As part of K2 Integrity’s commitment to monitor and provide insights into the evolving global sanctions campaign against Russia, we have reviewed and summarized recent developments since our last update on 13 May.
Expiration of OFAC GePolineral License 9C
On 24 May, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced that General License 9C would not be renewed, expiring at 12:01 a.m. on 25 May. The expiration of the general license means that U.S. financial institutions are no longer authorized to process any transactions related to debt and equity with certain Russian financial institutions for U.S. and non-U.S. investors.
General License 9C — issued pursuant to the Russian Harmful Foreign Activities Sanctions Regulations — had authorized all transactions that are ordinarily incident and necessary to deal in debt or equity of Russian financial institutions subject to blocking sanctions since the beginning of Russia’s invasion into Ukraine.1 The license effectively allowed U.S. person bondholders of the relevant debt and equity to divest their holdings to non-U.S. persons. More importantly, General License 9C had authorized all transactions necessary to the receipt of interest, dividend, or maturity payments in connection with previously issued debt or equity of the Central Bank, the National Wealth Fund, or the Ministry of Finance of Russia. Under this authorization, U.S. banks were permitted to process these payments for both U.S. and non-U.S. investors.
This general license had been utilized by the Russian government to make international bond payments in U.S. dollars as bond payments were due and in accordance with the terms of the bonds. With the expiration of the general license, U.S. financial institutions will not be permitted to process such payments, forcing Russia into a technical default for all bonds that do not contain an alternative currency provision. The bondholders may either renegotiate the terms of the bonds or choose to trigger the default and pursue various ways of collecting the funds due. On 27 May, Russia is due to make another $100M payment under its bonds. According to Reuters, Russia has a total of 15 international bonds outstanding with a face value of around $40 billion — half of which are estimated to be held by investors outside of Russia.2
Separately, Bloomberg reported on 19 May that U.S. Treasury Secretary Janet Yellen — in discussions with G7 leaders — announced U.S. officials were considering imposing secondary sanctions on third parties who continue to purchase Russian oil.3 While there are no details regarding the scope of these potential prohibitions, Yellen’s comments surrounding secondary sanctions against Russia’s energy sector suggest the United States wants to deter Russia from re-routing oil to other major importers, such as China and India. If imposed, secondary sanctions would target third parties for transacting with designated Russian persons, essentially cutting off third party persons, who continue to support Russia, from the international financial system. Previously, the United States imposed similar pressure on the purchasers of Iranian oil under the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, successfully diminishing the international demand for the oil.
1 The general license applied to the following Russian financial institutions: Vneshekonombank, Otkritie, Sovcombank, Sberbank of Russia, VTB, or any entity in which one or more of the listed entities own 50 percent or greater interest. It contains similar authorizations for Alfa-Bank and Alrosa, or their 50% or more owned subsidiaries, which remain valid until a later date since these entities were designated in a later tranche.
2 “Explainer: What impact would a Russian debt default have?” Reuters. 31 March 2022. https://www.reuters.com/business/what-impact-would-russian-debt-default-have-2022-03-30/
3 “Yellen Says Secondary Sanctions on Russia Oil Discussed at G-7.” Bloomberg. 19 May 2022. https://www.bloomberg.com/news/articles/2022-05-19/yellen-says-secondary-sanctions-on-russia-oil-discussed-at-g-7?sref=Pw1Mp35R