Over the last several months, companies have become entangled in an increasingly complex web of new and expanded sanctions and export control restrictions related to Russia in response to its war on Ukraine. The current geopolitical landscape puts an exclamation point on having in place an effective and appropriately resourced sanctions compliance program.

Among recent developments, the U.S. Department of State and the Department of Treasury’s Office of Foreign Assets Control (OFAC) announced Sept. 14 another round of new blocking sanctions, this time targeting more than 150 individuals and entities “engaged in sanctions evasion and circumvention, those complicit in furthering Russia’s ability to wage its war against Ukraine, and those responsible for bolstering Russia’s future energy production,” according to the State Department. Concurrently, the Treasury Department imposed furthers sanctions on Russia’s elites and its industrial base, financial institutions, and technology suppliers.

Additionally, on Sept. 14, the Commerce Department’s Bureau of Industry and Security (BIS) publicized 45 “common high-priority items” by six-digit Harmonized System (HS) Codes that Russia seeks to procure for its weapons programs. Such items “pose a heightened risk of being diverted illegally to Russia because of their importance to Russia’s war efforts,” the BIS said, adding that it may update the list periodically as new information becomes available.

Export controls restrictions

The new sanctions and export controls build upon an earlier round that was issued by the State Department, OFAC, and the BIS that took effect May 19. Among those targeted include manufacturing and construction companies, information-technology suppliers, Russian companies that facilitate drilling and mining operations, higher education institutions that train Russia’s future energy specialists, Russian research institutes where new extraction technologies are developed, and firms that attract and advise on investment in Russia’s energy industry.

As part of those measures, the BIS released two rules that importantly added licensing requirements for a much broader range of items, as outlined in the Export Administration Regulations (EAR) Entity List, in a continued effort “to cut off the Russian defense industrial base, as well as entities that seek to support it,” Deputy Secretary of Commerce Don Graves said in a press release.

From an export controls compliance standpoint, licensing requirements for parties on the Entity List apply not only to exports out of the United States, but also the re-exports of those items between foreign countries, and even transfers in-country between end users.

Practically speaking, the expanded universe of items subject to licensing requirements related to Russia means more companies than ever before are subject to export control restrictions. Whereas in the past, export controls pertained to a relatively small universe of highly technical and sophisticated technologies with the aim of keeping them out of adversaries’ hands, “today, export controls are deployed more broadly, much like a sanctions tool,” said Robert Slack, a partner in Fenwick’s Trade and National Security practice.

Many companies that historically didn’t have to think terribly hard about some of these export control rules are now facing significant new compliance challenges, Slack said, “because swept up in the various new Russia-related export control restrictions are licensing requirements and other limitations on very basic commodity products that previously have not been subject to control,” he said.

The list of common high-priority items is divided into the following four tiers:

• Tier 1: Items of the highest concern due to their critical role in the production of advanced Russian precision-guided weapons systems, Russia’s lack of domestic production, and limited global manufacturers
• Tier 2: Additional electronics items for which Russia may have some domestic production capability but a preference to source from the United States and its partners and allies
• Tier 3: A broader range of electronic items, as well as navigation and camera components, that Russia has sourced from foreign companies; further electronic components used in Russian weapons systems, with a broader range of suppliers; and mechanical and other components utilized in Russian weapons systems
• Tier 4: Manufacturing, production and quality testing equipment for electric components, circuit boards and modules

Additionally, the BIS rule added “certain additional chemicals to Supplement No. 6 to part 746 of the EAR, which consists of discrete chemicals, biologics, fentanyl and its precursors, and related equipment designated EAR99 that may be useful for Russia’s industrial capability or may be diverted from Belarus to Russia for these activities of concern,” the BIS stated.

“You basically have to go to the U.S. government and ask for permission to either send the items to Russia or transfer them within Russia,” Slack said. “In most cases, that kind of request will be denied.”

The BIS rule further expanded the destination scope of the Russia/Belarus Foreign-Direct Product Rule (FDPR) to sweep in reexports to the temporarily occupied Crimea region of Ukraine, “thereby making it more difficult for items to be procured for Russia’s use in Crimea in support of its ongoing military aggression in Ukraine,” the BIS stated.

“The extraterritorial scope of these rules has expanded quite dramatically in some ways through the FDPR,” Slack said. This means that a broader universe of items manufactured outside the United States are now subject to elements of export-related controls and, thus, even companies producing goods outside the United States can still get caught by the FDPR in some cases, he said.

“Setting aside the moral and political concerns of doing business in Russia, only companies with fairly sophisticated compliance programs in place can really appropriately ensure that they are not inadvertently running afoul of these restrictions,” Slack said.

“Companies that lack really sophisticated trade compliance programs should not be doing any business directly or indirectly related to Russia. Period,” he added. “The rules are too complicated.”

Russian government intervention

Even companies with sophisticated compliance programs are discontinuing operations. “A lot of U.S. and Western companies that have operations in Russia are actively looking to wind down those operations, or they may be looking to limit those operations,” Slack said.

Darshak Dholakia, a partner with Dechert, said, “There are such nuances and complexity in what you can and cannot do that some companies are de-risking and saying, ‘It’s just not worth it. We don’t want to spend the resources to try to figure out how to be compliant. We’re just going to exit the market.’”

The Yale School of Management maintains a comprehensive database of companies that have left Russia, to date. As of Sept. 19, it was at more than 1,000 companies. The database further grades each company “A” to “F” for its completeness of withdrawal.

Divesting company assets comes with its own unique set of challenges, however, because once a company decides to exit Russia, “one challenge is you have to identify a non-sanctioned buyer that is willing to pay your price, and you’ve got to get Russian government approval of any divestiture of your assets,” Dholakia said.

This could result in months of delays, because the Russian government often won’t approve the originally agreed upon terms of a deal, which will “almost always be well below what the market rate should be, even based on the value of the assets,” Dholakia said.

They may even try to steer the divestiture of assets to another Russian company, as opposed to one you agreed to. “It’s another way for Russia to consolidate power among its elites,” Dholakia added. These are all things that companies need to be aware of as they’re exiting the country.

A total takeover of the company’s management or operations is another real possibility, as was the case with Danone and the Carlsberg Group. In October 2022, Danone announced plans to transfer control of its Essential Dairy and Plant-based (EDP) business in Russia, “which was progressing according to the expected schedule,” the company said in a press release.

Those plans changed without warning, however, when Russian authorities decided to place Danone Russia under temporary external administration. Danone said it was “investigating the situation.”

Carlsberg Group faced a similar situation when the government took control over its Baltika Breweries operations. “The change to the management of Baltika Breweries has consequently been made without the knowledge or approval by Carlsberg Group,” the company stated. “It is unclear to Carlsberg Group what implications this development will have on the ongoing operations of Baltika Breweries in Russia as well as the current sales process.”

Furthermore, prior to the divestment of assets located in the Russian Federation, the Russian government requires an exit tax. “It’s basically extortion,” Slack said. “They are taxing your exit to recoup as much as possible and putting that into the Russian Treasury.” Bare in mind that making that exit tax payment requires authorization from OFAC, as addressed by FAQ 1118.

Additional permissions could be required from a U.S. export compliance standpoint. For example, companies with physical offices in Russia that have items controlled for export—such as laptops, cell phones, fax machines, or production equipment in the case of factories—must receive permission from the U.S. Commerce Department before being able to transfer those items to an acquiror.

Sanctions compliance practices

Companies with Russia touchpoints must have in place written and well-documented sanctions and export-controls compliance policies and procedures that are carefully monitored, audited, and tested on an ongoing basis, Slack advised.

The following four key questions should be carefully considered:

• Where are you shipping to?
• Who are you shipping to?
• What is the item’s end use?
• Is that item controlled?

Dholakia recommended having in place an automated screening tool that automatically runs sanctions checks against entities and individuals. Ongoing screening, monitoring, and third-party due diligence is essential, particularly since sanctions and export control restrictions change fairly frequently, he said.

In addition to having to mitigate sanctions and export control violations, the humanitarian aspect is a very real risk as well. “In talking with clients, and in talking with other members of the bar generally, one of the biggest issues is protecting personnel,” Slack said. “There is very careful consideration around the question, ‘How do we limit the risk to personnel?’”

Looking ahead to China

While the U.S. government’s focus of late mostly has been on sanctions and export controls pertaining to Russia, it does raise critical questions about what else could be ahead for global supply chains pertaining to China as well.

“Russia right now largely presents tactical questions for companies: How do we tactically comply with these restrictions?” Slack said. “When it comes to China, the discussions are still very much strategic in nature: What does it mean for the long-term development of our product? Do we have critical engineering facilities in China? Are we over-reliant on a Chinese customer base? What are the implications for potential future restrictions?”

Enforcement trends

Whether a company has touchpoints to Russia or China, all companies “need to internalize the new enforcement landscape they are living in and make sure they are dedicating appropriate resources to address the challenges,” Slack said.

In July, the U.S. Department of Justice’s National Security Division, the BIS, and the Treasury Department’s Office of Foreign Assets Control (OFAC) issued a “Tri-Seal Compliance Note” describing their respective voluntary self-disclosure (VSD) policies that apply to U.S. sanctions, export controls, and other national security laws. The trio of agencies, through this compliance note, encourage companies to “promptly” self-disclose any potential violations in exchange for “significant mitigation of civil or criminal liability,” such as a non-prosecution agreement or a 50 percent reduction in the base penalty amount, according to the compliance note.

In practical terms, issuance of the compliance note could mean more investigations and a higher likelihood than in the past of the government finding out about a violation of U.S. sanctions, export controls, or other national security laws. It essentially puts companies’ feet to the fire about weighing the risk of the government finding out about a violation or whether to remediate minor violations and move on without a self-disclosure.

Also, be sure to review any guidance that regulators publish, such as the joint alert that the BIS and the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) published, which detailed evasion tactics and transactional and behavioral red flags to assist financial institutions in enhancing their vigilance against those attempting to evade export controls.