U.S. Strengthens Sanctions And Export Control Regime Against Russia And Belarus - Export Controls & Trade & Investment Sanctions

On May 19, 2023, the U.S., in concert with the other members of the G-7, issued new export control and sanctions restrictions on Russia, Belarus, and several entities outside of Russia and Belarus that supply Russia and Belarus, including restrictions on certain transfers to Iran and further restrictions on transfers to the Crimea region of Ukraine. The actions taken in parallel by the U.S. Department of Commerce's Bureau of Industry and Security (BIS), the U.S. Department of State (State Department), and the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) target more than 300 entities and individuals and are aimed at further degrading Russia's capacity to wage war against Ukraine. OFAC also imposed new reporting requirements for certain property interests of specified Russian financial institutions held by U.S. persons, the first of which is due June 18 as described below.

On the same day, the Financial Crimes Enforcement Network (FinCEN) and BIS published a second joint alert reminding financial institutions to remain vigilant to Russian and Belarusian efforts to circumvent U.S. export control and sanctions restrictions.

Overview of Additional BIS Restrictions Under the EAR

BIS implemented a series of changes to its restrictions against Russia and Belarus under the Export Administration Regulations (EAR), including expanding existing licensing requirements to cover thousands of additional items and adding 71 entities to the Entity List. The changes include:

One thousand two hundred and twenty-five additional HTS-6 Code entries have been added to Supplement No. 4 to Part 746 of the EAR. These new additions target a variety of consumer items (including sunglasses), electronics, instruments, and advanced fibers for the reinforcement of composite materials, including carbon fibers. This means three entire harmonized tariff system chapters (Chapters 84, 85, and 90) are now subject to EAR restrictions. Items listed in Supplement No. 4 require a license if exported, reexported, or transferred to or within Russia or Belarus under § 746.5(a)(1)(ii) and will be reviewed under a policy of denial, except for items that may be necessary for health and safety or humanitarian reasons which will be reviewed on a case-by-case basis. In practical terms, this means that many items that were subject to the EAR as EAR99, which previously did not trigger an export license to Russia, now require a license.
BIS further expanded the scope of the existing Russia/Belarus Foreign-Direct Product (FDP) Rule. The expanded FDP places restrictions on the export, reexport, or transfer (in-country) of certain foreign-produced items to the Crimea region of Ukraine in addition to parallel controls already in place for Russia and Belarus.
Sixty-nine Russian entities were added to BIS's Entity List (Supplement No. 4 to Part 744). These entities also received "footnote 3" designations as Russian or Belarusian military end users, which subject them to Russia/Belarus-Military End User FDP Rule restrictions. Two additional entities from Armenia and Kyrgyzstan were also added to the Entity List.
BIS expanded the scope of the licensing requirements for Russia and Belarus under § 746.5(a)(1)(iii) to add additional chemicals to Supplement No. 6 to Part 746 of the EAR, including certain discrete chemicals, biologics, fentanyl and its precursors, and related equipment designated EAR99.
An additional HTS-6 Code, which includes a variety of electrical parts of machinery or apparatus, was added to the Supplement No. 7 to Part 746 of the EAR and now requires a license for export or reexport to Iran under § 746.7(a)(1)(ii). Restrictions on items listed in Supplement No. 7 are intended to further undermine Iran's ability to support the Russian and Belarusian industrial bases.

More details about these new restrictions can be found here (Commerce Department regulatory changes) and here (Commerce Department update to Entity List).

Overview of OFAC Actions

OFAC also took a number of actions on May 19, 2023, including designating an additional 22 individuals and 104 entities to its Specially Designated Nationals (SDN) list due to their involvement in sanction evasion networks, Russia's energy extraction capabilities, and Russia's financial sector. U.S. persons, including U.S. financial institutions, are prohibited generally from engaging in any transaction with SDNs and are required to block (i.e., freeze) any property or interests in property belonging to SDNs.

In addition and among other changes, the Secretary of the Treasury, acting in concert with the Secretary of State, determined Section 1(a)(i) of Executive Order (EO) 14024 shall apply to Russia's architecture, engineering, construction, manufacturing, and transportation sectors. As a result, the OFAC may impose sanctions on any individual or entity determined to operate or have operated in these sectors of the Russian economy. OFAC expects to promulgate regulations defining those sectors consistent with the definitions described in Frequently Asked Question 1126. Further, OFAC implemented restrictions on provision of certain architecture and engineering services to Russia, with certain exceptions related to entities owned by U.S. persons or with respect to certain wind down or divestiture activities.

OFAC issued four Russia-related General Licenses and amended Directive 4 under EO 14024 (Directive 4), "Prohibitions Related to Transactions Involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation." Directive 4 prohibits, unless licensed or otherwise authorized by OFAC, U.S. persons from engaging in "any transaction involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation, including any transfer of assets to such entities or any foreign exchange transaction for or on behalf of such entities." It further prohibits actions that would evade or avoid the prohibitions of Directive 4 or any conspiracy to do so. Directive 4, as amended, adds an additional requirement stating that U.S. persons must submit a report to OFAC regarding any property in their possession or control in which an entity subject to Directive 4 has a direct or indirect interest in such property on or before June 18, 2023, and annually thereafter.

General License 13E — authorizing U.S. persons to pay taxes, fees, or import duties, and purchase or receive permits, licenses, registration, or certifications otherwise prohibited under Directive 4 through 12:01 a.m. EDT, August 17, 2023.
General License 66 — authorizing transactions ordinarily incident and necessary to the wind down of any transactions involving Public Joint Stock Company Polyus (Polyus) through 12:01 a.m. EDT, August 17, 2023.
General License 67 — authorizing transactions ordinarily incident and necessary to the divestment or transfer, or facilitation thereof, of debt or equity owned by Polyus prior to May 19, 2023 to a non-U.S. person through 12:01 a.m. EDT, August 17, 2023.
General License 68 — authorizing transactions ordinarily incident and necessary to the wind down of transactions involving certain blocked higher-education universities and institutes through 12:01 a.m. EDT, July 18, 2023.

Additional information regarding OFAC's actions can be found here.

Overview of State Department Actions

The State Department placed sanctions on almost 200 individuals, entities, vessels, and aircraft pursuant to EO 14024. Specifically, the sanctions were imposed on individuals and entities deemed to be "complicit in: sanctions evasion and circumvention; maintaining Russia's capacity to wage its war of aggression; and supporting Russia's future energy revenue sources," as well as those "supporting Russia's war, including Russia-installed puppet occupation authorities, those involved in theft of Ukrainian grain, and in the systematic and unlawful transfer and/or deportation of Ukraine's children."

The individuals and entities designated were deemed to have been involved in Russia's future energy production, military-related procurement and sanctions evasion efforts, Russia-Iran maritime logistics networks, Russia's metals and mining industry, and others. More details can be found here.

BIS and FinCEN Joint Alert

Finally, BIS and FinCEN issued a second joint alert urging financial institutions to remain vigilant against efforts by individuals and entities to evade BIS export controls implemented in connection with the Russian invasion of Ukraine. The report provides information on the new export control restrictions implemented since June 2022, when the first joint alert (see here) was released. The joint alert also details evasion typologies, including evasion through the use of third-party intermediaries and transshipment points and provides additional transactional and behavioral red flags to assist in identifying suspicious transactions relating to possible export control evasion.

The report further specifies the nine high-priority Harmonized System codes that are listed in Supplement No. 7 to Part 746 of the EAR, meaning a license is required for any items associated with these HS codes if destined to Russia, Belarus, the Crimea region of Ukraine, or Iran, including certain foreign-produced items. These items were identified as covering critical U.S. components used in Russian weapon system components that have been recovered on the battlefield of Ukraine, including parts of electronic integrated circuits. The list is not exhaustive but provides "prioritized targets for customs and enforcement agencies around the world" to ensure evasion measures are identified and thwarted.

To read the FinCEN and BIS Joint Alert, see here.

Conclusion

The additional sanctions imposed on Russia by the U.S. government are part of a wider global strategy. Secretary of the Treasury Janet L. Yellen contextualized the new measures within the extant sanctions landscape: "From the beginning of President Putin's illegal and unprovoked war, our global coalition has focused on supporting Ukraine while degrading Russia's ability to conduct its invasion. Our collective efforts have cut Russia off from key inputs it needs to equip its military and is drastically limiting the revenue the Kremlin receives to fund its war machine. [These] actions will further tighten the vise on Putin's ability to wage his barbaric invasion and will advance our global efforts to cut off Russian attempts to evade sanctions."

These measures and the recent criminal charges brought by the U.S. Department of Justice in coordination with the recently launched Disruptive Technology Strike Force indicate the U.S. government intends to closely monitor and enforce its sanctions and export control restrictions. Companies and individuals should take stock of these recent actions and the increasing and continued use of export control restrictions.

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