• In response to Russia’s continued war operations and military attacks throughout Ukraine, the U.S. government and its allies imposed many more sanctions and new export control restrictions in the past week, specifically targeting Russian financial institutions, Russian state-owned enterprises, Russian elites, and several of Russia's critical industrial sectors.

In response to the Russian invasion and continued war operations throughout Ukraine, the U.S. government and its allies imposed significant additional sanctions and new export control restrictions this past week, specifically targeting Russian financial institutions, Russian state-owned enterprises, Russian elites, and several of Russia's critical industrial sectors.

President Joe Biden stated that these new measures are designed to "impose severe costs on the Russian economy" to "maximize the long-term impact on Russia" and minimize the impact on the United States and its allies. The U.S. is targeting the core infrastructure of the Russian financial system, including sanctions against Russia's largest financial institutions, restricting the ability of the government of the Russian Federation to raise capital, and cutting it off from access to critical technologies. The effect of these measures can already be seen in the change to the value of the ruble, and the closure for several days of the Russian stock market. Longer term negative effects are also expected on the Russian economy. Political pressure for harsher sanctions is building in western countries as indiscriminate Russian bombardments of cities kill more and more civilians.

Under part of the new allotment of sanctions since Feb. 23, 2022, OFAC announced an addition of designations to the Specially Designated Nationals and Blocked Persons List (SDN List). Of most importance, President Putin and Sergei Lavrov, the Minister of Foreign Affairs of Russia were added to these designations. Further, OFAC issued new sectoral sanctions and announced new restrictions to financial institutions and state-owned enterprises.

Banking and Financial Institutions. As part of the U.S. effort to cripple the Russian banking industry, OFAC issued new sanctions on banks and financial institutions which control about eighty percent (80%) of all banking assets in Russia.

OFAC designated several Russian banks as SDNs:

• Vnesheconombank (VEB), Promsvyazbank (PSB), and 42 of their subsidiaries
• Otkritie and Novikombank (and all of their subsidiaries worldwide), and
• VTB Bank PJSC (VTB), Russia's second-largest bank, and 20 of its subsidiaries

U.S. persons, including U.S. financial institutions and corporations, are generally prohibited from engaging in any unlicensed transactions with SDNs and are required to block, or freeze, any property or interests in property belonging to SDNs that are or come into U.S. possession. Additionally, under OFAC's ownership rule, entities that are owned 50 percent or more, directly or indirectly, by one or more SDNs are also subject to OFAC's sanctions. This is true even if OFAC does not specifically list those entities as SDNs. U.S. persons, therefore, will need to conduct due diligence review of foreign counterparties to ensure they are not owned 50 percent or more by SDNs.

In addition to these prohibitions applicable to U.S. persons, non-U.S. persons may be exposed to secondary sanctions risk. For example, non-U.S. persons could be identified for property-blocking sanctions in relation to specific activities related to persons subject to property-blocking sanctions under Executive Order (E.O.) 14024. Activities subject to secondary sanctions include:

Assisting, sponsoring or providing financial, material or technological support for, or goods or services to or in support of persons blocked pursuant to the Executive Order. Importantly, all of the blocking sanctions issued in connection to Russia's invasion of Ukraine were taken pursuant to E.O. 14024.

OFAC has issued a number of general licenses related to these designated entities, including 30-day wind-down periods for most of the above banks. OFAC issued general licenses allowing some energy transactions payments, through June, 24, 2022, with VEB, VTB and Otkritie, and general licenses related to certain bonds, debt and for transactions involving agricultural commodities, medicine and medical equipment exported to Russia.

In the past, OFAC has broadly read the language about providing support so non-U.S. persons should treat any transactions with these banks with great care. In addition, efforts to hide transactions with these parties will draw OFAC scrutiny.

Correspondent & Payable-Through Account Restrictions. Separately from the SDN designations, Sberbank, which is Russia's largest bank and a bank involved in many international transactions, was targeted with sanctions, along with 25 of its subsidiaries. These sanctions, issued under OFAC Directive 2, under E.O. 14024, will require U.S. banks to sever correspondent and payable through accounts with Sberbank and reject future transactions involving Sberbank by March 26, 2022. The bank’s assets are not blocked or frozen, but this measure effectively will cut-off Sberbank from being able to wire or otherwise engage in U.S. dollar transactions.

SWIFT. On Feb. 26, 2022, the United States, along with many allies, including the European Commission, France, Germany, Italy, the United Kingdom and Canada, announced that they will ensure that certain Russian banks are removed from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system. This action will ensure that these banks are disconnected from the international financial system and will harm their ability to operate globally. The following day, on Feb. 27, Japan announced it will also join this measure.

Russia Foreign Reserves. The United States and key allied nations also imposed restrictive measures that will prevent the Central Bank of Russia from deploying its international reserves, which are currently estimated at approximately $650 billion, in any way which may undermine the impact of the sanctions. On Feb. 28, 2022, OFAC implemented additional restrictions with respect to the Central Bank and published Directive 4 under E.O. 14024, which prohibits 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.

Sovereign Debt. Under OFAC Directive 3 under E.O. 14024, OFAC imposed sectoral sanctions prohibiting U.S. persons from providing new debt or equity to several Russian state-owned entities, including Sberbank, Gazprombank, Russian Agricultural Bank, Gazprom, Transneft, Rostelecom, Alrosa, Sovcomflot, RushHydro, Russian Railways, Alfa-Bank and Credit Bank of Moscow. While typically "new debt" means a loan or other extension of credit, OFAC’s position specifically includes payment terms, or allowing an entity to not pay for the relevant period (14 or 30 days depending on the entity), constitutes "new debt" and requires an OFAC license. This measure will impede the ability of these entities to operate and invest in their respective business sectors. U.S. companies with existing sales contracts for goods or services to any of these entities should carefully check credit terms and NOT extend credit to these entities on any future transactions.

Senior Russian Officials, Russian “Oligarchs” and Families. In addition to sanctions on the above entities, OFAC sanctioned President Putin and Minister of Foreign Affairs Sergei Lavrov, as well as other members of Russia's Security Council, and family members of individuals in Putin's inner circle, i.e. the “Oligarchs.” The list includes high-level government officials, senior officials of some of the designated banks and their family members. Based on the President’s comments in the State of the Union speech, we expect many more such designations.

Energy, Maritime and Sovereign Debt. Other OFAC measures implemented include:

• Designation of Nord Stream 2 AG and Matthias Warnig as SDNs, with a short wind-down period ending March 2, 2022. Nord Stream 2 has now gone out of business.
• Designation of five Russian-flagged oil tankers and container ships owned by PSB as SDNs.
• Expansion of existing sovereign debt restrictions. Specifically, the action prohibits U.S. financial institutions from engaging in the secondary market for bonds issued by the Central Bank of Russia, the National Wealth Fund of Russia or the Ministry of Finance of Russia after March 1, 2022.

Maritime. The maritime industry may be another sector seriously affected by the OFAC designations. It is likely there are countless cargoes on order, awaiting loading, or in transit aboard vessels that are being financed with documentary letters of credit (DLCs) issued, confirmed or advised by now sanctioned Russian financial institutions for the benefit of exporter sellers. Even on cargoes not financed by DLCs, the bills of lading and dock receipts or other negotiable instruments and non-negotiable sea waybills issued by the ocean carriers for all sorts of shipments may present a problem when goods arrive and have to be released at their destination. The standard transactions for a negotiable bill of lading include transfers of title by endorsement, and surrender to either the carrier or a financing bank at destination. If any intermediary is involved, they may also be affected.

U.S. persons with current sales of goods or services to Russia or Belarus should carefully review not only their customer, but also the bank used in the transaction, the insurer, and the carrier to avoid having transactions tied up in sanctions problems.

In addition to the sanctions imposed by OFAC, on Feb. 24, 2022, BIS issued a fact sheet and pre-publication version of a new rule effective Feb. 24, 2022 (and published in the Federal Register on March 3, 2022 (87 Fed. Reg. 12226)). This rule drastically limits exports of sophisticated goods, software and technology to Russia impacting Russia's ability to develop its aerospace and defense sectors and compete globally.

High-Tech Exports Shall Require a License, under a Policy of Denial. BIS will require a license, reviewed with a policy of denial, for the export, reexport or transfer (in-country) of products, software and technology controlled on the Commerce Control List (CCL) in Categories 3-9 to Russia (15 C.F.R. § 746.8(a)(1)). These items, in 58 Export Control Classification Numbers (ECCNs) with unilateral controls, were not previously controlled to Russia, include microelectronics, telecommunications items, sensors, navigation equipment, avionics, marine equipment and aircraft components. BIS restrictions are calculated to target Russia's ability to acquire items it cannot produce itself. The rule provides for review of license applications on a case-by-case basis of items in certain categories to determine if those transactions benefit the Russian government or defense sector. The categories include flight safety, maritime safety, humanitarian needs, government space cooperation, civil telecommunications infrastructure, government-to-government activities and support of limited operations of partner country companies in Russia.

Restrictions on the Use of Export Administration Regulations (EAR) License Exceptions. BIS also significantly restricted the availability of license exceptions for Russia exports, reexports and transfers (in-country). Under 15 C.F.R. § 746.8(c), only limited license exception provisions remain available for exports, reexports or transfers under § 746(a)(1), including: License Exception TMP (temporary imports) for items for use by the news media; License Exception TSU (technology and software unrestricted) for software updates for civil end users that are subsidiaries or joint ventures of U.S. companies or companies of allied countries in the EAR's Country Groups A:5 or A:6; License Exception ENC (encryption commodities), but excluding Russian government end users and Russian state-owned enterprises; and License Exception CCD (consumer communication devices), which now authorizes exports and reexports to Russia of certain consumer communications devices and software to and for the use of individuals and independent nongovernmental organizations in Russia.

Near Total Embargo of U.S. Items to Russian Military. The Rule expands the Expanded Military End Use/End-User Rule (MEU) to apply to all items subject to the EAR (items located in the U.S., U.S.-origin items located anywhere and foreign manufactured items containing above a de minimis U.S.-origin controlled content). This effectively prohibits exports of any item subject to the EAR to such entities. The only exceptions are for food and medicine designated as EAR99 and certain mass-market encryption commodities and software classified as ECCN 5A992.c or 5D992.c, provided that they are not for Russian government end users or Russian state-owned enterprises. BIS also added a number of Russian aviation, shipbuilding and other industrial base entities to the Entity List, so that even lower technology exports to these listed entities will now require an export license, one where there is a presumption of denial.

Expansion of Foreign Direct Product Rule. BIS established two new foreign direct product (FDP) rules with respect to Russia under 15 C.F.R. § 734.9 of the EAR, which impact a large number of foreign-made products. These new rules significantly limit Russia's access to foreign-made products which are the direct product of U.S. software or technology, or the direct product of plants (or major components of plants) that are themselves the direct product of U.S. software or technology. Therefore, foreign-made products that are produced with or incorporate U.S. technology or software are subject to the EAR and would require a U.S. export license to ship to Russia.

Expanded and Revised Restrictions on Crimea to Cover Donetsk and Luhansk Regions. The Rule expanded 15 C.F.R. § 746.6 to cover these regions and prohibit the export or reexport of items subject to the EAR, except food, medicine and certain software for personal communications. There is thus a virtual embargo on sending U.S. origin goods, technology, or software to these areas.

Partner Country Exclusion from Russia and Russia-MEU FDP rules. Certain partner countries that are adopting or have expressed intent to adopt substantially similar measures are not or will not be subject to the Russia and Russia-MEU FDP rules. 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.

In President Biden's address to the nation on Feb. 24, 2022, he noted that restrictions on Russia's imports of key technology, including semiconductors, would squeeze its "access to finance and technology for strategic areas of its economy and degrade its industrial capacity for years to come." He said the sanctions would hurt Russia's ability to modernize its military, its aerospace industry, and its space program and would be a "major hit to Putin's long-term strategic ambitions." The far-reaching sanctions and export controls described above will impact a range of U.S. and non-U.S. businesses with customers, suppliers, partners, vendors and other business dealings in Russia.

Several notable implications for technology-focused companies include:

• For U.S. companies that export products, software or technology to Russia that are controlled on the CCL in Categories 3–9, a license is now required to any entity in Russia. BIS anticipates that these new controls under the rule will result in an additional 350 license applications being submitted to BIS annually. The new restrictions exclude deemed exports and deemed reexports. This means that companies that employ Russian national employees in the United States would not have the same licensing requirement under the new rule for sharing controlled technology with such employees that would be required for exports of the same technology to Russia.
• The software and technology covered by the Russia FDP rule includes that which is specified in any ECCN in product groups D (software) and E (technology) in Categories 3-9 of the CCL. This includes a broad array of software and technology, resulting in many more foreign-made products being subject to U.S. export control jurisdiction. BIS explained the concept of "destination" is used to address situations involving multistep manufacturing processes that occur in more than one country and in which the parties involved have knowledge that the foreign-produced item being produced will ultimately be reexported or exported from abroad to Russia. BIS anticipates new license requirements under the Russia FDP rule will result in an additional 2,000 license applications being submitted to BIS annually.

On March 02, 2022, BIS issued a supplemental fact sheet, which describes further sanctions and imposed costs on Russia and Belarus. This release details additional economic costs on Russia and Belarus in response to Russia’s invasion of Ukraine. The U.S. extended these restrictions to punish Belarus for enabling Russia’s invasion of Ukraine and to prevent Belarus from becoming a conduit for exports to Russia.

To effectuate these promises, the U.S. announced the following measures:

• Sweeping restrictions on Belarus to choke off its import of technological goods. The Department of Commerce will extend the stringent export control policies put in place for Russia to Belarus. This action will help prevent diversion of items, technologies, and software through Belarus to Russia.
• Full blocking sanctions on Russian defense entities. The Department of State will impose sweeping sanctions that target Russia's defense sector In total, 22 Russian defense-related entities will be designated, including firms that make combat aircraft, infantry fighting vehicles, electronic warfare systems, missiles, and unmanned aerial vehicles for Russia's military.
• Export Controls Targeting Oil Refining, a Key Revenue Source that Supports Russian Military. The Commerce Department will impose restrictions on technology exports that would support Russia's refining capacity over the long term. Targeting Entities Supporting the Russian and Belarusian Military. The Commerce Department, in coordination with its interagency partners, will add entities that have been involved in, contributed to, or otherwise supported the Russian and Belarusian security services, military and defense sectors, and/or military and defense research and development efforts to the Entity List. These actions will ensure that the military as well as the aerospace, maritime and high-technology sectors do not obtain U.S. technology goods and technology that can be used to support Russian technical maintenance and innovation.
• Banning Russian aircraft from entering and using domestic U.S. airspace. As the President announced, the United States will close off American air space to all Russian flights. This ban includes aircraft certified, operated, registered or controlled by any person connected with Russia. This ban will affect many airlines which use aircraft leased from Russian entities. This step also includes revoking all Russian airlines' - both passenger and cargo - ability to operate to and from U.S. destinations, as well as refusing entry of any Russian-operated aircraft into U.S. airspace. This step brings the United States in line with over thirty other countries, including most of Europe and Canada.

For many weeks the Biden Administration has been stressing that actions taken against Russia would be taken in coordination with U.S. allies to maximize the intended effect. Over the past week, that expected coordination has been on full display. The actions of many allies is summarized below:

• The European Union (EU) froze President Putin's and Russian Foreign Minister Lavrov's European assets; sanctioned 351 members of the Russian State Duma; has agreed to implement sanctions on Russia's financial, energy and transport sectors, and visa policy; committed to restricting Russia's access to SWIFT; closed its airspace to Russian aircraft; banned Russian media outlets Russia Today and Sputnik; and plans to institute increased export controls and an export financing ban.
• Germany halted certification of the Nord Stream 2 pipeline, meaning it cannot commence operations. Germany further announced that it would be sending Ukraine 1,000 anti-tank weapons and 500 stinger missiles, action which constitutes a total shift in the country's arms export policy.
• Australia announced sanctions targeting more than 300 Russian government officials; barred several top Russian banks from transacting with Australian financial institutions; and extended current Crimea-related sanctions to include the Donetsk and Luhansk regions.
• Canada canceled all export permits to Russia; banned new transactions in Russian sovereign debt; sanctioned more than 400 entities and individuals; and announced that it will impose sanctions on President Putin and supports removing Russia's access to SWIFT.
• Japan prohibited the issuance of Russian bonds, freezing several Russian individuals' assets, committed to restricting Russia's access to SWIFT, and restricted travel into the country.
• The United Kingdom sanctioned major Russian banks, and more than 100 individuals, entities and subsidiaries; agreed to prohibit flights by Russian airline Aeroflot from landing in the U.K.; suspended all dual-use export licenses to Russia from the U.K.; closed its airspace to Russian aircraft; and announced that it will impose sanctions on President Putin.
• Turkey announced it will apply the 1936 Montreux Convention that regulates naval passage through the Bosporus and the Dardanelles straits, allowing Turkey to block passage to warships of a belligerent state (Russia) unless the ship is returning to its naval base in the Black Sea.
• At least two of China's biggest state-owned banks announced that they will not support transactions with Russia.
• Switzerland announced that it is freezing Russian assets and adopting the EU's sanctions on Russia, setting aside its tradition of neutrality. This action is a very sharp departure from past Swiss practice.
• Two non-NATO countries, Finland and Sweden, attended a NATO leaders summit, prompting threats from Russia. In addition, Sweden announced that it was sending substantial funding and weapons directly to the Ukraine military.
• Israel indicated it would vote in favor of a United Nations resolution condemning Russia's invasion of Ukraine, constituting a shift in policy for the country.

As the sanctions and restrictions outlined in this alert come into effect, and additional sanctions are announced and implemented across the globe, U.S. entities should anticipate any business with Russian entities will be increasingly limited. Now is the time to conduct thorough diligence of all operations and counterparties to determine where Russian touchpoints exist, as discussed in another Miles & Stockbridge alert here.

Miles & Stockbridge continues to closely follow developments in this area and assess impact on U.S. and non-U.S. businesses operating generally in Eastern Europe and the Russian Federation and Ukraine specifically.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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