In response to the Russian Federation’s invasion of Ukraine in February 2022, the US, UK, and EU have implemented sweeping coordinated economic sanctions and export control restrictions targeting key industries, entities, and individuals in both Russia and Belarus. As the regulatory environment continues to rapidly evolve based on the trajectory of the Russian invasion, this update will detail the international response as of March 7, 2022 and outline the essential compliance measures that global businesses will need to implement in the short term.
The US has utilized a wide-range of regulatory enforcement agencies to target Russia and Belarus in recent days, including updated export controls from the Department of Commerce’s Bureau of Industry and Security (“BIS”), robust economic sanctions from the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), and the development of a new task force under the Department of Justice.
i. US Export Control Restrictions on Russia and Belarus
The Department of Commerce’s BIS has implemented significant and unprecedented export control restrictions on Russia and Belarus under the US Export Administration Regulations (“EAR”), including new licensing requirements, updated foreign-direct product and military end-user rules, and fresh BIS Entity List additions.
• New BIS License Requirements and Licensing Policy of Denial.
The BIS revisions to the EAR add new license requirements at EAR § 746.8(a)(1) for exports of all items classified under Export Control Classification Numbers (“ECCNs”) in Categories 3 through 9 of the EAR’s Commerce Control List (“CCL”) to Russia and Belarus. This includes a wide-range of dual-use hardware, software, and technology, including various electronics, telecommunication items, sensors and cameras, navigation equipment, avionics, marine equipment, aircraft components, and a variety of other products that were not previously subject to BIS license requirements for exports to Russia and Belarus. If your business exports any such products to Russia or Belarus under ECCNs in CCL Categories 3-9, this is a critical new restriction, as there will be a policy of denial for export license requests submitted to BIS for any such items.
• New Foreign Direct Product and Military End-User Rules.
BIS has also created new Foreign Direct Product rules (the “FDP Rules”) targeting the ability of Russia and Belarus (and their respective militaries) to acquire certain foreign-produced items.
The FDP Rules, contained in § 734.9 of the EAR, establish a control over foreign-produced items that are: (i) the direct product of certain US-origin software or technology subject to the EAR; or (ii) produced by certain plants or major components thereof which are themselves the direct product of certain US-origin software or technology subject to the EAR. Such items will be subject to a BIS license requirement, with a general policy of denial, when it is known that the foreign-produced item is destined to Russia or Belarus or will be incorporated into or used in the production or development of any part, component, or equipment produced in or destined to Russia or Belarus.
Further, the FDP Rules carve out stricter restrictions for exports to Russian and Belarusian “military end users,” which apply to foreign-produced items that are (i) the direct product of any software or technology subject to the EAR that is on the CCL; or (ii) produced by certain plants or major components thereof which are themselves the direct product of any US-origin software or technology on the CCL. The FDP Rules for such Russian and Belarusian military end users are distinct in that they apply to all EAR-controlled items, including those designated EAR99, with certain limited exceptions.
Notably, BIS has highlighted that certain US allies are implementing substantially similar export control measures towards Russia and Belarus, and are therefore exempt from some of the requirements imposed pursuant to the FDP Rules. The initial list of such countries is included at Supplement No. 3 to Part 746 of the EAR, and includes all EU countries, Australia, Canada, Japan, New Zealand, and the UK.
• Entity List Additions and Regional Export Restrictions.
BIS has continued to utilize its Entity List as a sanctions tool, including designating 47 new Russian entities associated with the Russian defense industrial base on February 24, and then 91 new separate designations on March 3, including 1 entry in Belize, 3 entries in Estonia, 1 entry in Kazakhstan, 1 entry in Latvia, 2 entries in Malta, 81 entries in Russia, 1 entry in Singapore, 1 entry in Slovakia, 2 entries in Spain, and 3 entries in the UK Entity List restrictions subject US persons to specific BIS licensing requirements for the export, re-export, or transfer of EAR-controlled items to any such foreign person designated on the Entity List.
BIS also imposed export restrictions on transactions involving the disputed regional territories in eastern Ukraine, including for Crimea and the so-called Donetsk People’s Republic (“DNR”) and Luhansk People’s Republic (“LNR”). All export activity involving those disputed regions is now comprehensively restricted by BIS, subject to limited exceptions for food and medicine designated as EAR99 and certain mass market software for internet-based communication.
• Oil and Gas Extraction Export Controls.
A White House Fact Sheet issued March 2 announced that the Department of Commerce would be imposing additional export control restrictions on oil and gas extraction equipment to target Russia’s oil refining capacity, and on March 3, BIS formally published new amendments to the EAR to implement the updated Russian oil refinery sector sanctions. The new rules specify certain oil refinery equipment by their respective Harmonized Tariff Schedule (“HTS”) codes that will now require a license for the export, re-export, and transfer (in-country) to or within Russia, regardless of the intended end use of the equipment.
ii. US OFAC Economic Sanctions
In parallel to BIS’s export restrictions, OFAC has imposed wide-ranging and comprehensive economic sanctions on Russia and Belarus to target significant industries, entities, and foreign actors. This includes regional embargoes on DNR and LNR, new designations on the OFAC Specially Designated Nationals and Blocked Persons (“SDN”) List, restrictions on transactions involving Russian sovereign debt and other debt and equity restrictions, and most recently, the issuance on Tuesday, March 1 of the “Russian Harmful Foreign Activities Sanctions Regulations” to implement a previous Biden Administration Executive Order from April 2021 (E.O. 14024, “Blocking Property With Respect To Specified Harmful Foreign Activities of the Government of the Russian Federation”). These economic sanctions on Russia and Belarus are unprecedented in their scope, as further outlined below.
• Donetsk People’s Republic and Luhansk People’s Republic Embargoes.
On February 21, the Biden Administration issued Executive Order 14065, which expanded the scope of US economic sanctions originally imposed in 2014 in connection with Russia’s annexation of Crimea to cover the DNR and LNR territories in Ukraine, now recognized by Russia as “independent.” The Order prohibits all new investment in the DNR and LNR regions by US persons, wherever located, as well as prohibiting the import or export of any goods, services, or technologies from or to those regions. The Order also prohibits any action by a US person, wherever located, to approve, finance, facilitate or guarantee any transaction involving the DNR and LNR by a foreign person where that transaction would otherwise be prohibited under the Order by a U.S person or within the US
• SDN Designations: Russian and Belarusian Financial Institutions.
On February 24, OFAC enacted comprehensive blocking sanctions pursuant to E.O. 14024 on several Russian and Belarusian financial institutions, adding several key commercial banks, credit institutions, and investment funds to the SDN List. For Russia, this includes Vnesheconombank (“VEB”) and Promsvyazbank, as well as VTB Bank, Bank Otkritie, Sovcombank OJSC, Novikombank, and dozens of their majority-owned subsidiaries. The Russian Direct Investment Fund was also designated as an SDN. For Belarus, new SDNs include the Belarusian Bank of Development and Reconstruction Belinvestbank JSC and Bank Dabrabyt JSC.
These additions to the SDN List mean that all US persons are prohibited from transacting or dealing with these designated financial institutions and their majority-owned subsidiaries in any way unless otherwise expressly authorized by OFAC. Non-US persons are also prohibited from engaging in transactions or other business dealings involving the sanctioned financial institutions if those activities have a direct or indirect nexus with the US In addition, such non-US financial institutions and companies could potentially be subject to secondary sanctions, including being added to the SDN List themselves, if they conduct “significant” transactions with the sanctioned entities.
• SDN Designations: Russian and Belarusian Government Officials, Oligarchs, and the Energy and Defense Industrial Bases.
In addition to financial institutions, OFAC has targeted key Russian and Belarusian government officials and oligarchs, as well as numerous entities in both nations’ defense and energy industries. On February 25, OFAC took the rare action to sanction Russian President Vladimir Putin himself, along with several other senior Russian Security Council officials, including Foreign Minister Sergei Lavrov. Moreover, OFAC sanctioned several Russian elite individuals and their family members that are close to President Putin, including Alisher Usmanov, Sergei Ivanov, Nikolai and Andrey Patrushev, and Igor and Ivan Sechin, as well Russian financial sector leaders, including Alexander Vedyakhin and Andrey Puchkov.
To target the Russian oil and energy sectors, OFAC has imposed sanctions against Russia’s Nord Stream 2 pipeline project that spanned from Russia to Germany and was pending commercial operations, expressly designating Nord Stream 2 AG and its managing director as SDNs. Nord Stream 2 AG is a Swiss entity owned by Russian state-owned gas company Gazprom that built and manufactured the Nord Stream 2 gas pipeline in recent years.
OFAC took similarly aggressive action in regards to Belarus, designating 24 Belarusian individuals and entities associated with the defense and security industries as SDNs. This includes seven Belarusian officials and elites, as well as major Belarusian defense companies such as Minsk Wheeled Tractor Plant, JSC 558 Aircraft Repair Plant, Oboronnye Initsiativy, Minotor-Service, KB Radar-Managing Company, State Authority for Military Industry of the Republic of Belarus, and LLC Synesis.
• Russian Debt and Equity Prohibitions.
Beyond the SDN List designations, OFAC has also imposed several additional financing restrictions with regard to Russia. First, while OFAC has yet to designate Russia’s largest financial institution Sberbank on the SDN List, it has imposed correspondent and payable-through account (“CAPTA”) sanctions on Sberbank. Effective March 26, 2022, all US financial institutions will be required to close any Sberbank correspondent or payable-through accounts and to reject any future transactions involving Sberbank and 25 of its foreign financial institution subsidiaries. Once effective, payments that Sberbank attempts to process in US dollars for its clients will be disrupted and rejected once the payment hits a US financial institution.
OFAC further issued debt and equity prohibitions targeting 13 Russian entities critical to the Russian economy, including several of Russia’s largest financial institutions. Also effective March 26, 2022, the new “Directive 3” rules issued under E.O. 14024 will prohibit US persons from transacting or dealing in new debt of longer than 14 days’ maturity or new equity in the designated entities, which include the following:
- Sberbank (Russia’s largest financial institution);
- Gazprombank Joint Stock Company (Russia’s third-largest financial institution);
- Joint Stock Company Russian Agricultural Bank (Russia’s fifth-largest financial institution closely affiliated with the agricultural sector);
- Public Joint Stock Company Gazprom (The world’s largest natural gas company);
- Public Joint Stock Company Gazprom Neft (Russia’s largest oil producer and refiner);
- Public Joint Stock Company Transneft (Manager of Russia’s network of petroleum-related pipelines);
- Public Joint Stock Company Rostelecom (Russia’s largest telecommunications company);
- Public Joint Stock Company RusHydro (One of Russia’s largest power companies);
- Public Joint Stock Company Alrosa (The world’s largest diamond mining company);
- Joint Stock Company Sovcomflot (Russia’s largest 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); and
- Credit Bank of Moscow Public Joint Stock Company (Russia’s largest non-state public bank and Russia’s sixth-largest financial institution).
iii. US Department of Justice Task Force
On March 2, the US Department of Justice (“DOJ”) announced the launch of Task Force KleptoCapture, an interagency law enforcement task force dedicated to enforcing the economic sanctions, export restrictions, and other countermeasures that the US has imposed on Russia and Belarus. According to DOJ, the Task Force will be staffed with prosecutors, agents, analysts, and professional staff who are experts in sanctions and export control enforcement, anticorruption, asset forfeiture, anti-money laundering, tax enforcement, national security investigations, and foreign evidence collection. The establishment of such a Task Force in the US is unique and unprecedented, and it will serve as a critical component of the US’s Russia policy and enforcement posture across the regulatory spectrum. President Joe Biden highlighted the creation of the Task Force in his March 1 State of the Union address, warning targeted Russian oligarchs that the US is “joining with our European allies to find and seize your yachts, your luxury apartments, your private jets. We are coming for your ill-begotten gains.”
iv. Other US Responses
• SWIFT Access.
The US, in coordination with the European Commission, the UK, and Canada, also took action to ensure that selected Russian banks are removed from the global SWIFT messaging system (the Belgium-based Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) operates an interbank messaging system that allows thousands of banks and financial institutions across the world to communicate). Prior to this action, Iran and North Korea were the only other countries that had seen institutions removed from SWIFT in their entirety.
In coordination with the US and the EU, the UK has also begun to implement a wide array of sanctions and export control restrictions in response to Russia’s invasion of Ukraine, specifically under the UK’s Russia (Sanctions) (EU Exit) Regulations 2019 as amended, including the Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022 and related amendments, through the UK Office of Financial Sanctions Implementation (“OFSI”) within HM Treasury, and through the UK Export Control Joint Unit within the Department for International Trade.
i. UK Office of Financial Sanctions Implementation
Like the US, the UK has designated a number of Russian entities and individuals on the OFSI-administered UK Sanctions List, including Russian President Vladimir Putin and Foreign Minister Sergei Lavrov. Such asset freeze restrictions have also been extended to key financial institutions, including IS Bank, Bank Rossiya, PJSC Promsvyazbank, VTB Bank, Bank Otkritie, Sovcombank, and VEB.RF. The financial institution sanctions impose asset freezes and prohibitions against making funds available to or for the benefit of all designated persons. The UK has continued to utilize the asset freeze and travel ban restrictions issued as part of the UK Sanctions List, and on March 3 sanctioned Russian billionaire Alisher Usmanov and former Russian deputy prime minister Igor Suvalov (both of whom have also been sanctioned by the EU).
On February 28, OFSI announced that it will continue to introduce new sanctions regimes and that the UK government will take further restrictive economic measures by targeting the Central Bank of the Russian Federation, in concert with the US and EU, and will seek to prohibit all UK persons from undertaking financial transactions involving the Central Bank, the Russian National Wealth Fund, and the Ministry of Finance of the Russian Federation. Further, OFSI plans to introduce additional restrictions against Russian financial institutions, as well as measures to prevent Russian companies from issuing transferable securities and money market instruments in the UK. We expect updated information about these additional sanctions efforts in the coming days, but in the meantime, the UK has shown that it is continuing to push for new avenues to combat Russian aggression abroad and to coordinate with its global allies from an economic sanctions perspective to impose comprehensive countermeasures.
ii. UK Export Control Joint Unit
As part of its February 28 announcement, OFSI also noted that it plans to introduce a set of new measures to significantly strengthen the UK’s trade restrictions against Russia, including prohibitions against the export of high-end and critical technical equipment and components in a variety of sectors, including microelectronics, telecommunications, and aerospace, marine, and navigation equipment.
Further, the UK Export Control Joint Unit issued a notice on March 2 regarding the updated UK tranche of trade sanctions, specifically those found in the Russia (Sanctions) (EU Exit) (Amendment) (No. 3) Regulations 2022, containing a list of critical-industry goods and technology which are now prohibited for export, supply or transfer to, or for use in, Russia, along with the provision of related technical assistance, financial services and brokering services.
The European Union has imposed numerous significant sanctions, or so-called “restrictive measures,” in coordination with the US and UK in response to Russia’s aggression in Ukraine, some of which, to date, go beyond the pale of the actions taken by the US and UK
i. Restrictive Measures
In the last week of February and first week of March, the EU announced a series of Council Decisions and Regulations imposing a variety of new restrictive measures on Russia.
• Targeted Asset-Freeze Designations.
The EU has added numerous individuals to the EU asset-freeze list, including 351 members of the Russian State Duma who voted in favor of recognizing the independence of the DNR and LNR; President Putin and Minister Lavrov; various Russian government ministers and members of the Russian National Security Council; the Internet Research Agency; and financial institutions including Bank Rossiya, Promsvyazbank, and VEB.RF.
• Regional Restrictions.
Similar to US restrictions on Crimea and the DNR and LNR territories, the EU has imposed comprehensive restrictions on investing in, exporting to, and importing from the DNR and LNR territories.
• Airspace Restrictions.
The EU further imposed a ban on any aircraft operated by Russian air carriers, any Russian registered aircraft, or any non-Russian-registered aircraft which is owned or chartered, or otherwise controlled by any Russian person or entity, to land in, take off from, or overfly EU territory.
• Export Restrictions.
The EU has adopted regulations to prohibit the sale, supply, transfer, or export, directly or indirectly, of certain goods and technology (whether or not originating in the EU) to any individual or entity in Russia or for use in Russia, including those (i) for use in connection with oil refining; (ii) for use in connection with the aerospace and aviation industry; (iii) certain dual-use goods and technology; and (iv) items which may contribute to Russia’s military and technological enhancement.
• SWIFT Ban.
On March 2, the EU identified seven Russian banks to exclude from SWIFT, including Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank, VEB.RF, and VTB Bank.
• Broadcasting Restrictions.
On March 2, the EU approved the suspension and prohibition against broadcasting activities in the EU of the Russian media outlets Sputnik and Russia Today.
Compliance Recommendations and Risk Mitigation Strategies
Due to the rapidly changing situation on the ground in Ukraine, the geo-political and regulatory responses from the US, UK, EU, and global allies are evolving on a near daily basis. Any company that does business with, near, or in Russia, Belarus, or Ukraine, or with Russian or Belarusian individuals, entities, and financial institutions, needs to (i) be aware of the applicable regulations already in place, and (ii) begin to implement risk-mitigation and compliance strategies to ensure they do not run afoul of any newly-implemented prohibitions.
In the short-term, we recommend the following courses of actions in terms of risk mitigation and compliance measures:
- Conduct contract, agreement, and supply-chain due diligence to determine all potential contacts and terms that involve Russia, Belarus, and Ukraine;
- Increase attention and due diligence on denied/prohibited party screening and end-use/end-user certifications with business partners, customers, distributors, vessels, carriers, banks, and financial institutions operating in Russia, Belarus, and Ukraine, and follow-up on any concerns or “red-flags” that could involve a US/UK/EU sanctioned party;
- Review, update, and revise non-US distribution and re-sale agreements to obtain assurances from such parties that US-origin hardware/software/technology may only be re-exported to Russia, Belarus, and Ukraine in accordance with applicable US economic sanctions and export control laws and regulations;
- From a US enforcement perspective, be aware of (i) the OFAC 50% rule, whereby any entity owned 50% or more in the aggregate by an SDN(s) is also considered to be an SDN by OFAC, regardless of whether it is expressly designated on the SDN List; and (ii) OFAC secondary sanctions risks, whereby non-US persons and entities can be sanctioned and/or designated as an SDN themselves for conducting significant transactions with currently designated SDNs;
- Determine and confirm the accuracy of the export control jurisdiction and classification (e.g., ECCNs) for all hardware, software, and technology items your business exports to Russia, Belarus, and Ukraine;
- Understand that certain (albeit limited) BIS export control license exceptions and OFAC sanctions general licenses do exist, so do not assume that a Russia or Belarus-related transaction is prohibited from a US standpoint – there may be a path to “Yes,” but it will require a specific analysis, comprehensive due diligence, and development of supporting arguments; and
- For non-US companies, conduct due diligence on your supply-chain and global distribution operations in connection with the updated Foreign Direct Product Rules described herein.