Russia Invades and the West Reacts: U.S. Government Intensifies Sanctions and Export Controls Against Russia

Pillsbury - Global Trade & Sanctions Law

On February 24, 2022, the U.S. Government issued a number of sanctions measures in response to Russia’s attack on Ukraine.  These measures include sweeping financial sanctions and stringent export controls, which will have broad impacts on companies and individuals doing business in Russia, Ukraine and Belarus.  Today’s announcement came alongside additional measures coordinated with U.S. allies, including the United Kingdom, European Union, Canada, and Japan.

A brief overview of today’s U.S. measures is provided below.  In following blogs, we will provide more focused looks at (a) U.S. sanctions; and (b) sanctions and export controls issued by a number of other key economies around the world.

Financial Sanctions

The U.S. Department of Treasury, Office of Foreign Assets Control (OFAC) imposed the following sanctions targeting the Russian financial system and the ability of several large banks, military companies and energy sector participants to access finance:

  • SDN Designations:  OFAC added a number of additional financial institutions, individuals, and entities to the SDN List.  Accordingly, all transactions with and services for these parties are prohibited, and the property and interests in property of such persons that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, individually or in the aggregate, 50 percent or more by one or more blocked persons are also blocked.  Designated parties include the following:
    • Financial Institutions: Russia’s second largest financial institution, VTB Bank (VTB), and its 20 subsidiaries, as well as Bank Otkritie, Sovcombank OJSC, and Novikombank and their collective 34 subsidiaries.
    • Individuals: The following Russian elites, family members and related companies:  Sergei Ivanov (and his son, Sergei), Nikolai Patrushev (and his son Andrey), Igor Sechin (and his son Ivan), Andrey Puchkov, Yuriy Solviev (and two real estate companies he owns), Galina Ulyutina, and Alexander Vedyakhin.
    • Belarusian Individuals and Entities: 24 Belarusian individuals and entities, including two significant Belarusian state-owned banks, nine defense firms, and seven regime-connected official and elites.
  • New Directive 2 to Executive Order 14024: OFAC issued a new Directive to prohibit correspondent and payable-through account services and the processing of transactions for Russia’s largest financial institution, Sberbank, and its 25 subsidiaries, to become effective as of March 26, 2022.  Sberbank is the largest bank in Russia and holds one third of Russia’s financial assets.  Sberbank has not been added to OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List).  As a result of Directive 2, U.S. financial institutions must close any Sberbank correspondent or payable-through accounts and must reject any future transactions involving Sberbank or its foreign financial institution subsidiaries, unless exempt or authorized by OFAC.
  • New Directive 3 to Executive Order 14024: Similar to Directive 1 under Executive Order 13662, new Directive 3 prohibits all transactions in, provision of financing for, and other dealings in new debt of greater than 14 days maturity and new equity issued by the following thirteen Russian state-owned enterprises and entities:  Sberbank, AlfaBank, Credit Bank of Moscow, Gazprombank, Russian Agricultural Bank, Gazprom, Gazprom Neft, Transneft, Rostelecom, RusHydro, Alrosa, Sovcomflot, and Russian Railways. The restriction applies to debt or equity issued on or after March 26, 2022.

Export Control Restrictions

The U.S. Department of Commerce, Bureau of Industry and Security (BIS) imposed the following export control restrictions:

  • Broad Expansion of Licensing Requirements for Exports, Reexports, and Transfers to Russia.  The rule expands licensing requirements for the export, reexport, or transfer (in-country) to or within Russia of any item subject to the EAR and specified in Export Control Classification Numbers (ECCNs) in Categories 3, 4, 5, 6, 7, 8, or 9 of the CCL, excluding deemed exports and deemed reexports.  This includes certain microelectronics, computers, telecommunications items, products and software with encryption functionality, sensors, navigation equipment, avionics, marine equipment, and aircraft components that were not previously subject licensing requirements for Russia.
  • Restrictions on the use of License Exceptions – Previously available license exceptions are restricted for Russia, and only certain limited sections of the following license exceptions are now available:
    • TMP  – for items for use by the news media;
    • GOV – for certain government activities;
    • TSU – 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 – for baggage, excluding firearms and ammunition;
    • AVS – for aircraft flying into and out of Russia;
    • ENC – for encryption items, but not if they are destined for Russian ‘government end users’ and Russian state-owned enterprises; and
    • CCD – for consumer communication devices, but not if they are destined for government end users or certain individuals associated with the government.
  • Two New Foreign Direct Product Rules – one for all of Russia (the “Russia FDP Rule”) and one for Russian “military end users” (the “Russia-MEU FDP Rule”):
    • The Russia FDP Rule expands the scope of the direct product rule to cover foreign-made items that are the direct product of U.S. software or technology, or of items produced by a complete plant or “major component” of a plant that itself is the “direct product” of such U.S.-origin technology or software, that is subject to the Export Administration Regulations (EAR) and described in Categories 3-9 of the Commerce Control List (CCL).  The Russia FDP Rule applies 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 produced in or destined to Russia.  The Russia FDP rule does not apply to foreign-produced items that would be designated as EAR99.
    • The Russia-MEU FDP Rule is more extensive than the Russia FDP Rule.  The Russia-MEU FDP Rule expands the scope of the direct product rule to cover foreign-made items that are the direct product of any U.S. software or technology subject to the EAR that is on the CCL, or of items produced by a complete plant or “major component” of a plant that itself is the “direct product” of such U.S. origin technology or software.  Such items will require a license if an entity with a Footnote 3 designation on the Entity List is a party to the transaction, or if there is knowledge that the item will be incorporated into or used in the production or development of any part, component, or equipment produced, purchased, or ordered by any entity with a Footnote 3 designation on the Entity List.  These restrictions apply to all items, including those designated EAR99, with certain exceptions, and impose a license requirement for Footnote 3-designated Russian military end users.
      • Footnote 3 Designation – 47 Russian entities have been transferred from the MEU List to the Entity List and are designated with a Footnote 3 notation.  Parties with a Footnote 3 designation are subject to the Russia-MEU FDP Rule.  Accordingly, a license is required to export, reexport, or transfer (in-country) all items subject to the EAR (including foreign-produced items under the Russia-MEU FDP rule) to these entities, with limited exceptions.  Footnote 3 also applies to the Russian Ministry of Defence, including the Armed Forces of Russia, wherever located.  BIS also added two new Russian MEUs to the Entity List with a Footnote 3 designation.  Additional entities may be added in the future.
    • Partner Country Exclusion:  The Russia FDP Rule and the Russia-MEU FDP Rule license requirements do not apply to exports or reexports from partner countries who have committed to implementing substantially similar export controls on Russia under their own domestic laws.  The following partner countries are excluded from both FDP Rules: currently 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.
  • Expands Russia “Military End Use” and “Military End User” Controls to Apply to all Items Subject to the EAR. The rule expands the scope of the “military end use” and “military end user” controls under § 744.21 of the EAR to apply to all items subject to the EAR instead of the narrower subset of items identified in supplement no. 2 to Part 744.  There are exceptions for food and medicine classified as EAR99 and mass market encryption commodities and software (5A992/5D992) that are not for a Russian government end user or state-owned enterprise.
  • Review Policy of Denial to Most License Applications for Russia:  Applications for the export, reexport, or transfer (in-country) of items that require a license for Russia will be reviewed, with limited exceptions, under a policy of denial.  Certain applications related to safety of flight, 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 will be reviewed on a case-by-case basis.

UK, EU, Japanese and other authorities are expected to issue additional detail on sanctions, export controls and implementation on February 25, 2022.

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