Navigating the New Economic Sanctions and Trade Restrictions against Russia
NAVIGATING THE NEW ECONOMIC SANCTIONS AND TRADE RESTRICTIONS AGAINST RUSSIA
On February 22, 24, and 25, 2022, the United States and its allies implemented new economic sanctions and trade restrictions against Russia in response to its recognition of separatist regions and invasion of Ukraine. The impact of these sanctions and restrictions on businesses will vary depending on their scope of activities in Russia and Ukraine. However, every U.S. company that engages in business with Russia or Ukraine should note the following:
First, businesses should ensure that payments to and from Russia do not involve blacklisted financial institutions and should continue to screen business partners to avoid dealing with blacklisted entities and individuals.
Second, businesses should stop business activities in the Donetsk and Luhansk regions of Ukraine that are now subject to a trade embargo.
Third, businesses with exports to Russia (or those whose products are incorporated into foreign products destined for Russia) should confirm whether an export license is now required and, if so, stop exporting unless an export license is obtained.
The authors have lived and worked in both Russia and Ukraine and express their deep concern for the on-going military conflict and its impact on Ukrainians, ordinary Russian citizens, and others around the world.
Payments and Business Activity: Sanctions against Russian and Belarusian Banks, Entities, and Individuals
The SDN List. Pursuant to Presidential executive order, the United States has prohibited dealing with the property of numerous entities and individuals involved in the on-going conflict in Ukraine. The Office of Foreign Asset Control (OFAC) in the U.S. Department of Treasury places individuals and companies on a “sanctions list” called the Specially Designated Nationals (SDN) list. These individuals and companies’ assets are blocked or frozen, and U.S. persons are generally prohibited from dealing with them. These sanctions also apply to entities that are owned 50 percent or more in the aggregate by persons or companies identified on the SDN list. Businesses should request the identity of customers’ bank or financial institution before directing any payment because if the payee bank or financial institution is subject to sanctions, then the U.S. correspondent bank will be required to freeze the funds instead of processing the transfer to the customer’s bank or financial institution.
U.S. First Tranche of Sanctions. The United States, as a result of Russia’s recognition of two separatist regions of Ukraine, imposed the so-called “first tranche” of sanctions on February 22, 20221 and added the following to the SDN list: (i) Vnesheconombank (VEB), including 25 subsidiaries; (ii) Promsvyazbank, including 17 subsidiaries; and the family members of three Russian “elites."2 OFAC also issued a general license authorizing the servicing of pre-existing bonds3 and the winding down of transactions with VEB by March 24, 2022.4
U.S. Second Tranche of Sanctions. In the “second tranche” of U.S. sanctions, announced on February 24, 2022, the day following Russia’s invasion of Ukraine, the United States added VTB Bank (and 20 subsidiaries), Otkritie Bank (and 12 subsidiaries), Sovcombank (and 22 subsidiaries), and Novikombank. Eight general licenses were issued to permit the following transactions: agricultural, medical, and COVID-related commodities; winding down of transactions; and transactions by international organizations. The United States also ordered all U.S. financial institutions to close correspondent or payable-through accounts with Russia’s largest bank, Sberbank, by March 26, 2022.5 This will create a substantial disruption of payments to and from Russia as payment processing between the United States and Sberbank will be rejected. The U.S.’s second tranche of sanctions also included a number of family members of additional Russian elites6 and 24 Belarusian entities and individuals.7
U.S. Third Tranche of Sanctions. On February 25, 2022, OFAC added to the SDN list Russian President Vladimir Putin, foreign minister Sergei Lavrov, defense minister Sergei Shoigu, and Valery Gerasimov, chief of the general staff of the Russian armed forces.8
New Debt and Equity Restrictions. The United States has also further limited Russia’s access to capital markets. U.S. persons are now prohibited from providing any debt or equity with a maturity date of more than 14 days to certain Russian state-owned enterprises. Aside from the impact on Russia’s principal energy, gas, oil, telecommunications, hydroelectricity, diamond mining, and maritime companies, businesses will not be able to accept letters of credit as payment from certain Russian banks unless payment is made within 14 days.
U.K. and E.U. Sanctions. The United States has sought to coordinate these trade restrictions with the European Union, Japan, Australia, Canada, New Zealand, and the United Kingdom. The United Kingdom has imposed similar sanctions on five banks (IS Bank, Bank Rossiya, Promsvyazbank, Genbank, and Black Sea Bank of Development & Reconstruction) as well as three individuals (Gennadiy Timchenko, and Boris and Igor Rotenberg).9 The U.K.’s second tranche of sanctions added all members of the Russian parliament that voted to recognize the two separatist regions of Ukraine.10 Further, the European Union sanctioned 351 members of the Russian parliament, and 27 other Russian entities/elites, including the Internet Research Agency, Bank Rossiya, Promsvyazbank, and Vnesheconombank.11
Trade Embargo: The Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR) Regions of Ukraine
Regional Embargo. In the first sanctions announced by President Biden on February 21, 2022, the United States imposed an embargo on the separatist Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR). The United States imposed the embargo because the Russian Federation recognized the regions as independent states earlier the same day.
Scope of Application. The President’s executive order prohibits U.S. persons from participating in the following transactions in the DNR/LNR: (i) new investment; (ii) imports and exports (directly or indirectly, including reexports) of goods, services, or technology; (iii) and any “approval, financing, facilitation, or guarantee” of any such transaction by a foreign person.12Notably, the executive order also permits the Secretary of State and Secretary of the Treasury to expand the territory covered by the restrictions to “other regions of Ukraine,” which could be used to apply sanctions to additional areas as they are occupied by Russian forces.13
General Licenses. As permitted under executive order, OFAC issued six general licenses providing exceptions to the embargo. These licenses, among other things, authorize: a winding-down period for existing operations or contracts until March 23, 202214; the export of food, medicine, medical devices, and COVID-related support15; telecommunications and mail service16; operations of international organizations17; and personal remittances.18
Export Restrictions for Russia’s Defense Sectors: Implications for U.S. Electronics, Technology, and Telecommunication Businesses
Export Controls. To “severely” restrict Russia’s access to “technologies and other items and vital technology” that can be used for military purposes, the U. S. Department of Commerce’s Bureau of Industry and Security (BIS) has implemented expansive export controls described as “the most comprehensive application” of export controls on U.S. items that targets a single nation.19 The rule will broadly impact U.S. and foreign businesses that produce, export, reexport, or transfer technology, products, or services related to telecommunication, computers, semiconductors, information security equipment, lasers, and sensors destined for Russia. The restrictions also extend to items made abroad that use related U.S. technology. Certain additional restrictions apply to military end-users and entities added to the Entity List.
Expansive Commerce Control Licensing Requirements. The new rule adds license requirements for exports to Russia that will cover all items subject to the EAR and classified under any Export Control Classification Number (ECCN) under Categories 3 to 9 of the Commerce Control List (CCL). Previously, 58 of these ECCNs did not apply to Russia.20 The rule also imposes a stringent policy of denial for any license applications for Russia.21 Exceptions to the general policy of denial are extremely limited and include circumstances to ensure basic safety, humanitarian needs, news media, and limited government activities.22 Businesses with sophisticated technologies designed and produced in the United States, or supporting foreign products based on any U.S. technology, must carefully evaluate the exports, re-exports, transfers, intermediaries, and end-users of possible restricted items on the CCL.
New Foreign Direct Product Rules for Russian Military End Users. Businesses that export U.S.-origin software, technology, equipment (including tooling), and data used for foreign-produced items or parts destined to Russia, or that are used to produce parts or equipment destined to Russia, will be subject to two new Foreign Direct Product (FDP) rules.23 Certain partner countries that adopt similar measures will not be subject to the new rules.24 Thus, technology, software, and manufacturing businesses should carefully screen end users to ensure that products that are incorporated into foreign products do not end up in the hands of Russian military end users, which will be subject to the license requirement without exception.
Russian “Military End User” Controlled Item and Entity Lists. The new rule expands the scope of the existing Russian “military end user” restriction to all controlled items, with the exception of food and medicine for Russian “government end users” and Russian state-owned enterprises.25 The new rule also adds 47 entities to the Entity List, which include 45 Russian entities transferred from the Military End-User (MEU) List (now subject to an expanded license requirement), two new Russian entities, and two revised Russian entities.
Other Restricted Regions. Lastly, this rule imposes comprehensive export, reexport, and transfer (in country) restrictions for the so-called Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR) regions of Ukraine (“Covered Regions of Ukraine”) and makes conforming revisions to export, reexport, transfer (in-country) restrictions for the Crimean Region of Ukraine.26
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Businesses are strongly encouraged to seek professional legal counsel about the application of these new economic sanctions and trade restrictions on their activities in Russia and Ukraine.
Endnotes
[1] U.S. Department of the Treasury, U.S. Treasury Imposes Immediate Economic Costs in Response to Actions in the Donetsk and Luhansk Regions (Feb. 22, 2022), https://home.treasury.gov/news/press-releases/jy0602.
[2] Aleksandr Bortnikov (Director of the Russian Federal Security Service), Sergei Kiriyenko (Putin’s Deputy Chief of Staff), and Petr Fradkov (CEO of Promsvyazbank).
[3] General License No.2, Exec. Order No. 14,024, 86 Fed. Reg. 20249 (April 15, 2021).
[4] General License No.3, Exec. Order No. 14,024, 86 Fed. Reg. 20249 (April 15, 2021).
[5] U.S. Department of the Treasury, U.S. Treasury Announces Unprecedented & Expansive Sanctions Against Russia, Imposing Swift and Severe Economic Costs (Feb. 24, 2022), https://home.treasury.gov/news/press-releases/jy0608.
[6] Including family members of Sergei Ivanov (a member of the Russian security counsel and Putin’s former chief of staff), Nikolai Patrushev (secretary of the security council), and Igor Sechin (head of Rosneft); as well as executives of Sberbank and VTB Bank.
[7] U.S. Department of the Treasury, U.S. Treasury Targets Belarusian Support for Russian Invasion of Ukraine (Feb. 24, 2022), https://home.treasury.gov/news/press-releases/jy0607. Sanctioned entities include Belinvestbank and Bank Dabrabyt (and affiliates), Mink Wheeled Tractor Plant (and two of its executives), the State Authority for Military Indsutry (and two of its executives), Belspetsvneshtechnika, KB Radar, 558 Aircraft Repair Plant, Integral Co., Minotor-Service, Oboronnye Initsiativy, OKB TSP Scientific Production Ltd., Synthesis LLC (and CEO), and 27x7 Panoptes LLC. Sanctioned individuals include Viktor Khrenin (Minister of Defense), Aleksandr Volfovich (secretary of the security council), and Aliaksandr Zaitsau (Lukashenko-connected oligarch).
[8] U.S. Department of the Treasury, Russia-related Designations (Feb. 25, 2022), https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20220225_33.
[9] U.K. Office of Financial Sanction Implementation HM Treasury, Financial Sanctions Notice Russia (Feb. 22, 2022), https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1056386/Notice_Russia_22022022.pdf.
[10] GOV.UK, UK Hits Russian Oligarchs and Banks with Targeted Sanctions: Foreign Secretary's Statement (Feb. 22, 2022), https://www.gov.uk/government/news/uk-hits-russian-oligarchs-and-banks-with-targeted-sanctions-foreign-secretary-statement.
[11] Directive 2022/260/EC of the European Parliament and of the Council of 23 February 2022 Relating to Restrictive Measures in respect of Actions Undermining or Threatening the Territorial Integrity, Sovereignty and Independence of Ukraine, 2022 O.J. (L 42I), 3–14.
[12] The White House, Executive Order on Blocking Property of Certain Persons and Prohibiting Certain Transactions with Respect to Continued Russian Efforts to Undermine the Sovereignty and Territorial Integrity of Ukraine, Section 1(a) (Feb. 21, 2022), https://www.whitehouse.gov/briefing-room/presidential-actions/2022/02/21/executive-order-on-blocking-property-of-certain-persons-and-prohibiting-certain-transactions-with-respect-to-continued-russian-efforts-to-undermine-the-sovereignty-and-territorial-integrity-of-ukraine/.
[13] Id. Section 1(a)(i). The executive order is similar to Executive Order 13685 imposing an embargo on the Crimea, which prohibits, with limited exceptions, “the importation into the United States, directly or indirectly, of any goods, services, or technology from the Crimea region of Ukraine.”
[14] General License No.17, Exec. Order No. 14,024, 86 Fed. Reg. 20249 (April 21, 2021).
[15] General License No.18, Exec. Order No. 14,024, 86 Fed. Reg. 20249 (April 21, 2021).
[16] General License No.19 and No.22, Exec. Order No. 14,024, 86 Fed. Reg. 20249 (April 21, 2021).
[17] General License No.20, Exec. Order No. 14,024, 86 Fed. Reg. 20249 (April 21, 2021).
[18] General License No.21, Exec. Order No. 14,024, 86 Fed. Reg. 20249 (April 21, 2021).
[19] U.S. Department of Commerce, Commerce Implements Sweeping Restrictions on Exports to Russia in Response to Further Invasion of Ukraine (February 24, 2022), available at https://www.commerce.gov/news/press-releases/2022/02/commerce-implements-sweeping-restrictions-exports-russia-response (last visited Feb 25, 2022). Bureau of Industry and Security, Commerce Implements Sweeping Restrictions on Exports to Russia in Response to Further Invasion of Ukraine (February 24, 2022), https://www.bis.doc.gov/index.php/documents/about-bis/newsroom/press-releases/2914-2022-02-24-bis-russia-rule-press-release-and-tweets-final/file (last visited Feb 25, 2022).
[20] 15 C.F.R. § 734.
[21] U.S. Department of Commerce, Russia Rule Fact Sheet (February 24, 2022) https://www.commerce.gov/news/fact-sheets/2022/02/us-department-commerce-bureau-industry-and-security-russia-rule-fact-sheet (last visited Feb 25, 2022).
[22] U.S. Department of Commerce, Russia Rule Fact Sheet, (February 24, 2022), available at https://www.commerce.gov/news/fact-sheets/2022/02/us-department-commerce-bureau-industry-and-security-russia-rule-fact-sheet (last visited Feb 25, 2022). 15 C.F.R. § 734, 738, 740, 742, 744, 746, and 772
[23] 15 C.F.R. § 734, 744, and 746.
[24] 15 C.F.R. § 746.8(a). Exports, reexports, and transfers (in-country) from the following countries are not subject to these rules: 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.
[25] 15 C.F.R. § 746
[26] Id.
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