US Imposes Territorial Sanctions on Ukrainian Breakaway Republics & Broader Russia Based Sanctions: What You Need to Know

The Russian announcement can be found here. President Biden’s Executive Order can be found here. President Biden’s speech can be found here. OFAC’s actions can be found here.

Trade Prohibitions on DNR and LNR Regions

The EO prohibits:

1. New investments by US persons, wherever located, in DNR and LNR regions and any other region of Ukraine if subsequently identified by the US Secretary of the Treasury in consultation with the US Secretary of State (collectively the “Covered Regions”);
2. Importation into the United States, directly or indirectly, of goods, services, and technology from the Covered Regions;
3. Exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a US person, wherever located, of any goods, services, or technology to the Covered Regions; and
4. Any approval, financing, facilitation, or guarantee by a US person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited by this section if performed by a US person or within the United States.

These prohibitions are very similar to those already imposed on trade and investment in Crimea.

Blocking Authority Related To DNR and LNR Regions

The EO also provides authority for the Treasury Department, in consultation with the State Department, to identify and sanction by blocking (i.e., designating as a Specially Designated National (SDN)) any person determined:

1. to operate or have operated since February 21, 2022, in the Covered Regions;
2. to be or have been since February 21, 2022, a leader, official, senior executive officer, or member of the board of directors of an entity operating in the Covered Regions;
3. to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to the EO; or
4. to 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 and interests in property are blocked pursuant to the EO.

OFAC General Licenses re DNR and LNR Regions

Also on February 21, 2022, the Office of Foreign Assets Control (OFAC) issued a series of General Licenses (GLs), the most immediately important of which is the wind-down license GL 17, which gives US persons until March 23, 2022, to wind down operations in the DNR and LNR. Interestingly the GL does not refer to the Covered Regions identified in the EO. The other General Licenses are fairly standard authorizations of exports of agricultural and medical items, telecommunications and mail, official business of certain international organizations, non-commercial personal remittances, and exportation of services incident to the exchange of personal communications over the internet, such as instant messaging, chat and email, social networking, sharing of photos and movies, web browsing, and blogging.

GL 17 – Wind down of pre-existing contracts until March 23 

GL 18 – Agricultural and medical exports and reexports as well as COVID-19-related transactions

GL 19 – Telecommunications and mail 

GL 20 – Official business of the UN, ICSID, MIGA, ICRC, and certain other international organizations 

GL 21 – Non-commercial personal remittances 

GL 22 – Exchange of personal communications over the Internet 

What Do DNR/LNR Sanctions Mean for US Persons?

OFAC had already placed the Governments of DNR and LNR on the SDN List, as well as DNR and LNR state banks, thereby making trade with those regions tricky even in the past. But the new trade restrictions now prohibit virtually all trade between the United States and those regions and mean some practical steps need to be taken:

1. US companies that have offices in the regions (which we assume are few and far between) will need to close those offices; and
2. US companies selling to or buying from Ukraine and Russia need to implement address screening, ideally utilizing zip codes from the regions, much in the same way they have done for Crimea. We recommend a batch screening of all suppliers, customers, and third party business partners in Ukraine and Russia against addresses in the DNR and LNR, followed by enhanced ongoing screenings before engaging in transactions with new third parties.
   • Like the United States, the Ukraine postal codes have five digits. The first two digits of the postal codes for the DNR are 83 through 87 and LNR are 91 through 94. Of course, Russia may change these zip codes in the future.

SDN and Debt Sanctions Issued February 22, 2022

In addition, following Russian authorization of troops to move into the DNR and LNR regions, President Biden announced further sanctions in a speech on February 22, 2022, and OFAC immediately implemented them. Shortly after President Biden’s speech, OFAC published:

• Directive 1A under E.O. 14024, which expands restrictions on US financial institutions with respect to Russian sovereign debt by prohibiting US financial institutions from participating in the secondary market for ruble and non-ruble denominated bonds issued after March 1, 2022, by the Central Bank, National Wealth Fund, or Ministry of Finance of the Russian Federation. Directive 1A already prohibited (and continues to prohibit) participation in the primary market for such bonds as well as lending ruble or non-ruble denominated funds to these three entities.
• Designation/blocking under E.O. 14024 of three individuals close to Putin and two major Russian financial institutions – Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB) and Promsvyazbank Public Joint Stock Company (PSB) – along with 42 of their subsidiaries and five vessels.

What Do These Additional Sanctions Mean for US Persons? 

US Financial Institutions that participate in the secondary market for ruble and non-ruble debt need an OFAC license if any of their transactions involve the Central Bank, National Wealth Fund, or Ministry of Finance of the Russian Federation. FAQ 964 makes it clear that the sanctions do not apply to all persons that operate or have operated in the financial services sector of the Russian Federation, but instead, for now, only those three persons identified in Directive 1A.

All US persons need to screen their suppliers, customers, and third-party business partners in Ukraine and Russia – and their ultimate beneficial owners — against the new SDN list.

What Else Do I Need To Know?  

Additional SDN designations are likely in the coming days, and President Biden in his speech promised more and significantly tougher sanctions if Russia takes any further steps. Additionally, European allies, including the United Kingdom and Germany, have begun taking measures in response to Russia’s actions, and some international banks may slow or stop international financial transactions related to Russia in anticipation of additional sanctions.