New Sanctions Authority Expands Compliance Risks for Companies Operating in Russia, Law Firms Say

Biden's order, issued April 15 (see 2104150019), allows the U.S. to designate people and entities operating in Russia’s defense and technology sectors and includes a prohibition on participation by U.S. financial institutions in Russia’s primary market for ruble or non-ruble denominated bonds. It “unquestionably increases the sanctions compliance challenges” for companies in Russia, Miller & Chevalier said in an April 21 post. The firm said the new restrictions may prompt companies to review their due-diligence practices and put in place new contingency plans to help them quickly respond to new U.S. designations.

New designations appear “likely,” Skadden saidApril 22. “U.S. officials have sent strong signals indicating additional measures may follow,” the firm said, and believe current sanctions are working. “Our intention was to act in a proportionate manner, and to be targeted in our approach, and to signal that we had the capacity to impose far greater costs if Russia continued or escalated its behavior,” Daleep Singh, a White House international economic aide, told Reuters April 23. “The results so far have been pretty close to what we had hoped for.”

Businesses will have to contend with a host of new restrictions imposed by Biden’s order, including a provision that “broadly authorizes” sanctions against Russia’s defense and technology sector, Jones Day said. Companies will also have to be mindful of new prohibitions surrounding Russian sovereign debt and U.S. participation in Russian Primary bond markets, Paul Weiss said April 21. The firm expects the new restrictions to “effectively shut down the Russian government’s ability to raise funds from U.S. financial institutions.”

The restrictions are likely to increase tensions between the two countries, mostly because the U.S. imposed them unilaterally rather than in a coordinated effort with allies, Paul Weiss said. It said the sanctions were very different from the recent U.S. designations against China for human rights violations, which were imposed along with the European Union, United Kingdom and Canada (see 2103220034) “U.S.-Russia relations are likely to continue to be challenging,” the firm said, “and given the additional sanctions authorities contained in the Order, there is a meaningful possibility of [the Office of Foreign Assets Control] making additional designations of Russian individuals and companies in the future.”

The U.S.-Russia relationship is being further complicated by Russia’s imprisonment of political opposition leader Alexei Navalny and the construction of the Nord Stream 2 gas pipeline. Lawmakers have urged the administration to issue tougher sanctions against Russia over both (see 2104160022 and 2104210016). Although the gas pipeline is almost completed, Miller & Chevalier said the U.S. may continue to impose sanctions. “[T]his new authority signals that dealings with individuals and entities in Russia with ties to the Nord Stream 2 pipeline may continue to carry sanctions risks even if the project is completed and becomes operational,” the firm said.

While companies should be prepared for more Russian designations under Biden’s executive order, the U.S. is unlikely to impose them immediately, Miller & Chevalier said, noting the new administration prefers a methodical approach to foreign policy decisions. “This marks a clear departure from the ‘maximum pressure’ approach to economic sanctions favored by the Trump administration,” the firm said. “Of course, retaliation on the part of the Russian Federation, or other geopolitical events, may intervene to upend that approach.”