Biden Administration Issues New Targeted Economic Sanctions On Russia

The Biden Administration has issued new targeted economic sanctions on Russia in response to Russian efforts to undermine free and fair elections in the United States, to engage in and facilitate malicious cyber-enabled activities against the United States and its allies, and to have performed a range of other activities contrary to US interests. The new measures will create additional compliance challenges for US companies active in the Russia market (most notably financial institutions). The Biden Administration, however, maintained the policy of the preceding Obama and Trump Administrations of targeting discrete persons and activities, while allowing US persons to otherwise continue conducting business in Russia.

Pursuant to a new Executive Order on Blocking Property with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation, the Treasury Department sanctioned 32 Russian entities and individuals, including government officials and six Russian companies that provide support to the Russian government’s cyber operations. The Treasury Department also issued a directive prohibiting certain transactions in Russian sovereign debt. The new directive prohibits US financial institutions from participating in the primary market for ruble or non-ruble denominated bonds issued by three Russian state financial organizations as well as from lending funds to those entities.

Russia Sanctions Overview

The Biden Administration’s new sanctions on Russia are the latest volley in US efforts to address malign activities engaged in by the Russian government targeting the United States and its allies, including election interference, malicious cyber activities (such as the recent SolarWinds hack), and undermining security and territorial integrity in countries and regions important to US national security. Beginning in 2014, in response to Russia’s annexation of the Crimea region of Ukraine, the United States imposed sanctions targeting the Russian financial, defense, and energy sectors and various Russian individuals, including senior Russian government officials and Russian executives with connections to Russian President Vladimir Putin. Over the following seven years, the United States imposed additional sanctions measures on Russia in response to hacking incidents, the use of chemical/biological weapons, and human rights violations.

US economic sanctions imposed on Russia and Ukraine during this period comprise of four categories of measures: (1) blocking sanctions against individuals and entities; (2) sectoral sanctions against entities operating in the financial services, defense, and energy sectors of the Russian economy; (3) a ban on investment and prohibition on the export or import of goods, technology, or services to or from Crimea; and (4) secondary or “retaliatory” sanctions designed to deter non-US persons from engaging with Russia on certain activities.

Biden Administration Sanctions

Consistent with the approach taken by the Obama and Trump Administrations, the Biden Administration has targeted specific malfeasors and the Russian Government’s sources of revenue and capital, rather than the broader trade restrictions that characterize the Cuba and Iran sanctions regimes. The new sanctions authorized by the Biden Administration are principally blocking measures targeting specific individuals and companies. These measures have the effect of blocking all property and interests in property of the designated individuals and entities as well as entities owned 50% or more by any of the designees. As a result, US persons are generally prohibited from engaging in transactions with the designated individuals and entities. These blocking measures are effective as of April 15, 2021.

The sovereign debt prohibitions are a new type of measure targeting the Russian Government’s ability to raise capital. Pursuant to Directive 1 under the Executive Order, beginning on June 14, 2021, US financial institutions¹ are prohibited from: (1) participating in the primary market for ruble or non-ruble denominated bonds issued after June 14, 2021 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; and (2) lending ruble or non-ruble denominated funds to those entities. Notably, the directive does not prohibit US financial institutions from participating in the secondary market for bonds issued by these entities. These prohibitions also only apply to bonds issued by, or loans made to, the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation—not to any entity that is owned, directly or indirectly, 50 percent or more by one or more of these three entities.

Implications

The Biden Administration’s new economic sanctions against Russia present new compliance challenges for US financial institutions engaged in business activities involving Russian sovereign debt. US persons conducting business in Russia or with Russian individuals and entities will also want to update their screening processes to account for the newly designated individuals and entities. Within the bounds of these new economic sanctions and those already in place, US companies can continue business in Russia and with Russia companies.

¹ The directive defines US financial institutions as “any US 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 US holding companies, US affiliates, or US 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.”