New U.S. Sanctions Imposed in Response to Russian Government’s “Harmful Foreign Activities”

New U.S. Sanctions Imposed in Response to Russian Government’s “Harmful Foreign Activities”

April 16, 2021, Covington Alert

On April 15, 2021, President Biden issued a new Executive Order (“April 15 Executive Order”) that broadens the scope of U.S. authorities to impose sanctions on Russia and related actors in response to specified “harmful foreign activities” of the Government of the Russian Federation. The April 15 Executive Order authorizes sanctions on a wide range of persons, including those determined by the Secretary of the Treasury to be (i) operating or to have operated in the technology or the defense and related materiel sectors of the Russian economy, or involved in a list of harmful activities outside of Russia; (ii) Russian persons who materially assist or support a government whose property is blocked under U.S. sanctions; and (iii) Russian persons involved in disrupting gas or energy supplies to Europe, the Caucasus, or Asia. Pursuant to the Order, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) imposed property-blocking sanctions measures against six companies operating in Russia’s technology sector that it contends support malicious cyber activities of the Russian intelligence services, such as the 2020 intrusion of SolarWinds, a major U.S. information technology firm, through which hackers gained access to multiple parts of the U.S. federal government computer systems.

Also pursuant to the April 15 Executive Order, OFAC issued a new Directive that broadens prohibitions imposed in August 2019 under the Chemical and Biological Weapons Act (“CBW Act”) and prohibits U.S. financial institutions’ participation in the primary market for Russia’s sovereign debt. The Biden Administration explained that its actions pursuant to the April 15 Executive Order are “to impose costs on Russia for actions by its government and intelligence services against U.S. sovereignty and interests.”

At the same time, OFAC announced new sanctions designations targeting entities and individuals believed to have been involved in Russian interference in the 2020 U.S. presidential election and Russian individuals and entities operating in the Crimea region of Ukraine. The United States also expelled 10 personnel from the Russian diplomatic mission in Washington, D.C.

The April 15 Executive Order and designations follow a period of increased tensions in U.S.-Russia relations. On March 2, 2021, the U.S. State Department made a determination pursuant to the CBW Act that the Russian government had used a chemical weapon, Novichok nerve agent, against the Russian opposition leader Alexey Navalny in violation of the Chemical Weapons Convention, and imposed sanctions and export controls measures as a result. Relatedly, OFAC has imposed property-blocking sanctions against Russian government officials determined to have been involved in the poisoning and imprisonment of Mr. Navalny, and the U.S. Department of Commerce announced that it has added 14 entities to the Entity List due to their alleged involvement in weapons of mass destruction proliferation activities.

The April 15 Executive Order targets specified “harmful foreign activities” of the Russian government and declares a national emergency to deal with the threat posed by Russia’s efforts to (i) undermine the conduct of free and fair democratic elections and democratic institutions in the United States and its allies and partners; (ii) engage in and facilitate malicious cyber- enabled activities against the United States and its allies and partners; (iii) foster and use transnational corruption to influence foreign governments; (iv) pursue extraterritorial activities targeting dissidents or journalists; (v) undermine security in countries and regions important to U.S. national security; and (vi) violate well-established principles of international law, including respect for the territorial integrity of states.

Expanding the Authority to Impose Property-Blocking Sanctions

The April 15 Executive Order significantly expands the U.S. government’s authority to impose property-blocking sanctions in response to Russia’s involvement in a broad range of “harmful foreign activities.” Specifically, Section 1 of the Order provides for the imposition of such blocking measures against persons whom the Secretary of the Treasury determines, in consultation with the Secretary of State and, in some cases, with the Attorney General, are engaged in any of the following activities:

• Operate or have operated in the technology sector or the defense and related materiel sector of the Russian economy, or any other sector of the Russian economy as may be determined by the Secretary of the Treasury in the future;
• Are responsible for or complicit in, or have engaged or attempted to engage in, any of the following for or on behalf of, or for the benefit of, directly or indirectly, the Russian government:
  • Malicious cyber-enabled activities;
  • Interference in a United States or other foreign government election;
  • Actions or policies that undermine democratic processes or institutions in the United States or abroad;
  • Transnational corruption;
  • Assassination, murder, or other unlawful killing of, or infliction of other bodily harm against, a U.S. person or a citizen or national of a U.S. ally or partner;
  • Activities that undermine the peace, security, political stability, or territorial integrity of the United States, its allies, or its partners; or
  • Deceptive or structured transactions or dealings to circumvent any U.S. sanctions, including through the use of digital currencies or assets or the use of physical assets;
• Qualify as a leader, official, senior executive officer, or member of the board of directors of (i) the Russian government, (ii) an entity that has, or whose members have, engaged in any activities described above, or (iii) an entity whose property and interests in property are blocked pursuant to the April 15 Executive Order;
• Qualify as a political subdivision, agency, or instrumentality of the Russian government;
• Are a spouse or adult child of any person whose property and interests in property are blocked as a result of any of the above-noted activities or positions;
• Have materially assisted or provided financial, material, or technological support, or goods or services, to or in support of Russia’s malign activities described above or a person whose property and property interests are blocked pursuant to the April 15 Executive Order;
• For Russian persons, have materially assisted or provided financial, material, or technological support, or goods or services, to or in support of a government whose property and property interests are blocked under U.S. sanctions; or
• For Russian persons, are involved in cutting or disrupting gas or energy supplies to Europe, the Caucasus, or Asia.

OFAC has not issued guidance as to what constitutes the “technology sector” or the “defense and related materiel sector” of the Russian economy under the April 15 Executive Order. Importantly, however, while OFAC advised in Frequently Asked Question (“FAQ”) 887 that the April 15 Executive Order provides notice that persons operating in these sectors may be targeted by the United States for property-blocking sanctions measures, the mere fact that these sectors are identified in the Order does not mean that the property and property interests of all persons operating in the sectors are automatically blocked. Rather, only persons specifically designated pursuant to the April 15 Executive Order for operating in these sectors (or any other sector to be identified) are subject to blocking sanctions under the Order, and such designated parties will appear on the List of Specially Designated Nationals and Blocked Persons (“SDN List”). OFAC also clarified that companies previously identified on its Sectoral Sanctions Identifications List as subject to specified, debt-related restrictions under Directive 3 because they are operating in Russia’s “defense and related materiel” sector would not be subject to the property-blocking sanctions measures under the April 15 Executive Order unless they were also designated for property blocking under the new Order.

Designations Pursuant to the April 15 Executive Order

OFAC designated six Russian companies operating in the technology sector pursuant to the April 15 Executive Order by adding them to the SDN List for providing various forms of support to the Russian intelligence services’ malicious cyber operations. These companies’ designation on the SDN List means that their property and interests in property that are or come into the United States or the possession or control of a U.S. person will be required to be blocked, and U.S. persons will be prohibited from engaging in virtually any dealings with such persons without prior authorization from OFAC. Pursuant to OFAC’s “50% Rule,” these same sanctions measures will apply to entities owned 50% or more, directly or indirectly, individually or in the aggregate, by one or more blocked parties, even if such owned entities are not themselves designated on the SDN List.

New Sanctions Against Russian Debt

Pursuant to the April 15 Executive Order, OFAC also issued Directive 1 that generally prohibits “U.S. financial institutions” from participating in the primary market for ruble and non-ruble denominated bonds issued after June 14, 2021, by the Central Bank, the National Wealth Fund, or the Ministry of Finance of the Russian Federation. (For purposes of this Directive, the term “U.S. financial institution” is broadly defined.) “U.S. financial institutions” are further prohibited from lending ruble or non-ruble denominated funds to these three entities. Directive 1 also prohibits: (1) any transaction that evades or avoids, causes a violation of, or attempts to violate the prohibitions of Directive 1, and (2) any conspiracy formed to violate any of the prohibitions of Directive 1. Notably, the White House announcement warned that: “This directive provides authority for the U.S. government to expand sovereign debt sanctions on Russia as appropriate.”

Importantly, OFAC has clarified in FAQ guidance (FAQ 889) that U.S. financial institutions are not prohibited from participating in the secondary market for bonds issued by the Russian Central Bank, the National Wealth Fund, and the Ministry of Finance. Further, the prohibitions of Directive 1 do not apply to entities that are owned 50% or more, directly or indirectly, individually or in the aggregate, by one or more of these three entities (FAQ 891) or to state-owned Russian enterprises.

Notably, as explained in FAQ 890, Directive 1 expands upon the preexisting directive issued under Executive Order 13883 dated August 1, 2019, relating to the implementation of sanctions under the CBW Act (“CBW Directive”), but does not replace it. The CBW Directive prohibits “U.S. banks” (as opposed to “U.S. financial institutions”) from participating in the primary market for non-ruble denominated “Russian sovereign” bonds and lending non-ruble denominated funds to the “Russian sovereign” after August 26, 2019. However, as the FAQ explains, the separate prohibitions under the CBW Directive do not apply to bonds or loans denominated in rubles.

Also on April 15, OFAC imposed property-blocking sanctions measures under other sanctions authorities against 32 entities and individuals for carrying out what the U.S. government alleges were Russian government-directed attempts to influence the 2020 U.S. presidential election, and other acts of disinformation and interference. The action targeted Russian officials, proxies, and several disinformation outlets linked to the Russian intelligence agencies, the Federal Security Service (“FSB”) and Russia’s Main Intelligence Directorate (“GRU”), both of which were previously sanctioned by OFAC. OFAC further targeted the network of previously sanctioned Evgeny Prigozhin, including with respect to his attempts to evade sanctions and with a particular focus on activities in Africa.

In addition, the United States, in close cooperation with its allies, sanctioned eight individuals and entities associated with Russia’s ongoing occupation of and activities in Crimea. Specifically, the sanctions target individuals and entities participating in the construction of the Kerch Strait Bridge, “officials carrying out the occupation of Crimea,” and one detention facility that OFAC said was emblematic for its human rights abuse.

Pursuant to OFAC’s 50% Rule, these same sanctions measures will apply to entities owned 50% or more, directly or indirectly, individually or in the aggregate, by one or more SDNs or their majority-owned affiliates, even if such owned entities are not themselves designated on the SDN List.

Leading up to these actions, in March 2021, following the State Department’s determination that the Russian government had used chemical or biological weapons in violation of international law, the Biden Administration imposed a new round of sanctions pursuant to the CBW Act. This action was in response to the U.S. government’s finding that Russia used the chemical nerve agent Novichok in an assassination attempt against Russian opposition leader Alexey Navalny and that in 2018, the Russian government also deployed Novichok in an assassination attempt against Sergey Skripal and his daughter in the United Kingdom. The United States had imposed two previous rounds of sanctions against Russia under the CBW Act in 2018 and 2019 for its actions targeting Mr. Skripal, as described in our prior alerts on the CBW Act sanctions here and here.

Consistent with its statutory obligations under the CBW Act, the State Department expanded previously adopted measures to terminate all sales to Russia of any defense articles or defense services, amended the International Traffic in Arms Regulations to include Russia in the list of countries subject to a policy of denial for exports of defense articles and defense services, and imposed additional export restrictions that are subject to limited waivers. Additionally, on March 17, 2021, the Commerce Department’s Bureau of Industry and Security (“BIS”) announced that it will review license applications under a presumption of denial for exports and reexports of items controlled for national security reasons (“NS”) to Russia. BIS also suspended the following license exceptions for NS-controlled items destined to Russia: Servicing and Replacement Parts and Equipment (“RPL”), Technology and Software Unrestricted (“TSU”), and Additional Permissive Reexports (“APR”). However, certain categories of exports of NS-controlled items will continue to be permitted pursuant to a partial waiver on national security grounds.

In a related measure, BIS added 14 entities to its Entity List (ten in Russia, three in Germany, and one in Switzerland) for their involvement in “proliferation activities in support of Russia’s weapons of mass destruction programs.”

The U.S. government’s response to Russia’s use of banned chemical weapons also included the imposition of property-blocking sanctions against the Russian FSB and its leadership, among others, for the proliferation of weapons of mass destruction or means of their delivery. OFAC also imposed such sanctions measures against senior Russian officials who allegedly orchestrated Mr. Navalny’s poisoning and oversaw his prosecution.

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Covington has deep experience advising clients on the legal, policy, and practical dimensions of U.S. sanctions. We will continue to monitor developments with respect to Russia and more generally in this area, and we are well-positioned to assist clients in understanding how these developments may affect their business operations.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Trade Controls practice group.