On February 24, 2022, President Biden announced a new tranche of sweeping sanctions against Russia in response to its invasion into Ukraine with both the Treasury Department and the Commerce Department taking action to implement these measures. The new restrictions specifically target financial institutions, Russian elites, state-owned enterprises, and several of Russia's critical industries and sectors such as aviation, high-tech and maritime.
In addition to the new Office of Foreign Asset Control (OFAC) sanctions, the Bureau of Industry and Security of the Commerce Department implemented broad export control restrictions, including: prohibitions on shipments of US goods, technology, and software; new licensing requirements with a presumption of denial with certain limited exceptions such as safety of flight; and application of the foreign direct product (FDPR) rule to impose export control restrictions on the use of US-origin technology and equipment to manufacture products destined for Russia. These represent the most sweeping export controls imposed on Russia since the days of the cold war Coordinating Committee for Multilateral Export Controls (CoCom).
Each of the actions by the Departments of Treasury and Commerce are described in the sections below.
The Treasury Department
The Treasury Department's Office of Foreign Assets Control (OFAC), acting pursuant to Executive Order 14024 (EO), implemented several economic sanctions targeting two of Russia's largest banks as well as other entities and individuals involved in Russia's financial sector.
Russian Financial Institutions
Four new Russian financial institutions and their subsidiaries were added to the Specially Designated Nationals (SDN) List, following the addition of VEB and Promsvyazbank in the first set of US sanctions. With these new designations, the US government has imposed blocking sanctions on six of Russia's major banks and more than 100 of their subsidiaries, including many Russian financial institutions and even subsidiary financial institutions and companies located outside of Russia.
US persons, including US financial institutions, are prohibited generally from engaging in any transactions with SDNs and are required to block (i.e., freeze) any property or interests in property belonging to SDNs. Additionally, under OFAC's 50% ownership rule, entities that are owned 50% or more, directly or indirectly, by one or more SDNs in the aggregate are also subject to OFAC's sanctions, even if OFAC does not publicly list those entities as SDNs. US persons, therefore, need to conduct due diligence into their foreign counterparties to ensure that they are not owned 50% or more by SDNs.
In addition to VEB and Promsvyazbank, full blocking sanctions have been imposed on the following:
- VTB and its subsidiaries
- Otkritie and its subsidiaries
- Sovcombank and its subsidiaries
- Novikombank and its subsidiaries
The full list of subsidiaries can be found here.
In addition to the updated SDN list, OFAC issued Directive 2 under EO 14024, "Prohibitions Related to Correspondent or Payable-Through Accounts and Processing of Transactions Involving Certain Foreign Financial Institutions." Starting March 26, 2022, US individuals are prohibited from opening or maintaining correspondent bank accounts as well as processing any transactions on behalf of Sberbank and its 25 subsidiaries. US financial institutions must reject such transactions unless permitted by OFAC.
Russian State-Owned Enterprises (SOE)
OFAC expanded Russia-related debt and equity restrictions already in place on Russia's economy by issuing Directive 3 pursuant to EO. 14024, "Prohibitions Related to New Debt and Equity of Certain Russia-related Entities." US persons are prohibited from engaging in transactions or dealings in new debt of longer than 14 days maturity and new equity of 11 Russian SOE and two privately-owned entities that operate in the Russian financial sector.
The 13 firms include:
- Sberbank , a major Russian financial institution
- Gazprombank Joint Stock Company , a large financial institution closely linked to Russia's energy sector
- Joint Stock Company Russian Agricultural Bank, a large financial institution affiliated with Russia's agriculture sector
- Public Joint Stock Company Gazprom , the world's largest natural gas company
- Public Joint Stock Company Gazprom Neft , a large oil producer and refiner
- Public Joint Stock Company Transneft , company that manages Russia's petroleum-related pipelines
- Public Joint Stock Company Rostelecom, large Russian telecommunications company
- Public Joint Stock Company RusHydro, hydroelectricity company
- Public Joint Stock Company Alrosa, world's largest diamond mining company
- Joint Stock Company Sovcomflot, maritime and freight shipping company
- Open Joint Stock Company Russian Railways, one of the world's largest railroad companies
- Joint Stock Company Alfa-Bank , Russia's largest privately-owned financial institution
- Credit Bank of Moscow Public Joint Stock Company , Russian non-state public bank
OFAC issued a number of General Licenses including:
- No. 5 (official business of certain international organizations);
- No. 6 (agricultural commodities, medicine, medical devices, COVID-19 support);
- No. 7 (overflights, emergency landings, air ambulance services);
- No. 8 (certain energy transactions authorized through June 24, 2022);
- No. 9 (wind-down for certain transactions in debt or equity of designated parties through May 25, 2022);
- No. 10 (wind-down for certain derivative contracts through May 25, 2022);
- No. 11 (wind-down for dealing with three banks, Otkritie, Sovcombank and VTB Bank, but not Novikombank nor Promsvyazbank, which was previously designated, through March 22, 2022);
- No. 12 (authorizing rejections, rather than blocking, for three banks, Otkritie, Sovcombank and VTB Bank, but not Promsvyazbank through March 25, 2022);
- Belarus General License 6 (official business of the US government); and
- Belarus General License 7 (certain international organizations)
OFAC has issued extensive guidance to provide further insight into these licenses.
Ten individuals and their families with close ties to President Putin and Russia's financial sector have also been added to the SDN list.
- Sergei Borisovich Ivanov, close ally to President Putin and former Chief of Staff of the Presidential Executive Office, Deputy Prime Minister, and Defense Minister of Russia
- Sergei Sergeevich Ivanov, Special Presidential Representative for Environmental Protection, Ecology, and Transport
- Nikolai Platonovich Patrushev , Secretary of the Russian Federation Security Council
- Andrey Patrushev , employed within Russia's energy sector
- Igor Ivanovich Sechin, CEO of Rosneft
- Igor Sechin , close ally to President Putin and former Deputy Prime Minister of the Russian Federation
- Alexander Aleksandrovich Vedyakhin , First Deputy Chairman of the Executive Board of Sberbank
- Andrey Sergeyevich Puchkov, VTB Bank executive
- Yuriy Alekseyevich Soloviev , VTB Bank executive
- Galina Olegovna Ulyutina, wife of Soloviev
Additionally, two Russian-based real estate companies, Limited Liability Company Atlant S and Limited Liability Company Inspira Invest A, were designated to the SDN list because of Andrey Sergeyevich Puchkov's interests in the entities.
The Commerce Department
Meanwhile, the Commerce Department imposed new restrictions on US exports to critical industries to the Russian economy, such as aerospace, aviation, maritime, and high-tech. Items classified as EAR99, including most consumer goods for the Russian people, will not be affected unless destined for a military end user (MEU).
New Commerce Control List (CCL) License Requirements
In addition to the existing licensing requirements set forth for each of the items specified in Categories 0-10, all items in Categories 3-9 (no matter the reason for control) now require a license to be exported to Russia, unless an exception or special provision applies. Therefore, licenses are now required for items such as: microelectronics, telecommunications equipment, navigation equipment, avionics, and aircraft components, among others.
Licensees seeking to export, reexport, or transfer (in-country) items related to these ECCNs will be reviewed under a policy of denial. However, certain categories will be reviewed on a case-by-case basis to determine if the transaction would benefit the Russian government if related to flight safety, maritime safety, humanitarian needs, government space cooperation, civil telecommunications infrastructure, government-to-government activities, and to support limited operations of partner country companies in Russia.
Restrictions on Russian military end users have been expanded to cover a broader category of items and are no longer limited by the specified categories on the CCL. The Russian entities on the MEU List have all been moved to the Entity List at Supp. 2 of Part 744. Now, all items subject to the EAR require a license to be exported, re-exported, or transferred (in-country) to or within Russia except for food or medicine designated as EAR99 and 5A992.c, or 5C992.c items (generally mass market telecommunications devices or other devices with encryption such as smart phones) for the few Russian MEUs not deemed to be a Russian "government end user" or Russian SOE. And, as noted above, the US government has implemented a policy of denial for such license applications.
The full list of entities added to the Entity List can be found here.
Foreign Direct Product Rule (FDPR): Two new rules related to the FDPR have been created specific to Russia and Russian MEUs
Under the new Russia FDPR, foreign-produced items are subject to the EAR if they are a direct product of technology or software in any ECCN in Categories 3, 4, 5, 6, 7, 8, or 9 of the CCL, as well as foreign-produced items that are a direct product of a plant or equipment that itself is a direct product of Categories 3, 4, 6, 7, 8, or 9 software or technology. The rule applies broadly to any foreign-produced item when there is "knowledge" that the foreign-produced item is destined to Russia, or will be incorporated into, or used in the production or development of any part, component, or equipment not designated EAR99 and produced in or destined to Russia.
Although the rule expressly does not apply to EAR99 items, the expansive list of ECCNs covered by this rule will result in many additional foreign-produced items being subject to the EAR, including personal communication devices, aviation parts, and semiconductors.
There is a limited "savings clause" for sanctions against Russia added under EAR § 746.8(a)(2) and (3), shipments of items removed from eligibility for a License Exception or reexport or transfer (in-country) without a license (NLR) as a result of this regulatory action that were enroute aboard a carrier to a port of export, reexport, or transfer (in-country), on March 26, 2022, pursuant to actual orders for reexport, or transfer (in-country) to or within a foreign destination, may proceed to that destination under the previous eligibility for a License Exception or reexport or transfer (in-country) without a license (NLR).
Meanwhile, the new Russia-MEU, or Footnote 3, FDPR operates similarly to the general Russia FDPR, with several key differences. The Russia-MEU FDPR applies to Russian MEUs that have a "Footnote 3" designation on the Entity List. Rather than imposing additional licensing requirements for certain ECCNs, the Russia-MEU FDPR rule applies to any foreign produced item (including EAR99 items) that is the direct product of technology or software subject to the EAR and specified in any ECCN in any category of the CCL, or produced by a plant or equipment that itself is the direct product of technology or software subject to the EAR and specified in any ECCN in any category of the CCL.
The rule applies where there is "knowledge" that foreign-produced item will be incorporated into, or will be used in the production or development of any part, component, or equipment produced, purchased, or ordered by any entity with a footnote 3 designation. Except in limited circumstances, no License Exception applies to Footnote 3 designated entities.
However, 27 countries are exempt from these two new Russia-related FDPR rules because they have implemented or are planning on implementing similar restrictive export control measures on Russia. The list of countries includes the following: Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, New Zealand, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.
License Exception Restrictions
Previous license exceptions to Russia have also been revoked. Only certain sections of the following exceptions are now available for exports to Russia.
- MP (Temporary Imports, Exports, Reexports, and Transfers in Country), for items for use by the news media;
- GOV, for certain government activities;
- TSU (Technology and Software Unrestricted), for software updates to civil end users that are subsidiaries of, or joint ventures with, companies headquartered in the United States or partner countries;
- BAG (Baggage), for baggage, excluding firearms and ammunition;
- AVS (Aircraft, Vessels, and Spacecraft), for aircraft flying into and out of Russia;
- ENC (Encryption Commodities, Software, and Technology), for encryption items, but not if they are destined for Russian 'government end users' and Russian state-owned enterprises; and
- CCD (Consumer Communication Devices), for consumer communication devices, but not if they are destined for government end users or certain individuals associated with the government.
Beyond US Sanctions on Russia
This action follows initial sanction measures implemented by the US and its allies. Earlier this week, the US government restricted investment, trade, and financing in Donetsk and Luhansk as well as prohibiting transactions with two Russian financial institutions, Russian sovereign debt, Russian Oligarchs, and Nord Stream 2 AG and its CEO.
We also note that several other countries and allies have announced new sanctions against Russia, including Australia, Canada, the EU, Japan, and the UK.
- Australia is sanctioning several Russian government officials, barring several top Russian banks from transacting with Australian financial institutions, and extending current Crimea-related sanctions to include the Donetsk and Luhansk regions.
- Canada is cancelling all export permits to Russia and targeting 62 individuals related to Russia's major banks and top government officials.
- EU is expected to impose new sanctions including halting Russian banks' access to European financial markets, implementing measures that will target Russia's trade and transport sectors, and freezing President Putin's and Russian Foreign Minister Sergey Larvrov's European assets.
- Japan is prohibiting the issuance of Russian bonds, freezing several Russian individual's assets, and restricting travel into the country.
- UK is sanctioning all of Russia's major banks, including VTB, and more than 100 individuals, entities, and subsidiaries. All dual-use export licenses to Russia from the UK have been suspended. Future legislation is expected to prohibit high-tech exports to Russia, including semiconductors and aviation equipment.
In addition to Russia, the US government announced on February 24 new sanctions against Belarus due to its support of Russia's invasion into Ukraine. In particular, OFAC added two state-owned Belarusian banks, Belinvestbank and Bank Dabrabyt, and 11 other entities related to Belarus' defense sector to the SDN list. Several individuals related to the defense industry and others with close ties to the Belarusian government were also added. Two general licenses, outlined above, have been issued by OFAC authorizing certain transactions related to official US government business and international organizations and entities.
We will continue to monitor the sanctions and export control restrictions as they emerge.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.