• The Gloves are Off: U.S. Sanctions Block Aggressors in Crimea
  • March 19, 2014 | Authors: J. Scott Maberry; Cheryl Palmeri
  • Law Firm: Sheppard, Mullin, Richter & Hampton LLP - Washington Office
  • In response to Russia’s military presence in the Crimean region of Ukraine, President Obama issued an Executive Order (“EO”) on March 6, 2014, authorizing the blocking of property of individuals and entities involved in the political destabilization of Ukraine. The EO provides categories of persons subject to the sanctions but leaves the U.S. Treasury and State Departments to designate the specific persons covered by the EO.

    Broadly, the EO prohibits dealing in the property of designated persons and prohibits entry by those persons into the United States. As we reported in May 2013, the Treasury Department previously imposed similar restrictions against 18 individuals designated under the Magnitsky Act for engaging in human rights abuses against specified individuals in Russia. The new EO also prohibits donations of articles such as food, clothing, or medicine to a designated person. Also, and perhaps most importantly for U.S. businesses, the EO prohibits providing funds, goods, or services to, or receiving the same from, a designated person.

    Persons covered by the EO include those involved in actions or policies that undermine the democratic process or institutions in, or that threaten the peace, security, stability, sovereignty, or territorial integrity of, Ukraine. Also covered are persons asserting governmental control over any region in Ukraine without the Ukrainian government’s authorization and anyone involved in misappropriation of Ukrainian state assets. Moreover, the EO reaches any person acting on behalf of such persons or who has materially assisted, or provided support, goods, or services in support of such activities.

    Among those the Treasury and State Departments may designate pursuant to the EO are Russian and Ukranian leaders involved in Russia’s increasing military presence in Crimea or the Crimean parliamentary vote to annex the region to Russia.

    Based on information currently available, it appears that U.S. designations may also target ousted Ukranian President Viktor Yanukovych, former Prime Minister Mykola Azarov, and other senior Ukranian officials accused of embezzling as much as $37 billion from Ukranian state funds. The European Union has already frozen the assets of those individuals, and the U.S. Treasury Department’s Financial Crimes Enforcement Network has issued two advisories reminding U.S. financial institutions to apply enhanced scrutiny to private banking accounts held by or on behalf of the officials and to monitor transactions that could potentially represent misappropriated or diverted state assets, the proceeds of bribery, illegal payments, or public corruption. In the past, the U.S. Department of Justice Kleptocracy Asset Recovery Initiative has successfully recuperated such illicit funds. The most recent example involved freezing more than $458 million in assets the DOJ determined were stolen by former Nigerian dictator Sani Abacha.

    The potential impact of U.S. sanctions in this case is severely limited by the United States’ relatively small trading relationship with Russia. Each year, the United States engages in only around $40 billion in imports and exports with Russia, compared to approximately $460 billion in trade between Russia and Europe. Europe, for its part, has been reluctant to restrict commercial activity and investment in Russia, preferring instead to engage in further diplomacy before resorting to punitive measures. Without Europe’s backing, it remains to be seen whether U.S. sanctions will have the desired effect of deterring Russia from further intervention in Crimea.

    The current unilateral U.S. sanctions do, however, wield one particularly potent weapon. Designations under the EO may include Russian financial institutions. The largest of those, Sberbank, has subsidiaries, offices, and branches throughout Europe and Asia. If targeted, the funds of Sberbank and other Russian state-owned banks could be blocked from entering or passing through U.S. accounts. U.S. businesses, banks, and persons would then be prohibited from dealing in such funds.

    As evidenced by the recent developments in the United States’ relations with Iran (on which we reported in January and February of this year), sanctions that restrict financial institutions can be quite effective. Blocking Russia’s access to the U.S. financial market, even without European support, could prove detrimental to Russia’s ability to compete in the international marketplace. The Russian economy already took a beating last week in response to the Crimean crisis, with Russian stocks plummeting and the ruble falling to a record low against the dollar. Restricting Russia’s ability to engage in global financial transactions is likely to exacerbate that volatility in Russia’s economic state.

    And executive branch sanctions could be just the beginning. Members of the U.S. Congress have expressed plans to impose separate sanctions against Russia, which may well go further than those imposed by the President. Executive sanctions can be revoked as quickly as they are imposed. Congress, however, is slow to enact legislation and even slower to reverse it. Any congressionally imposed sanctions, therefore, are likely to be both severe and unrelenting. Moreover, as evidenced by the United States’ recent negotiations with Iran, the involvement of multiple branches of the U.S. government brings with it the potential for disagreement regarding objectives, a divided approach to negotiations, and reciprocal saber-rattling.

    The world is watching as the situation in Crimea and the U.S. responses continue to unfold. Any number of unpredictable variables will determine the conclusion to this act in U.S.-Russian relations. U.S. businesses and financial institutions would be wise to pay close attention to ensure compliance with new restrictions on business or trade with Russia.