Russia-related FAQs have been <a href="https://home.treasury.gov/policy-issues/financial-sanctions/faq/updated/2022-02-22" target="_blank" rel="noopener">updated</a>.

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SmarTrade

Senior Legislative and Regulatory Policy Advisor

Scott E. Diamond

Partner

Francesca M.S. Guerrero

Samir D. Varma

International Trade

OFAC Implements Additional Sanctions on Russian Financial Sector and Individuals