In a move coordinated with U.S. allies, the United States imposed a “first tranche” of sanctions on Russia today following that country’s recognition of the Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR) as independent countries.  These measures follow the imposition of a U.S. embargo on the separatist regions yesterday and U.S. government officials, including President Biden, emphasized that additional sanctions are possible.

Today’s action adds the Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB) and Promsvyazbank Public Joint Stock Company (PSB), along with 42 of their subsidiaries, to the SDN List.  The move effectively cuts the banks off from the U.S. financial system, and will likely result in global non-U.S. financial institutions cutting ties with the banks.  The United States also extended sanctions on dealings in Russian sovereign debt, prohibiting U.S. financial institutions from participating in the secondary debt market for ruble or non-ruble denominated bonds issued after March 1, 2022.

VEB & PSB

The addition of VEB, PSB, and their subsidiaries to the SDN List means that U.S. persons, including U.S. companies and financial institutions, U.S. citizens and permanent residents, and any persons located in the United States, are prohibited from conducting direct or indirect dealings with the banks, unless authorized by the U.S. Office of Foreign Assets Control (OFAC).  Any VEB or PSB property or interests in property in the possession or control of U.S. persons must be formally blocked (frozen) and reported to OFAC within 10 days, unless a license applies.  Non-U.S. persons are also prohibited from engaging in transactions or other business dealings involving the banks if those activities have a direct or indirect nexus with the United States or U.S. persons.  Non-U.S. financial institutions and companies could also be subject to secondary sanctions, including potentially being added to the SDN List themselves, if they conduct a “significant” transaction with either institution following the imposition of sanctions.

U.S. persons are authorized to conduct transactions ordinarily incident and necessary to the wind down of preexisting dealings with VEB through 12:01 am EST on March 24, 2022 pursuant to the newly issued General License No. 3 to E.O. 14024 and to engage in certain transactions involving VEB that are ordinarily incident and necessary to the servicing of Russian sovereign bonds issued before March 1, 2022 pursuant to General License No. 2.

The full list of subsidiaries identified by OFAC in today’s announcement are provided below.

More Banks Could be Targeted

 The Secretary of the Treasury issued a formal notice today authorizing further sanctions on any financial institution in Russia under E.O. 14024, paving the way for additional sanctions on the Russian financial industry.  A Fact Sheet issued by the White House today notes that over 80 percent of Russia’s foreign exchange transactions are in U.S. dollars and half of Russia’s foreign trade is conducted in dollars.  Today’s notice is a warning that the U.S. could cut off Russia’s access to U.S. dollar transactions by imposing broader sanctions on the financial industry in Russia, a move that would have significant impacts for companies that do business in or with Russia.

Secondary Market Restrictions on Sovereign Debt

OFAC expanded existing sanctions on Russian sovereign debt by issuing Directive 1A to E.O. 14024.  The updated Directive prohibits U.S. financial institutions from participating in the secondary debt market for ruble or non-ruble denominated bonds issued by the Russian Central Bank, National Wealth Fund, or Ministry of Finance after March 1, 2022.  The Directive applies to all U.S. financial institutions in the United States, but not to their foreign branches, offices, or agencies.

Russian Elites

OFAC added three Russian individuals to the SDN List – Denis Aleksandrovich Bortnikov, an executive with VTB Bank, Petr Mikhailovich Fradkov, the Chairman and CEO of PSB, and Sergei Vladilenovich Kiriyenko, the CEO of VK Group, the parent company of Russia’s top social media platform, VKontakte.

Allied Measures

U.S. allies have imposed, or are preparing to impose, sanctions on Russia in response to the situation in Ukraine.  Germany announced today that it would suspend the certification process for the Nord Stream 2 pipeline.  The United Kingdom imposed limited sanctions, including sanctions on PSB, earlier today.  The European Union has approved a raft of sanctions measures that are likely to be similar in scope to the sanctions imposed by the United States.  Canada, Australia, and Japan have also indicated that new sanctions on Russia will be issued.

Please contact our sanctions team with any questions about these and further developments. …
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