Yesterday, the Office of Foreign Assets Control (OFAC) issued guidance and general licenses clarifying the intended scope of the Directive 4 sanctions imposed on the Russian Central Bank, National Wealth Fund, and Ministry of Finance (Directive 4 entities). As outlined in our earlier post, Directive 4 prohibits any transactions involving a Directive 4 entity, including the transfer of assets to Directive 4 entities and foreign exchange transactions involving the entities without authorization from OFAC. OFAC’s guidance contains a number of helpful clarifications on the intended scope of the sanctions.

New Frequently Asked Questions

  • Broad prohibition on business: In its guidance, OFAC confirms that the sanctions prohibit not only foreign currency transactions, but also direct or indirect trade, financial, and other unlicensed U.S. transactions or business dealings involving Directive 4 entities. For example, the provision of goods, services, or technology to a Directive 4 entity would be prohibited, even if there is no foreign currency transaction involved.
  • Reject, don’t block: U.S. persons must reject and report impermissible transactions involving Directive 4 entities to OFAC. The Directive does not impose a blocking requirement, so U.S. persons are not required to formally freeze the property or property interests of Directive 4 entities.
  • No 50 Percent Rule: OFAC confirmed that the 50 percent rule does not apply to Directive 4 entities, which means that Directive 4 sanctions do not flow down to entities that are majority owned by the listed institutions.
  • Beware of intermediaries and related parties: OFAC specifically warns U.S. persons of attempts by Directive 4 entities to circumvent sanctions through intermediaries:
    • “In light of the current economic situation in Russia, U.S. persons should be on alert for non-routine foreign exchange transactions that may indirectly involve entities subject to the Russia-related Sovereign Transactions Directive, including transactions that are inconsistent with activity over the 12 months prior to February 28, 2022. For example, the Central Bank of the Russian Federation may seek to use import or export companies to engage in foreign exchange transactions on its behalf and obfuscate its involvement. U.S. persons should also exercise caution in engaging in foreign exchange transactions on the Moscow Exchange given the current heightened risk that the Central Bank of the Russia Federation could be a counterparty to such transactions.”
  • Not a secondary market prohibition: OFAC indicated that the Directive 4 sanctions do not prohibit trading in secondary markets for Russian sovereign debt, provided that no Directive 4 entity is a counterparty to such transactions. However, OFAC cautions that Directive 1A still prohibits U.S. financial institutions from participating in the secondary market for ruble or non-ruble denominated bonds issued after March 1, 2022 by Directive 4 entities.
General Licenses

OFAC issued two new general licenses that create the following limited exceptions to the broad prohibition set out under Directive 4:

  • General License 13 authorizes U.S. persons to pay taxes, fees, or import duties, and to purchase or receive permits, licenses, registrations, or certifications involving Directive 4 entities that are ordinarily incident and necessary to a persons’ day-to-day operations in Russia. The authorization is valid through 12:01 eastern daylight time, on June 24, 2022;
  • General License 14 authorizes certain transactions where a Directive 4 entity is involved solely as the operator of a clearing and settlement system so long as: (i) there is no transfer of assets to or from any Directive 4 entity; and (ii) no Directive 4 entity is either a counterparty or a beneficiary to the transaction.
OFAC also updated two existing general licenses:
  • General license 9A authorizes certain transactions necessary to the receipt of interest, dividend, or maturity payments in connection with debt or equity of Directive 4 entities issued before March 1, 2022. The authorization lasts through 12:01 a.m. eastern daylight time, on May 25, 2022;
  • General license 10A authorizes certain transactions necessary to the wind down of derivative contracts, repurchase agreements, or reverse repurchase agreements that include a Directive 4 entity as a counterparty. The authorization applies to such agreements entered into before 12:01 a.m. eastern standard time, on March 1, 2022. The authorization lasts through 12:01 a.m. eastern daylight time, on May 25, 2022.
Companies with operations that have exposure to the Russian economy and financial institutions should review these licenses and guidance entries carefully to ensure compliance with this rapidly evolving regulatory environment.