In implementing the EO, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated a number of members of Russia’s technology sector as Specially Designated Nationals (“SDN”). OFAC also issued a Directive, placing additional restrictions on U.S. financial institution dealings in certain debt of certain Russian government agencies, to supplement the existing restrictions under the previously issued Chemical and Biological Weapons (CBW) sanctions.
The EO grants OFAC broad authority to block the property of, and restrict dealings with, parties determined to
- have operated in the Russian technology or defense sectors as well as any other sector to be later determined by the Secretary of the Treasury in consultation with the Secretary of State;
- have engaged directly or indirectly on behalf of the Russian government in
- malicious cyber-enabled activities,
- interference in the election of a foreign government including the United States,
- actions or policies that undermine democratic processes or institutions in the United States or abroad,
- transnational corruption,
- murder or bodily harm of a citizen of the United States or its allies or partners,
- any activity undermining the peace, security, political stability, or territorial integrity of the United States, its allies, or its partners, or
- circumventing any United States sanctions;
- be or have been an official of the Russian government, any entity whose members have engaged in the above activities, or any entity whose property and interests are now blocked pursuant to the EO;
- be a spouse or adult child of a party designated based on the above;
- be a political subdivision, agency, or instrument of the Russian government;
- have provided support for any activity described above or any person whose property and interest are blocked pursuant to the EO; or
- be owned or controlled by, or to have acted or purported to act on behalf of, the Russian government or any person whose property and interests are blocked pursuant to the EO.
While the EO authorizes the designation of parties in Russia’s defense sector, OFAC has clarified that while certain members of the defense sector have already been identified by the U.S. government as part of its actions taken pursuant to the Countering Americas Adversaries through Sanctions Act (CAATSA), these parties are not deemed automatically designated as SDNs.
Enabled by the EO, and also on April 15, 2021, OFAC specifically designated 32 parties as SDNs, with their property and assets blocked. As with all SDN designations, these sanctions apply not just to the designated parties but also all entities owned 50% or more by one or more SDNs.
Significantly for non-U.S. persons, the EO provides the Biden administration with authority to block property of non-U.S. (including non-Russian) persons who provide support (whether financial, material, or technological, including through provision of goods or services) for any of the activities specified above or for any person whose property and interest are blocked pursuant to the EO. Further, existing authorities, specifically Section 228 of CAATSA, allow the designation of any party determined to have engaged in significant transactions with a Russian SDN. Therefore, these designations may also create increased risk of secondary sanctions. However, we note that, in its announcement of these sanctions, OFAC specifically mentions secondary sanctions risk only in relation to the designations tied to election interference. It remains to be seen how OFAC will view and exercise its secondary sanctions authority as it concerns the other designations.
In addition to the SDN designations, OFAC also issued “Directive 1,” taking more limited action with respect to three Russian entities determined by OFAC and the U.S. Department of State to be “political subdivisions, agencies, or instrumentalities of the Government of the Russian Federation”: the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation. These more limited restrictions are similar to OFAC’s use of more limited directives targeting Russian entities as part of the Crimea-related sectoral sanctions issued in 2014. Directive 1 expands on the CBW sanctions issued in August of 2019. Whereas the CBW sanctions restrict dealings by “U.S. banks” in non-ruble-denominated Russian sovereign bonds and prohibit U.S. banks from lending non-ruble-denominated funds to the Russian sovereign, Directive 1 expands these prohibitions to include ruble-denominated activity. While Directive 1 applies to “U.S. financial institutions,” which differs from the term “U.S. banks” used in the CBW sanctions, the definitions of these terms are almost identical in their coverage of entities engaged in the same banking, clearing, and securities activities. These prohibitions take effect June 14, 2021, and, as with most sanctions programs, include a further prohibition on any activity that seeks to evade or avoid these prohibitions. However, unlike OFAC’s usual approach to SDNs and blocked governments, OFAC has stated that the Directive 1 designations do not currently extend to entities owned by the covered agencies.
These actions represent part of a broader focus by the Biden administration on Russia and follow increased actions based on existing authorities. The administration’s focus to date has largely centered on the controversial Nord Stream 2 pipeline, including the February 22 designation of the Russian-owned pipelaying vessel Fortuna and its owner as SDNs, and Secretary of State Antony Blinken’s March 18 statements indicating an intent to take full advantage of the administration’s sanctions authority targeting parties supporting Russian energy export pipelines. Similarly in March, the U.S. Department of Commerce’s Bureau of Industry and Security, in response to Russia’s alleged use of nerve agents against dissidents, issued a presumption of denial for exports and reexports to Russia that are controlled for national security reasons and suspended the use of certain license exceptions for other exports and re-exports.
While the initial sanctions issued under this EO appear to only incrementally increase the U.S. sanctions against Russia, they form part of this administration’s increased focus on using both new and existing authorities to target, through trade measures, what the Biden administration has characterized as Russian aggression. The administration has also left itself with expansive, untapped authority through this EO to engage in additional actions if deemed necessary, up to and including the potential blocking of entire subdivisions of the Russian government.