International Regulatory Enforcement (PHIRE)
Biden Administration Pursues Suite of Actions Against Russia
By Tom Best, Vivian Fischer, Mary E. Rogers, Talya Hutchison, Scott M. Flicker, Behnam Dayanim, and Charles A. Patrizia
In a widely anticipated move, the Biden Administration announced on Thursday, April 15, 2021 a suite of different sanctions on the Russian state, state-linked entities, and private companies and individuals, intended to “impose costs” on that country for a number of “malign activities” contrary to U.S. domestic and foreign policy interests.1
Description and Analysis of the Biden Administration’s Actions
These actions, which include a new Executive Order and 32 Specially Designated National (“SDN”) designations pursuant to two different Executive Orders already in force, address a number of different recent episodes, such as Russian interference in the 2020 election, the ongoing occupation of the Crimea region of Ukraine, Russian paramilitary actions in Central Africa, and the alleged hacking of private U.S. companies and government institutions in 2020. Concurrent with these actions by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and the White House, the U.S. State Department also will expel ten Russian personnel from the country in connection with their attempts to interfere in the 2020 U.S. elections, reports of bounties on U.S. soldiers in Afghanistan, and the SolarWinds intrusion.
While the Biden Administration’s actions are significant and represent a direct response to aggressive actions hostile to the United States and its allies’ foreign policy interests, the economic effects of these SDN designations are likely to be very modest. In contrast, pursuant to the new Executive Order and its corresponding Directive 1, OFAC has, beginning June 14, 2021, prohibited U.S. financial institutions and their foreign branches from participating in the primary market for Russian ruble-denominated and non-ruble denominated bonds issued by the Russian Central Bank (Central Bank of the Russian Federation), the Russian Federation’s sovereign wealth fund (National Wealth Fund of the Russian Federation), and the Ministry of Finance of the Russian Federation.
These prohibitions are important in that they are incremental and, according to the U.S. government, at least, proportionate: rather than seek to choke off all methods available to the Russian state of funding itself, the ban on U.S. financial institutions participating in ruble-denominated debt primary markets follows a similar prohibition on U.S. financial institutions’ participation in non-ruble-denominated issuances imposed in 2019, pursuant to the Chemical and Biological Weapons Control and Warfare Elimination Act (“CBW Act”) and E.O. 13883.
As U.S. persons are not prohibited from participating in the secondary market for such instruments, the U.S. government appears to have attempted to impose additional funding costs on the Russian government without materially hobbling its ability to raise funding in its internal capital markets. What remains to be seen, however, is how extensively these actions will be implemented by Europe- and other-country-based financial institutions even if the prohibitions do not formally apply to them. If taken up widely, the additional funding and other costs to the Russian state could be significant.
Also noteworthy about the actions by the Biden Administration is the fact that Western allies, including the United Kingdom, Canada, Australia and the European Union, joined in the sanctions designation of five individuals and three entities related to the Russian occupation of the Crimea region of Ukraine by imposing their own sanctions.
Overall, the Biden Administration appears to have taken a measured approach to a long list of Russian alleged activity contrary to U.S. interests that had built up over the Trump Administration and more recently. While their character appears to be incremental, intended to be proportionate to each of the actions to which they respond and mostly limited in practical impact, the sovereign debt-related actions do have the potential to impose significant ongoing costs on the Russian state. These steps also leave the Biden Administration latitude for further escalation – including prohibiting secondary market trading in Russian-issued sovereign debt – if relations between the two countries continue to deteriorate.
Russian state media has already commented that Russia is likely to respond, so these actions may mark the beginning of a tit-for-tat cycle of restrictive measures between Russia and the West, similar to what we have seen with respect to China in the first few months of the Biden Administration.
Our economic sanctions, export controls and investigations and enforcement teams will continue to post updates and analysis on PHIRE as this situation evolves.