20 Jun 2022

The Price of Putin’s War: How Sanctions Exemptions Are Issued to Avoid Collateral Damage

On June 2nd, the Biden Administration announced a fresh new round of sanctions on Russia in the latest attempt to punish the Russian government for its invasion of Ukraine.

“The United States and our allies and partners are committed to supporting Ukraine and ensuring the Russian government feels the compounding effects of our actions,” said the White House statement.

Severe economic sanctions were initially imposed on Russia in the immediate aftermath of the Ukraine invasion on February 24, 2022. At that time, various types of economic and trade restrictions were levied on major financial institutions, business entities, government-owned funds, technology and individuals—including President Vladimir Putin, his family and members of his inner circle—by the U.S., the U.K., the E.U. and other nation states.

But while the economic consequences on Russia have already been profound, the implementation and enforcement of the sanctions has not been so simple. Indeed, Law360® reported in March 2022 on the creation of a task force of more than a dozen attorneys to hunt for violators of sanctions and to seize the assets of Russian oligarchs.

MLex®, a LexisNexis company, has just published a special report, “The Price of Putin’s War,” which provides readers with a wealth of information and analysis chronicling the announced measures, as well as the nuance of their wording and subtle differences in emphasis among participating governments. The reporting was contributed by MLex’s anti-bribery and corruption team, financial services specialists and financial crime reporters.

“The world acted quickly after Vladimir Putin’s full-scale invasion of Ukraine in February,” writes Samuel Rubenfeld, a reporter for MLex, who penned the introduction. “Three months on, sanctions, embargoes and fast-tracked legislation have piled up, but with notable gaps and differences between countries. This special report examines how the measures stack up in practice.”

For example, one of the intriguing aspects of the Russian sanctions regime is the manner in which the U.S., the U.K., the E.U. and others are using selective exemptions in an effort to avoid counterproductive collateral damage.

“Enforcers, especially in the U.S., are issuing exemptions as quickly as they’re announcing sanctions targeting entities supporting the Russian invasion,” writes Robert Thomason, correspondent for MLex, in one of the featured articles in the report. “Sanctions enforcers face the challenge of balancing the need to prevent entities from contributing to the worst conflict in Europe since World War II and allowing enough activity to prevent counterproductive disruptions.”

Thomason notes that the U.S. is issuing a number of “authorized-transaction notices and general licenses” to shield some corporate targets from the harsh economic measures contained in the sanctions.

The licensing system is a tactic that allows specific business operations to continue. For instance, exemptions have been granted to facilitate the flow of humanitarian aid and to provide time to carefully wind down sensitive business with sanctioned entities. It is also a mechanism that has been used to prevent sudden shocks to markets.

Thomason reports that the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) has issued 27 general licenses authorizing or renewing otherwise forbidden transactions with sanctioned Russian companies this year. “The pace at which the Treasury is issuing the general licenses is unusual,” he writes. “Most other programs have significantly fewer than that.”

He concludes that determining what companies should benefit from an exemption from Russian sanctions “is as fraught a decision as imposing the sanctions in the first place.”

In addition to Thomason’s article regarding sanctions exemptions, the report dives into five other key aspects of the economic fallout from the Russia sanctions:

  • How the financial services industry is seeking to sidestep the Ukraine fallout, but remains on high alert;
  • Choking off “the main artery”—how the sanctions vice on Sberbank keeps tightening;
  • A legislative fast track that is producing new U.K. laws and E.U. plans to go after Russian interests;
  • Professional services “enablers” that are being squeezed as the U.S. and U.K. target Russia’s middlemen; and
  • Commodity trade controls that are sparking European soul searching on the future of energy.

MLex is an investigative news agency dedicated to uncovering regulatory risk and provides exclusive, real-time market insight and analysis. From 14 bureaus worldwide, MLex journalists focus on monitoring the activity of governments, agencies and courts to identify and predict the impact of legislative proposals, regulatory decisions and legal rulings. Discover MLex with a free trial today.

Corporate legal and corporate compliance professionals may also want to consider leveraging   LexisNexis® Regulatory Compliance, a risk register and regulatory inventory that provides guidance, alerts and tools to help risk and compliance professionals manage, monitor and demonstrate compliance in the face of constant regulatory changes. The Sanctions Module, specifically, covers the economic and trade sanctions administered by Office of Foreign Assets Control (OFAC) and is regularly updated to keep pace with ongoing regulatory changes. This module provides guidance on complying with OFAC sanctions programs to help financial institutions develop and maintain a sanctions compliance program and mitigate financial and reputational risk.