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What Do Russian Sanctions Imply? 23 February 2022

In terms of the possible effects of the crisis between Russia and Ukraine on commercial life, the statements made by the countries in the international community regarding this crisis are crucial. In this sense, Germany froze the approval process of the Nord Stream 2 gas line as a first step, while the USA banned trade with Luhansk and Donetsk. On the other hand, England froze the assets of five Russian banks and three Russian billionaires in the country, and Japan gave some sanction signals for the future. Finally, Canada announced that in the first phase of economic sanctions, Canadians were barred from financial agreements with Donetsk and Luhansk.

Before talking about the US Executive Order, which is the main subject of our bulletin, we would like to state that this text was prepared in line with the developments that took place on 23.02.2022. Since the situation in the region is quite uncertain and tense, this study will not cover the new sanction decisions that may be taken due to Russia's advance in Ukraine as of 24.02.2022.

U.S. Sanctions Envisioned by Executive Order 14024

The Executive Order, which entered into force with the signature of the American President Joe Biden, targets the major financial institutions operating in Russia, their subsidiaries and individuals who take part in critical positions of these organizations. First of all, it should be noted that the bans envisaged in this sanction package are quite different from the example of Iran.

When the previous sanctions practices of the USA are examined, it is seen that many instruments have been used as a sanction tool in various periods. President Biden envisaged harsh sanctions on financial institutions with his statements. These sanctions could deprive Russia of access to the financing it needs to grow its economy, raising the country's borrowing cost and further devaluing the Ruble.
First of all, it would be reasonable to examine the sanctions in two stages. The first title of the sanctions is the relation to trade with the so-called "autonomous" pro-Russian entities established in the Luhansk and Donetsk Regions. The United States has prohibited all its citizens from trading any products or raw materials with these territories. In the second stage, US Administration orders for the termination of commercial relations with the institutions and organizations determined by the Executive Order.

The difference of this approach from the embargoes applied to Iran is in terms of the people on whom the sanctions will be applied. Because, in the embargo applied to Iran, serious obstacles were placed on the trade of third parties who are not US citizens in matters that were within the scope of the embargo. Naturally, the application of these restrictions to third parties was not the same as the application to their own citizens. The application of this prohibition to third parties by the US was naturally not the same as its application to its own citizens. Sanctions differed between those involving their own nationals (Primary sanctions) and those involving foreign nationals (Secondary sanctions). The issue with whom (real and legal) trade is prohibited within the framework of these sanctions is determined through the SDN (Specially Designated Citizens) list published by the Ministry of the Treasury. Although it is not as comprehensive as the Iran example, this list, which includes 445 real and legal persons, is a list that should be checked before trading with Russia.

Primary Sanctions: Binds US natural and legal persons (including green card holders) US-owned foreign companies that the US citizens hold majority stakes in for the purpose of investing. Violation of these sanctions can result in punishments up to imprisonment.

Secondary Sanctions: It binds citizens of other countries, including Turkish natural and legal persons. It can be applied to natural and legal person’s actions that the USA determines to violate the sanctions. If the use of dollars in the SWIFT system is made by the company using US systems (even the domain and hosting of the website), it is subject to primary sanctions. This means that your money transfers through the USA may be seized due to sanctions violation, or the US financial institution will refuse to make the transaction or return the money to the sender.

As a result, unlike the embargo applied to Iran, sanctions to be applied to Russia does not envisage an embargo covering foreign nationals.

In summary, with the Executive Order issued in the USA, financial institutions that play an important role in the Russian defense industry and the development of the country's infrastructure that have strong organic ties with the state were targeted. Vnesheconombank (VEB), a state bank that has an immense share in the development of Russia's economic and industrial infrastructure, its managers and subsidiaries were included in the banned lists by OFAC (Office of Foreign Assets Control). In this context, the assets of the relevant organizations and individuals in the USA were confiscated.

In addition, Promsvyazbank (PSB), which is a state bank that has a large share in the financing of the Russian defense industry, its subsidiaries and high level officials are also within the scope of the ban. In this context, US citizens and US-related legal entities will completely terminate their communication with these organizations and the United States Administration will prohibit the entry of natural persons that are within the scope of the ban.

IN CONCLUSION, the crisis between Russia and Ukraine has not yet had an enforceable effect on the third country citizens in terms of trade. The reason for this is that the USA and other European countries did not envisage an embargo that could potentially spread to all citizens of the world, both administratively and legally. Since these sanctions are only targeting certain financial institutions and their managers, they practically do not affect individuals exporting to Russia. If the third parties does not establish commercial relationships with the designated area and institutions set forth in the Executive Order, there won’t be any liability issues for commercial activities. However, if Russia continues its aggressive stance, it is clear that a potential series of sanctions awaits Russia. Although Russia’s removal from the SWIFT system, which was a measure applied to Iran in 2012, will affect countries such as the USA and Germany, it is a possibility that should be taken into account if Russia's progress continues. In this case, as in the case of Iran, additional sanctions will adversely affect both Russia and real and legal persons who have commercial relations with Russia.
 

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