The recently announced sanctions by the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) sent shockwaves through the Russian financial system, forcing the Moscow Exchange (MOEX) to halt trading of U.S. dollars and euros.¹ These sanctions are expected to significantly impact entities, individuals, and foreign financial institutions involved in international trade with Russia. Due to the constraints on the Ruble's (Russia's currency) convertibility, costs for importers and exporters are anticipated to rise sharply. Additionally, foreign financial institutions conducting certain transactions with sanctioned parties are at risk of secondary sanctions. A key takeaway from these sweeping sanctions announcement is that transactions involving Russian parties or suspected Russian parties continue warranting enhanced compliance due diligence.

Currency Exchange Impact

By sanctioning MOEX, OFAC’s reach forced international currency exchanges off Russia’s main marketplace. Instead, the Ruble’s exchange rate will now reflect interbank transactions. This development will obscure the Ruble’s trade value and increase the cost of currency conversions, resulting in higher costs for importers and exporters dealing with Russian parties. The Ruble’s depreciation is anticipated, due to decreased international trade and rising costs in Russia. 

Consequently, Russian foreign-exchange brokers have suspended withdrawals from U.S. dollar and euro-based accounts. The suspension will widen the gap between international buying and selling prices, further destabilizing the Ruble’s value. As such, Russian importers are likely to face higher costs due to the potential need to purchase foreign currency for international transaction payments.

Secondary Sanctions Risks

OFAC also expanded the regulatory definition of Russia’s military-industrial base to include all parties blocked under Executive Order (E.O.) 14024. This expansion puts foreign financial institutions at risk of secondary sanctions when conducting or facilitating significant transactions or providing services involving any party blocked under E.O. 14024. These parties include designated Russian banks such as VTB Bank Public Joint Stock Company (VTB) and Public Joint Stock Company Sberbank of Russia (Sberbank).

Further, foreign financial institutions are also at risk of sanctions for continuing to facilitate transactions related to Russia’s military-industrial base. Financial institutions should review OFAC’s Updated Guidance on Sanctions Targeting Support to Russia’s Military-Industrial Base and consult with experienced international trade counsel to identify potential sanctions risks. Implementing appropriate controls can mitigate these risks while minimizing disruptions to ongoing business operations.

Additional Sanctions

In coordination with the U.S. Department of Commerce, OFAC issued a new determination under E.O. 14071, which prohibits U.S. persons from providing any person in Russia with:

1. IT consultancy and design services; or 
2. IT support services and cloud-based services for enterprise management software and design and manufacturing software.

This prohibition takes effect on September 12, 2024.

Notably, OFAC maintains authorizations for certain telecommunication and internet-related transactions, as well as humanitarian transactions, under General Licenses (GL) 6D and 25D. These GLs generally authorize specific transactions involving information communications technology. However, given the scope of these GLs and the need for fact-specific analysis to determine applicability, parties seeking to operate under these licenses should consider obtaining a legal opinion. While not required, this proactive step can facilitate compliance reviews when seeking financing or refinancing; engaging in corporate transactions such as mergers and acquisitions; or responding to governmental investigations. 

Next Steps 

The newly implemented OFAC sanctions represent a significant escalation in economic measures against Russia with far-reaching implications. The restrictions on the Ruble’s convertibility, coupled with the potential risk of secondary sanctions, underscore the importance of heightened due diligence in transactions involving Russian parties. As OFAC continues to expand its Russian sanctions regime, entities, individuals, and foreign financial institutions involved in international trade should adapt internal compliance programs accordingly. Specifically, companies operating directly or indirectly in Russia and affiliated countries should consider undergoing risk assessments, trainings, and other risk management activities to mitigate against potential business operations. Further, companies should consider audit activities to detect efforts by foreign agents and subsidiaries to avoid the Russian sanctions.

Footnotes

1. Dept. of Treasury, As Russia Completes Transition to a Full War Economy, Treasury Takes Sweeping Aim at Foundational Financial Infrastructure and Access to Third Country Support (June 12, 2024), available here.