New US Sanctions on Russia Target Certain Cyber Actors and Sovereign Debt

What Happened

On April 15, 2021, President Biden issued an Executive Order imposing new sanctions on the Russian Federation citing election interference, malicious cyberattacks, and other Russian actions abroad (the Order). Under the authority provided by the Order, the US Department of the Treasury took two separate steps. First, it imposed blocking sanctions on six technology companies that support the Russian intelligence services. Second, it issued a directive under the Order (Directive 1) generally prohibiting participation by US financial institutions in the primary market for Russian sovereign debt issued after June 14, 2021. 

Background

The Order represents the Biden Administration’s first action against the Russian Federation and follows on US government reports that Russian-backed groups were responsible for the 2020 SolarWinds cyberattack, which left thousands of organizations vulnerable around the world and breached multiple agencies of the US government, as well as reports of Russian-backed efforts to interfere with the 2020 US presidential election through malicious cyber actors.

Previous Executive Orders authorized the imposition of blocking sanctions on individuals and entities responsible for cyberattacks. Executive Order13694 (2015), issued pursuant to the International Emergency Powers Act (50 U.S.C §§ 1701 et seq.) (IEEPA) and the National Emergencies Act (50 U.S.C. §§ 1601 et seq.), declared a national emergency to deal with threats posed to national security, foreign policy, and the economy of the United States by malicious cyber activities originating from outside the United States. OFAC’s cyber-related sanctions program under EO 13694 and OFAC’s implementing regulations (31 C.F.R. part 578) impose blocking sanctions on malicious cyber actors. This program has previously been used to target ransomware threat actors and others. 

New Blocking Sanctions

Blocking sanctions remain a significant tool against malicious cyber actors. Under the Order, the Department of the Treasury issued blocking sanctions on six companies designated as Russian companies in the technology sector supporting Russian intelligence services, specifically linking these companies to cyberattacks in the United States and abroad. OFAC simultaneously issued guidance clarifying that entities previously identified as operating in the defense and related materiel sector of the Russian Federation under Directive 3 to Executive Order 13662 are not automatically blocked by the Order unless such entities are also sanctioned by actions taken under the Order. (At the same time, OFAC separately issued blocking sanctions under other executive orders against 16 individuals and 16 entities who attempted to influence the outcome of the 2020 US presidential election.)

New Prohibition on Primary Dealing in Certain Russian Sovereign Debt

The Order also expands the Department of the Treasury’s authority to issue sanctions against malicious cyber actors linked to the Russian government to carry out the purposes of the Order. Under this authority, the Department of the Treasury issued Directive 1, which prohibits US financial institutions from participating in the primary market for bonds issued after June 14, 2021 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation, and further prohibits US financial institutions from lending to these three institutions. This prohibition does not limit US financial institutions from dealing in such bonds issued prior to July 14, 2021, and it does not target the activity of foreign banks or financial firms. OFAC’s guidance on Directive 1 further clarifies that US financial institutions are not prohibited from participating in the secondary market for Russian bonds and that OFAC’s 50% rule (for applying sanctions to subsidiaries of sanctioned entities) does not apply to Directive 1.

Potential Signal of Future Direction of Russian Sanctions

The Order’s broad authorization to sanction malicious Russian cyber actors suggests that Directive 1’s prohibition on dealing in Russian sovereign debt—whether ruble or non-ruble denominated—of the three specified Russian financial institutions is a warning. US banks were prohibited from participating in the primary market for non-ruble denominated bonds issued by the Russian sovereign and from lending non-ruble denominated funds to the Russian sovereign pursuant to OFAC’s prior directive of August 2, 2019, issued under Executive Order 13883 and the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991. At the same time, the potential scope of targets and actions under the Order is quite broad, and it appears that the US government may be sending a signal of possible actions to come.

Individuals and companies engaged in Russia’s technology and financial sectors should take note of the Order and Directive 1 as a signal of the new administration’s possible trajectory with respect to sectoral-type sanctions on Russian sovereign debt. In addition, as it relates to blocking sanctions, the Order underscores the critical importance of diligence procedures in these sectors and the identification of the true ownership of counterparties in order to prevent sanctions violations.   

The AML and Economic Sanctions practice of Hunton Andrews Kurth LLP will continue to monitor closely the development of this and other US sanctions matters. Please contact us if you have any questions or would like further information regarding these new developments or other OFAC sanctions matters.