What sanctions on Russia mean for U.S. companies

The jurisdiction-based sanctions the United States imposed on Russia and its financial sector aren’t expected to result in any immediate implications for U.S. companies or their global supply chains. But depending on how matters escalate, that could quickly change, according to sanctions experts.

President Joe Biden on Monday signed an executive order imposing broad sanctions on Russia and the Russia-backed separatist regions of Ukraine, known as the Donetsk People’s Republic (DNR) and the Luhansk People’s Republic (LNR).

“The purpose of this E.O. is to deny Russia the chance to profit from its blatant violations of international law,” said the White House in an accompanying fact sheet. “These actions are not directed at the people of Ukraine or the Ukrainian government.”

Specifically, the executive order prohibits:

• New investment in the DNR, LNR, or other regions of Ukraine as may be determined by the Secretary of the Treasury by a U.S. person, wherever they are located;
• Importation, directly or indirectly, of any goods, services, or technology from the covered regions into the United States;
• Exportation, re-exportation, 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; and
• Any approval, financing, facilitation, or guarantee by a U.S. person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited under the sanctions if performed by a U.S. person or within the United States.

The executive order also provides authority to impose sanctions on persons determined:

• To operate or have operated since the date of the order in the DNR or LNR;
• To be or have been since the date of the order a leader, official, senior executive officer, or member of the board of directors of an entity operating in the DNR or LNR;
• 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 order; or
• 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 order.

Along with the executive order, the Department of the Treasury issued six general licenses to ensure humanitarian and other related activity can continue in the sanctioned regions.

Sanctions on Russian financial services sector: The Treasury’s Office of Foreign Assets Control (OFAC) on Tuesday added to its Specially Designated Nationals List two major Russian state-owned 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.

“VEB is crucial to Russia’s ability to raise funds, and PSB is critical to Russia’s defense sector,” the Treasury Department stated. “These sanctions ensure VEB and PSB can no longer do business in the United States and are cut off from the U.S. financial system. All assets under U.S. jurisdiction will be immediately frozen, and U.S. individuals and entities are prohibited from doing business with these institutions unless authorized by OFAC.”

The broader impact of the sanctions on the financial services sector is that “any payments to U.S. businesses are likely to be stopped or delayed for compliance purposes,” said Melissa Mannino, former chief of enforcement and litigation at the Department of Commerce’s Office of Chief Counsel for Industry and Security.

“Further, we understand the imposition of enhanced export controls will be used by the U.S. government to supplement and complement the economic sanctions,” added Mannino, who is now a partner with law firm BakerHostetler. “The export controls would be aimed at limiting Russia’s industrial capabilities.”

Saskia Rietbroek, executive director and co-founder of the Association of Certified Sanctions Specialists, said the sanctions are “less ambitious” than expected.

“These two sanctioned Russian banks are policy banks, not retail,” she said. “So, while it keeps sanctions compliance professionals busy, it hasn’t caused a financial panic. However, the door is open to more designations in the financial sector.”

Broader implications on U.S. companies: “The Russian sanctions situation is fluid and dynamic,” said Giovanna Cinelli, who heads the international trade and national security practice at law firm Morgan Lewis. “The sanctions mirror the 2014 executive order related to Crimea, and that E.O. provides some guidance on where these sanctions may lead.”

“U.S. businesses with significant Russian contacts should be proactively planning for how to respond to further U.S. controls on doing business in Russia and with Russian entities.”

Melissa Mannino, Partner, BakerHostetler

Of note, Biden on Tuesday referred to the sanctions on Russia as the “first tranche” of such actions the United States might take. U.S. allies similarly indicated the potential of more sanctions to come.

“In the wake of the initial round of sanctions imposed by the United States, the United Kingdom, and the European Union, I do not assess there will be any significant implications for U.S. companies or their supply chains,” said Adam Smith, international trade partner at law firm Gibson Dunn and a former OFAC adviser. “The two Ukrainian regions that are now prohibited do not make up the heartland of Ukraine’s economy, and there are few, if any, U.S. commercial connections there.”

Smith added the sanctions against VEB and PSB, while more meaningful, “are not the core financial institutions in Russia that U.S. and foreign companies deal with. As such, we are still in a wait-and-see stance, depending upon what the West decides to do next and how Russia decides to retaliate. The impact on U.S. and global business could be significant—for example, if Russia throttles gas to Europe and/or restricts exports of key minerals to the West—or minimal.”

Russia’s next moves will dictate how aggressive an approach the United States might take, multiple legal experts commented. “A full-scale invasion of Ukraine could result in the sanctioning of a large portion of the Russian banking system, which would likely disrupt certain commodities supply chains, especially oil and gas, but likely others as well,” said Tom Best, a partner at law firm Paul Hastings.

“As a general matter, the Biden administration is continuing the strategy of issuing targeted sanctions, rather than broader sanctions, on all business in Russia,” said Greta Lichtenbaum, a partner at law firm O’Melveny & Myers. “The question is whether that approach changes if Russia expands its incursions into Ukraine. Any broad territorial sanctions will have a much broader impact on the ability of U.S. firms to do business in Russia.”

In terms of preparation, Mannino suggested, “U.S. businesses with significant Russian contacts should be proactively planning for how to respond to further U.S. controls on doing business in Russia and with Russian entities.”