On April 15, 2021 the Biden administration announced a broad set of measures to combat malaign activities of the Rusisan government against the United States. Some of these measures are very targeted and others create a broad structure for future sanctions that could have harsh consequences for us in the Nordics.
While they complicate the environment, these measures won’t be the last actions taken by the US. President Biden has already forecasted the potential for future sanctions against Russia during the announcement when he stated “I was clear with President Putin that we could have gone further, but I chose not to do so, to be — I chose to be proportionate.”
So what should banks and businesses do to mitigate the current and future risk of these sanctions?
First Step: Assess and Mitigate
The first action in addressing any new sanctions is to assess your exposure to the parties designated and the activities highlighted. The Biden administration has gone to great lengths in this announcement to make available identifiable information on the targets and their funding sources. This information should be used to determine if your bank or business has any exposure to the actors and their nefarious activities of politically guided misinformation, election interference, or sanctions evasion as highlighted by the Department of the Treasury’s press release “Treasury Escalates Sanctions Against the Russian Government’s Attempts to Influence U.S. Elections”. If exposure is found it is best to devise a specific plan to orderly mitigate the sanctions risk as quickly as possible.
Specifically for banks, an assessment should also be conducted for exposure under the prohibitions of Directive 1 of the new Executive Order (E.O) “Blocking Property with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation.” The directive prohibits US participation in the issuance of bonds by and lending to the Central Bank of Russia, the National Wealth Fund and the Ministry of Finance. It is important to note that the restrictions of Directive 1 are limited to the specified entities themselves and not to entities that they majority own, as clarified by FAQ 891. While these restrictions are currently very limited, as we have seen in other sanctions programs, there is always the potential for the administration to add secondary sanctions penalties in the future. Therefore it is strongly recommended that institutions understand their exposure and devise a mitigation strategy before there are potential consequences of restricted access to the US financial system.
Second Step: Plan for the future
As the designated parties and actors are outside of the Nordics and engaged in unusual business activities, the greatest impact of the new sanctions is likely to come from the broad authorizations of the new E.O. Several of the authorizations in the E.O. are similar to existing US sanctions, especially related to Ukraine and Human Rights, but this E.O. creates a new framework for more sweeping sanctions to target the Russian government in the future. As such, it is important to understand your bank or businesses exposure to parties engaged in activity that could be designated under the new E.O. and devise a plan to proactively address the risk of potential future designations.
The new E.O sets out three new “buckets” of activity for which the US can now designate actors, which are appropriately categorized corresponding to the sections of the E.O. as:
a) Supporting or engaged in conduct supporting the Russian government,
b) Supporting designated governments via Russia, and
c) Restricting energy exports to Russia’s neighbors
The restrictions under section a) have the most overlap to existing sanctions that have been applied to Russia. The important change is that now the criteria for designation has been expanded such that just being tied to the Russian government meets the criteria for designation. For example, under section a (iv) the US can designate an entity for acting as an “instrumentality” of the Russian government, which could be broadly applied to cover parties well beyond those that are owned and controlled by the Russian government.
Section b) is clearly aimed at efforts to use Russia’s territory and economic infrastructure to circumvent US sanctions against designated governments such as Syria and Venezuela. This section does not change the sanctions that are imposed on the likes of Syria or Venezuela but, as with section a), broadens the criteria for sanctions to allow the US to designate Russian actors that even just provide goods or services to US designated governments.
Section c) is clearly aimed at creating the authority for the US to react to a potential bypassing of Eastern Europe with a completed and operational Nordstream 2 pipeline. Historically, Russia has restricted the flow of gas and energy to neighboring countries for political purposes and this measure is broad enough to enable sanctions in response to restrictions on the supply of electricity and other energy sources as well.
Overall the new sanctions mark a broad expanse in the US architecture to target the Russian government, one which will only grow more complicated over time. As the sanctions challenges continue to expand, Sanctions Advisory is always here to help you solve any sanctions advice, risk management, training, and program development needs you have so please feel free to contact us via firstname.lastname@example.org.
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