Extension of the SDN List
The US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) has significantly extended the Specially Designated Nationals and Blocked Persons list (“SDN” and “SDN List” respectively).Specifically, the restrictions were imposed on:
- Gazprombank (JSC) (“GPB”) and its foreign subsidiaries in Luxembourg, Switzerland, Hong Kong, South Africa and CyprusGPB International SA (Luxembourg), GPB Financial Services Hong Kong Limited (Hong Kong), GPB Financial Services Limited (Cyprus), GPB-DI Holdings Limited (Cyprus), Gazprombank (Switzerland) Ltd (Switzerland) and GPB Africa and Middle East Pty Ltd (South Africa);
- more than 50 Russian banks and financial institutions, including Bank Dom RF JSC, Trust Bank PJSC, BCS Bank JSC, Fora Bank Joint Stock Commercial Bank, BBR Bank JSC, Bank Agroros JSC, National Reserve Bank Joint Stock Commercial Bank, Guta Bank JSC, Interstate Bank and others (together with GPB — “Sanctioned Banks”);
- more than 40 Russian securities registrars and special depositaries, including Nezavisimaya Registratorskaya Kompaniya R.O.S.T. JSC, Spetsializirovannyi Depozitarii Infinitum JSC, Pervyi Spetsializirovannyi Depozitarii CJSC, Noviy Registrator JSC, Specialized Depository Company Garant LLC, Independent Specialized Depository JSC, DRAGA JSC, etc.;
- four employees of VTB Bank PJSC branches in Shanghai (VTB Shanghai) and Sberbank PJSC in New Delhi (Sberbank New Delhi); and
- 11 employees of the Central Bank of the Russian Federation.
As a reminder, the US blocking sanctions have the following consequences:
- all US-based property of SDNs held in the possession or under the control of US Persons US sanctions are applied to:
i) US citizens or lawful permanent residents, regardless of their physical location;
ii) entities organised under the laws of the United States or any jurisdiction within the United States (including their branches and representative offices outside the US); and
iii) other persons in the United States
(jointly “US Persons”) shall be blocked; and - US Persons are prohibited from engaging in any transactions with SDNs and providing to them or receiving from them any benefits.
Risks of using the System for Transfer of Financial Messages (SPFS)
Since most major Russian banks have been disconnected from the SWIFT system, the Bank of Russia has been actively developing the System for Transfer of Financial Messages (“SPFS”) since 2014. As an alternative to SWIFT, SPFS enables the exchange of payment information and supports financial relationships despite existing restrictions.OFAC issued an alert emphasising that SPFS is part of the financial services sector of the Russian Federation economy, which plays a key role in promoting communication between financial institutions within Russia’s financial system, and therefore any foreign financial institution that joins or has already joined SPFS may be included on the SDN List for activities in this sector pursuant to Executive Order (E.O.) 14024 of 15 April 2021.
OFAC also recommends that foreign financial institutions be cautious about their exposure to financial institutions that have joined SPFS, as they may be conduits for Russian sanctions evasion.
As a reminder, on 24 June 2024, the European Union also imposed restrictions on the use of SPFS, which we discussed in detail earlier.
General Licenses
OFAC has issued four General Licenses authorizing certain transactions under new sanctions restrictions:- General License No. 53A authorizes all transactions that are ordinarily incident and necessary to the official business of diplomatic or consular missions of the Government of the Russian Federation and involve GPB or its subsidiaries (for instance, payment of salaries to employees of Russian missions and reimbursement of their expenses).
- General License No. 55C authorizes, until 28 June 2025, transactions:
- prohibited by the determinationThis determination prohibits the provision of the following categories of services related to the maritime transport of oil of Russian origin: trading/commodity brokering, financing, shipping, insurance, including reinsurance and protection and indemnity, flagging, customs brokering. of 21 November 2022 made pursuant to Section 1(a)(ii) of Executive Order (E.O.) 14071 of 6 April 2022 related to the maritime transport of crude oil originating from the Sakhalin-2 project, provided that the relevant products are intended solely for importation into Japan; and
- involving GPB or its subsidiaries that are related to the Sakhalin-2 project, including transactions involving Sakhalin Energy LLC.
- General License No. 113 authorizes, until 20 December 2024, all transactions that are ordinarily incident and necessary to the wind down of transactions involving the Sanctioned Banks listed in the Annex to this General License, or their subsidiaries, provided that any payment to them is made into a blocked account.
- General License No. 114 authorizes, until 20 December 2024, transactions that are ordinarily incident and necessary to:
- the divestment or transfer, or the facilitation of the divestment or transfer, of debt or equity issued or guaranteed by GPB, Interstate Bank or their subsidiaries (“Covered Debt or Equity”) to non-US Persons;
- facilitating, clearing, and settling trades of Covered Debt or Equity that were placed prior to 21 November 2024; and
- the wind down of derivative contracts entered into prior to 21 November 2024 and involving the above entities or Covered Debt or Equity, provided that any payment to such entities is made into a blocked account.
Consequences of Sanctions
The above US sanctions are intended to increase the economic isolation of Russian persons from the international financial system and to complicate cross-border payments:- after blocking sanctions were imposed on Russia’s systemically important banks in recent years, medium and small banks have become the main channel for cross-border payments. The designation of more than 50 such banks will further narrow this channel and complicate cross border payments. Meanwhile, other Russian banks that have not yet been designated and subsidiaries of foreign financial groups are likely to further tighten their internal policies on cross border payments; and
- as noted above, not only banks but also Russian securities registrars and special depositaries have been included on the SDN List, which is also aimed at complicating the operations of Russian corporations on international markets and creating obstacles for management companies investing in foreign financial instruments.
The designation of GPB, which plays a key role in cross-border payments for Russian gas supplies, and its foreign subsidiaries will inevitably require adjustments to the existing mechanics used to receive payments from Western counterparties established by the Decree of the President of the Russian Federation of 31 March 2022 “On the special procedure for the performance by foreign buyers of obligations owed to Russian natural gas suppliers.” It should also be noted that GPB was one of the few Russian banks to offer UnionPay cards, which are actively used by Russian individuals to make payments abroad. On 22 November 2024, GPB already warned its clients of the difficulties with using such cards abroad.
Finally, OFAC’s alert regarding the risks associated with using SPFS is likely to cause many financial institutions from friendly jurisdictions to cease working with the system in order to avoid potential exposure to US sanctions.
