New U.S., UK, and EU Sanctions Imposed in Response to Russia’s Action to Recognize the So-Called Donetsk and Luhansk People’s Republics

New U.S., UK, and EU Sanctions Imposed in Response to Russia’s Action to Recognize the So-Called Donetsk and Luhansk People’s Republics

February 22, 2022, Covington Alert

On February 21 and 22, 2022, in response to the Russian Federation’s recognition of the so-called Donetsk People’s Republic (“DNR”) and Luhansk People’s Republic (“LNR”) as independent states and not part of Ukraine, the United States, United Kingdom, and European Union announced a series of new sanctions. These measures include comprehensive sanctions on the DNR and LNR, property-blocking sanctions against certain Russian banks, entities, and individuals, and expanded restrictions on dealings by U.S. financial institutions in the secondary market for ruble or non-ruble denominated bonds issued by certain Russian entities after March 1, 2022.

The pro-Russian DNR and LNR have, since 2014, maintained de facto control over a portion of eastern Ukraine, forming part of the Ukrainian Donetsk and Luhansk administrative regions (known as “oblasts” in Ukraine). The DNR and LNR political entities have been subject to U.S., EU, and UK property-blocking sanctions since 2014, as have various individuals and entities who are understood by the U.S. and European authorities to have contributed to the destabilization of the Donetsk and Luhansk regions. The U.S., EU, and UK also have maintained other sanctions in relation to Russia, key features of which are summarized in our prior client alerts.[1]

The sanctions announced on February 21 and 22 expand the pre-existing U.S., UK, and EU sanctions in notable respects. This alert provides a summary of these new sanctions. The current sanctions dynamic with regard to Russia remains fluid, and further sanctions may be forthcoming in the near term, depending on developments in Ukraine and Russia.

On February 22, 2022, President Biden announced new property-blocking sanctions on two major Russian banks, State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (“VEB”) and Promsvyazbank PJSC (“PSB”), as well as on certain prominent Russian individuals and their family members. In addition, the President announced new restrictions on U.S. financial institutions’ dealings in Russian sovereign debt. President Biden described these measures as “the first tranche of sanctions” against Russia, issued in response to “the beginning of a Russian invasion” of Ukraine.

Shortly after the President’s speech, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) designated, under Executive Order 14024, a number of individuals and entities to its List of Specially Designated Nationals and Blocked Persons (“SDN List”), including VEB, PSB, and 42 of their affiliated entities, along with five vessels owned by a PSB affiliate. U.S. persons are broadly prohibited from transacting or dealing with SDNs or entities that SDNs own 50% or more, directly or indirectly, individually or in the aggregate with other SDNs. In addition, the property of SDNs or entities that they own 50% or more must be blocked, or frozen, when it comes into the United States or the possession or control of a U.S. person. “U.S. persons” are U.S. entities and their non-U.S. branches; individual U.S. citizens and lawful permanent residents (“green-card” holders), no matter where located or employed; and persons present in the United States.

OFAC also published Russia-related Directive 1A under Executive Order 14024, which expands upon the prohibitions on transactions related to certain Russian sovereign debt that were imposed in April 2021 by Directive 1 (which is replaced and superseded by Directive 1A). In particular, U.S. financial institutions are prohibited from participating in the secondary market for ruble or non-ruble denominated 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. U.S. financial institutions were already prohibited from lending ruble or non-ruble denominated funds to these three institutions, and from participating in the primary market for ruble or non-ruble denominated bonds issued by these three institutions.

Relatedly, OFAC added the Central Bank of the Russian Federation, the Ministry of Finance of the Russian Federation, and the National Wealth Fund of the Russian Federation to the Non-SDN Menu-Based Sanctions list (“NS-MBS List”), which identifies persons subject to measures short of full blocking sanctions and reflects the restrictions on dealings with these parties imposed by Directive 1A.

OFAC also issued General License No. 2, which authorizes transactions by U.S. persons with VEB that are ordinarily incident and necessary to the servicing of bonds issued before March 1, 2022 by the Central Bank of the Russian Federation, the Ministry of Finance of the Russian Federation, and the National Wealth Fund of the Russian Federation (except transactions prohibited by Directive 1A or involving other persons blocked pursuant to Executive Order 14024); and General License No. 3, which authorizes a wind down of transactions involving VEB through 12:01 a.m. EDT on March 24, 2022.

On February 21, 2022, President Biden issued an Executive Order (“February 21 Executive Order”) targeting activities in the so-called DNR and LNR regions of Ukraine for broad U.S. sanctions. The February 21 Executive Order responds to the Russian Federation’s recognition of these regions, which, according to the Order, contradicts Russian commitments under the Minsk agreements and threatens the territorial integrity of Ukraine.

Although the February 21 Executive Order does not define the precise boundaries of the so-called DNR and LNR regions, Section 8(e) of the Order defines “region of Ukraine” as “the land territory in that region as well as any maritime area over which sovereignty, sovereign rights, or jurisdiction is claimed based on purported sovereignty over that land territory or area.” Given that the government of Ukraine controls significant parts of the Donetsk and Luhansk oblasts, or regions, the definition has given rise to questions about whether the sanctions apply only to the areas the DNR and LNR actually control, or also to those areas which they claim are part of their sovereign territory but which they do not currently control.

Section 1 of the February 21 Executive Order prohibits the following activities with respect to the so-called DNR and LNR regions or other regions subsequently determined by the Secretary of the Treasury in consultation with the Secretary of State to be covered by the Executive Order (collectively, the “Covered Regions”):

• New investment by U.S. persons in the Covered Regions. The scope of prohibited “new investment” is not defined in the Executive Order but has been interpreted broadly under other sanctions programs to include equity investment, the commitment or contribution of funds or other assets (including extensions of credit), and contracts for the economic development of resources in the target market (including the supervision or guarantee of such contracts or participation in profits, earnings, or royalties from such contracts).
• The importation into the United States, directly or indirectly, of any goods, services, or technology from the Covered Regions.
• The exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a U.S. person, wherever located, of any goods, services, or technology to the Covered Regions.
• The approval, financing, facilitation, or guarantee by a U.S. person, wherever located, of a transaction by a non-U.S. person that would be prohibited by the order if conducted by a U.S. person or within the United States.

Section 2 of the February 21 Executive Order additionally imposes property-blocking measures against persons determined by the Secretary of the Treasury, in consultation with the Secretary of State, who (i) have operated in the Covered Regions since February 21, 2022; (ii) are or have been since February 21, 2022 leaders, officials, senior executive officers, or members of the board of directors of an entity operating in the Covered Regions; (iii) are owned or controlled by, or have acted or purported to act for or on behalf of, directly or indirectly, a person whose property has been blocked pursuant to the order; or (iv) have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property has been blocked pursuant to the order. No such persons have yet been designated.

Notably, these restrictions on trade and investment with respect to the so-called DNR and LNR regions of Ukraine largely mirror those restrictions imposed with respect to the Crimea region of Ukraine by a December 19, 2014 Executive Order issued by President Obama.

In tandem with the February 21 Executive Order, OFAC issued six general licenses:

• General License No. 17 provides a short-term wind down period for transactions by U.S. persons involving the so-called DNR and LNR regions, authorizing transactions prohibited by the order through 12:01 a.m. EDT on March 23, 2022, so long as the transactions do not involve a person whose property is blocked under the order, unless separately authorized.
• General License No. 18 authorizes transactions ordinarily incident and necessary to the export or reexport of agricultural commodities (including food), medicine, and medical devices (as well as replacement parts, components, and software updates for such devices) to the so-called DNR and LNR regions. It also authorizes transactions ordinarily incident and necessary to the prevention, diagnosis, or treatment of COVID-19 in the so-called DNR and LNR regions.
• General License No. 19 authorizes certain transactions that are ordinarily incident and necessary to the receipt or transmission of telecommunications and mail services to the so-called DNR and LNR regions, so long as the transactions do not involve a person whose property is blocked under the order, unless separately authorized.
• General License No. 20 authorizes transactions in the DNR and LNR regions that are for the conduct of the official business of the United Nations, the International Committee of the Red Cross, and certain other international organizations and entities.
• General License No. 21 authorizes all transactions that are ordinarily incident and necessary to the transfer of noncommercial, personal remittances to or from the so-called DNR and LNR regions, or for or on behalf of individuals ordinarily resident in the so-called DNR and LNR regions, provided the transfer is not by, to, or through any person whose property is blocked pursuant to the order. However, this license does not authorize donations of funds to or for the benefit of an entity or funds transfers for use in supporting or operating a business. This general license also authorizes all transactions that are ordinarily incident and necessary to maintaining, operating, or closing an account of an individual ordinarily resident in the Covered Regions, other than an individual whose property is blocked pursuant to the order, so long as transfers through the account are of a personal nature and do not involve transfers other than those covered by the license.
• General License No. 22 authorizes the export or reexport of certain services and software incident to the exchange of personal communications over the internet. Such software must be either classified as EAR99 under the U.S. Department of Commerce’s Export Administration Regulations (“EAR”) or as mass market software under Export Control Classification Number (“ECCN”) 5D992.c of the EAR, or, in the case of software not subject to the EAR, not listed under any multilateral export control regime. This general license does not authorize the exportation or reexportation, directly or indirectly, of services or software with knowledge or reason to know that such services or software are intended for any person whose property is blocked pursuant to the order.

The Biden Administration has indicated that there are potentially more trade control restrictions to come targeting Russia, stating that the measures implemented through the February 21 Executive Order are “distinct from the swift and severe economic measures we are prepared to issue with Allies and partners in response to a further Russian invasion of Ukraine.” President Biden also stated during his February 22 remarks that the U.S. will begin to take sanctions actions that go far beyond those taken in 2014 regarding Crimea.

On February 22, 2022, the UK Government imposed asset-freezing sanctions against three prominent Russian businessmen—Gennady Timchenko, Boris Rotenberg, and Igor Rotenberg—as well as five Russian banks—Bank Rossiya, Black Sea Bank for Development and Reconstruction, Joint Stock Company Genbank, IS Bank, and PSB. Those sanctions, which were issued pursuant to legislation implemented by the UK Government earlier this month, broadly restrict persons subject to UK jurisdiction from dealing, directly or indirectly, with the designated persons/entities, or any entities that they directly or indirectly hold 50% or greater interests in or otherwise control.

Among the parties designated on February 22 by the UK, all of them are subject to pre-existing U.S. property-blocking sanctions with the exception of PSB, which was designated by OFAC on February 22.

Gennady Timchenko has a major profile in Russian business circles and is publicly reported to have stakes in the companies Novatek, Sibur Holding, and Volga Group, as well as the newly-designated Bank Rossiya (among other entities). Boris and Igor Rotenberg are close relatives of Arkady Rotenberg, who has been subject to EU and UK asset-freezing sanctions since July 2014. The UK sanctions listings for Boris and Igor Rotenberg indicate that Boris Rotenberg is “a major shareholder of SMP Bank and sits on its Board of Directors,” and that Igor Rotenberg is “the Chairman of the Board of Directors of National Telematic Systems (NTS)” and “a shareholder in RT-Invest Transport Systems (RTITS).” (The UK Government has not specifically designated those entities, and has not thus far indicated whether it views those entities as subject to asset-freezing sanctions on the basis of their affiliations with Boris and Igor Rotenberg.)

With regard to the EU sanctions, the EU authorities imposed asset-freezing sanctions on February 22 against several members of the Russian parliament. The foreign ministers of the 27 EU Member States also agreed on February 22 on further sanctions measures against Russia. The specifics of those measures have not been published at the time of writing, but are expected to enter into force in the coming days. It is currently understood that the EU will add 27 individuals and entities from Russia’s defense, banking, and financial sectors to its asset-freezing list. There are also reports indicating that all members of Russia's parliament that voted in favor of the formal recognition of two breakaway regions in eastern Ukraine will be added to the EU asset-freezing list. Similar to the UK asset-freezing sanctions, persons subject to EU jurisdiction are broadly restricted from dealing with persons designated for EU asset-freezing measures, or with any non-listed entity in which designated persons holds a 50% or greater ownership interest or otherwise controls.

It is also understood that the new EU package may include provisions restricting the Russian government's access to EU capital and financial services markets. Additionally, the measures may include restrictions on trade between the EU and the occupied Donetsk and Luhansk regions. The UK Government has not, thus far, imposed categorical prohibitions on business activities in relation to those regions, however both the DNR and LNR political entities have been subject to UK and EU asset-freezing sanctions since 2014, which have practically inhibited (together with various other considerations) UK and EU companies from engaging in business in those regions in recent years.

As with the United States, the UK and EU authorities have signaled a readiness to impose further sanctions against Russia if it were to further invade Ukraine, or take other measures to further destabilize Ukraine. There has been considerable speculation in the press concerning the specifics of those measures, but the UK and EU authorities themselves have said relatively little publicly about them.

On a separate but related note, German Chancellor Olaf Scholz announced on February 22 that he has asked Germany’s Ministry of Economics to halt the process of certifying the Nord Stream 2 gas pipeline. That certification is a necessary administrative step, under German law, without which the pipeline cannot be put into operation. The Nord Stream 2 pipeline has been a source of contention in relation to the Ukraine crisis, since, once operational, it would allow for the transport of additional Russian gas through the Baltic Sea to Germany, bypassing the Ukrainian pipeline infrastructure. That represents an important change for the German government, which had refused to publicly consider imposing measures to block the pipeline until its announcement on February 22.

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We are closely monitoring developments concerning the U.S., UK, and EU sanctions against Russia, and will issue further updates in the event of material developments. In the meantime, we would be happy to address any questions you may have. Covington’s International Trade Controls team—which includes lawyers in the firm’s offices in the United States, London, Brussels, and Frankfurt—regularly advises clients across business sectors, and would be well-placed to provide support in connection with the emerging Russia sanctions. Our trade controls lawyers also work regularly with Covington's Global Public Policy team—consisting of over 120 former diplomats and policymakers in the United States, Europe, the Middle East, Latin America, Africa, and Asia—many of whom have had substantial government experience in sanctions and export controls matters, and who regularly advise our clients on emerging sanctions policy matters and related engagements with government stakeholders.

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