This is great, I love watching magic at 1/4 speed. I think he's sorting the cards into a face up and face down half and puts the two picked cards in the opposite half. It looks like he sorts faces up on the top half and faces down on the bottom. He might even have left the top card face down so the deck looks more unsorted because he flips it during the 4:04 move. Then he flips the halves which results in a sorted deck with the picked cards flipped.

Yep, you got it. The trick happens entirely during that fan-out of cards that Penn and Teller are inserting into. The trick is that Kostya's bottom hand is not a passive receptacle but is actively reaching out underneath the deck to grab any face-down cards and pull them onto the bottom, but he's practiced it so well that it doesn't look unnatural or jerky. The "into" hand is holding in order:

    1. a few face-down cards on top to make it look like it's still mixed,
    2. all the face-up cards plus Penn's card, which went in face-down,
    3. all the face-down cards plus Teller's card, which went in face-up.

At 4:04 Kostya does a simple move which Penn and Teller are totally allowed to see which reorients these; indeed, Penn's bellow at 4:06 is apparently because he was 100% convinced that this was going to be a "blink and you'll miss it" trick: maybe swapping out the deck, maybe the cards are not perfect rectangles and he can separate them at will, maybe a dozen other ways he knows to get the same illusion -- but instead he just saw the guy turn half of the cards over, meaning that they were already split into face-up and face-down: and he had totally missed it because the cards seemed to move so naturally and the hand underneath was 100% totally hidden from him.

The moves start earlier than that, from when the cards are being selected through to when they're replaced. Penn's groan at 4:06 is because the move at 4:04 tells him that the up/down cards are already separated and the trick is already finished.