On 15 April 2021, the U.S. Government announced a number of new sanctions measures against Russia, targeting a variety of “harmful foreign activities” contrary to U.S. foreign policy. In addition to designating a number of entities on the List of Specially Designated Nationals and Blocked Persons (SDN List) under existing authorities, President Biden issued Executive Order (EO) 14024, expanding the basis additional designations, including exposure for those operating in Russia’s technology and defense sectors, as well as a new Directive 1 imposing targeted financial sanctions related to Russian sovereign debt.
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued three separate press releases (see them here, here, and here) providing additional information regarding designations regarding Russia’s intelligence activities and malicious cyber actions, election interference, and activities in Crimea. The White House also issued a fact sheet, and the State Department announced the expulsion of ten Russian diplomats in a press release. The White House fact sheet also notes that the U.S. Government is “evaluating whether to take action under EO 13873 to better protect our [information and communications technology and services] supply chain from further exploitation by Russia.”
Notably, EO 14024 provides a very broad framework of sanctions authorities that could be used in a more expansive fashion should the U.S. Government decide to do so. With significant disagreements between Washington and Moscow still unfolding, it is conceivable that the U.S. Government could exercise these authorities in a far-reaching manner in future depending on how events unfold.
New sanctions Executive Order
Pursuant to EO 14024, entities or individuals who meet certain criteria may be designated as SDNs. EO 14024 does not impose comprehensive sanctions on the Russian Government, the entire country of Russia, or specified sectors of the Russian economy. However, EO 14024 does specifically list certain sectors of the Russian economy, such as the defense and technology sectors, and parties found to “operate in” those sectors can be designated in the future by OFAC as SDNs. In effect, this means that secondary sanctions can apply even if the underlying activity has no U.S. nexus. Please see Section 2 below for a more detailed discussion of these SDN designations.
EO 14024 specifically targets a number of Russia’s alleged activities, including:
- Efforts to undermine the conduct of free and fair democratic elections and institutions in the US, its allies and partners;
- Engaging in and facilitating malicious cyber activities;
- Fostering and using transnational corruption to influence foreign governments;
- Pursuing extraterritorial activities targeting dissidents or journalists, such as Alexei Navalny;
- Undermining security in countries and regions important to US national security; and
- Violating well-established principles of international law, including respect for the territorial integrity of states.
OFAC has issued new Frequently Asked Questions (FAQs) on certain EO 14024 topics, including FAQ 887 that makes clear that identification of a particular sector does not result in automatic blocking of all parties in that sector. According to FAQ 887, persons must be specifically identified by OFAC in order to be subject to blocking sanctions, and will be added to the SDN List. As a reminder, U.S. persons are generally prohibited from most dealings involving SDNs and even non-U.S. persons can face exposure under secondary sanctions if they are found by OFAC to be engaging in a “significant” transaction with a Russian SDN.
Under Section 1(a) of EO 14024, persons may be designated as SDNs if they engage in the following kinds of specified 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 later designated by the U.S. Government;
- FAQ 887 makes clear that entities identified on the Sectoral Sanctions Identification (SSI) List under Directive 3 for operating in the Russian defense and materiel sector are not automatically subject to blocking under EO 14024 unless they are separately designated pursuant to EO 14024 (e.g., Rostec, which is a Directive 3 SSI, is not automatically an SDN unless and until it becomes designated by OFAC as an SDN under EO 14024 or another designation authority).
- EO 14024 does not define the terms “technology sector,” “operate,” or “operated in,” which leaves open the question of how broadly the U.S. Government will interpret these activities.
- To be responsible for or complicit in, or to have directly or indirectly engaged or attempted to engage in any of the following for, on behalf of, or for the benefit of, directly or indirectly, the Russian Government:
- Malicious cyber-enabled activities;
- Interference in a U.S. or other foreign government election;
- Actions or policies that undermine democratic process or institutions in the U.S. 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 U.S., its allies, or partners
- 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;
- To be or have been a leader, official, senior executive officer, or member of the board of directors of:
- The Russian Government;
- An entity that has or whose members have engaged in any of the activities described above;
- An entity blocked pursuant to EO 14024;
- To be a political subdivision, agency, or instrumentality of the Russian Government;
- To have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of:
- Any activity described above;
- Any person blocked pursuant to EO 14024;
- To be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, the Russian Government or any person blocked pursuant to EO 14024.
Under Section 1(b) of EO 14024, the following kinds of persons may also be designated as SDNs:
- Any person determined to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, a government whose property and interests in property are blocked under OFAC’s regulations (e.g., Cuba, Iran, North Korea, Syria, or Venezuela) and who is:
- A citizen or national of Russia;
- An entity organized under the laws of Russia or any jurisdiction within Russia (including foreign branches); or
- A person ordinarily resident in Russia.
- Any person determined to be responsible for or complicit in, or to have directly or indirectly engaged in or attempted to engage in, cutting or disrupting gas or energy supplies to Europe, the Caucasus, or Asia and who is:
- A citizen or national of Russia; or
- An entity organized under the laws of Russia or any jurisdiction within Russia (including foreign branches).
Further, under EO 14024, OFAC designated six technology companies for operating in support of Russian Government intelligence operations and defense services. Pursuant to other existing authorities, OFAC also designated eight parties related to activities in the Crimea region of Ukraine and several additional parties related to the Russian Government’s alleged attempt to influence the 2020 U.S. presidential election.
These designations follow OFAC’s addition of several other Russian individuals and entities to the SDN List in March 2021 in connection with the poisoning and imprisonment of Alexei Navalny.
Sovereign debt restrictions
In addition to a number of SDN designations under the new EO, OFAC also issued a new Directive 1 under this new EO (distinct from Directive 1 under EO 13662, which has been in place for a number of years).
The new Directive 1 prohibits the following activities by U.S. financial institutions as of 14 June 2021, with respect to the Central Bank of Russia, the National Wealth Fund of Russia, and the Russian Ministry of Finance:
- Participation in the primary market for ruble or non-ruble denominated bonds issued after 14 June 2021 by one of those entities;
- Lending ruble or non-ruble denominated funds to one of those entities.
FAQ 888 states that Directive 1 also prohibits (1) any transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of the prohibitions contained in Directive 1; and (2) any conspiracy formed to violate any of the prohibitions in Directive 1, except to the extent otherwise provided by law or unless licensed or otherwise authorized by OFAC.
Other activities involving these entities are not prohibited by this Directive 1. FAQ 889 makes clear that this Directive 1 does not prohibit participation in the secondary market for bonds issued by these entities. FAQ 890 also notes that even before 14 June 2021, U.S. banks remain subject to certain prohibitions regarding non-ruble denominated bonds issued by the Russian sovereign (including these entities) pursuant to the separate prohibitions of EO 13883 regarding the Chemical and Biological Weapons (CBW) Act issued on 2 August 2019. The new EO expands these restrictions to include ruble-denominated bonds as well. Finally, FAQ 891 notes that the 50 percent rule does not apply to entities owned by the institutions listed in Directive 1.
Possible future action under EO 14024
EO 14024 provides a very broad framework of sanctions authorities that could be used in a more expansive fashion should the U.S. Government decide to do so. With significant disagreements between Washington and Moscow still unfolding, it is conceivable that the U.S. Government could exercise these authorities in a far-reaching manner in the future. Notably, EO 14024 would seem to give the U.S. Government a new authority to designate Russian oligarchs perceived to be associated with Russian President Vladimir Putin (in addition to prior authorities such as EO 13818 or other Global Magnitsky sanctions program authorities).
Companies conducting business with Russia should review the new designations to confirm that entities and individuals are not business partners or that any ongoing activities are not prohibited as a result of these changes. Companies should also be aware that the U.S. Government may decide to exercise these authorities in a more expansive manner in the future, depending on how events unfold.
For further information or assistance, please contact any of the Hogan Lovells lawyers identified below.
Authored by: Julia Diaz; Lindsay K. Brown; Ari Fridman; Aleksandar Dukic; Adam Berry; Ajay Kuntamukkala; Beth Peters; Ashley Roberts; Deborah Wei.