In response to the Russian invasion of Ukraine — and Belarus’s support of the invasion — the United States has unveiled a range of economic sanctions on Russia and Belarus over the past week that will impact every U.S. business with operations or contacts in those jurisdictions. This client alert will discuss the sanctions imposed as of February 28, 2022. This is a fast-moving issue and additional sanctions are possible at any time. In addition, the U.S. is coordinating this sanctions effort with European Union Member States, the United Kingdom, Canada, and other jurisdictions — so the scope and reach of U.S. and allied sanctions will change over time.
Bottom Line Up Front
As a result of the U.S. sanctions on Russia, every global business — based in the U.S. or based elsewhere — should determine:
- If its client/customer/supplier/contact list contains (a) persons and entities specifically sanctioned and added to the List of Specially Designated Nationals and Blocked Persons (“SDN List”) maintained by the Office of Foreign Assets Controls (“OFAC”) of the U.S. Department of the Treasury; or (b) persons or entities located in the so-called Donetsk People’s Republic or Luhansk People’s Republic.
- Whether any of its customers are, or are affiliated with, any of the 49 Russian entities added to the Entity List maintained by the U.S. Department of Commerce’s Bureau of Industry and Security at the (“BIS”).
- Whether it is a position to block any assets owned by any person or entity added to the SDN List;
- If any of its products are subject to the new foreign direct product rule applicable to Russian civilian and military end-users.
- Whether any relationships with specified Russian banks include any now-restricted areas of business.
The range of sanctions levied against Russia is among the broadest and deepest in U.S. history and will have a significant impact on both U.S.-based businesses and, because of the extraterritorial reach of these sanctions, companies based outside of the U.S.
Donetsk and Luhansk Regions
The U.S. has imposed an almost complete economic embargo on the Donetsk and Luhansk regions of Ukraine, similar to the U.S. embargo involving Crimea. As a result, no U.S. company or individual may, without a license, conduct business with those regions, whether directly or indirectly.
In connection with the Donetsk and Luhansk sanctions, OFAC designated as Specially Designated Nationals (“SDNs”) the Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (“VEB”) and Promsvyazbank Public Joint Stock Company (“PSB”), along with 42 of their subsidiaries and five vessels owned by PSB.
Foreign Direct Product Rule
On February 24, 2022, BIS issued a new rule that places major new restrictions on trade with Russia. This new rule is intended to (in the administration’s words) “restrict Russia’s access to vital technological inputs” and will:
- Impose a new license requirement for all exports, reexports, and transfers of items to Russia covered by Categories 3-9 of the Commerce Control List (“CCL”), including new controls on microelectronics, telecommunications items, sensors, navigation equipment, avionics, marine equipment, and civil aircraft components. However, this requirement does not cover deemed exports or deemed reexports; several EAR-based license exceptions remain available for such items.
- Apply a policy of denial for nearly all license applications for exports, reexports, or transfers within Russia.
- Expand existing restrictions on Russian military end-uses and military end-users to cover all items subject to the EAR, except for food and medicine designated as EAR99 and mass-market items, as long as they are not for the Russian government end-users or state-owned enterprises.
- Develop and apply two foreign direct product rules:
- In the civilian-focused version of the rule, a license is required for the export, reexport or transfer of all items, regardless of where manufactured, that are (a) the direct product of U.S.-origin software or technology specified in any Export Control Classification Number (“ECCN”) in product groups D or E in Categories 3-9 of the CCL; or (b) produced by plants or major components of plants that are the direct product of the above-specified U.S.-origin software or technology. This version of the foreign direct product 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 new rule does not apply to foreign-produced items that would be designated as EAR99 if they were in the U.S.
- The version of this rule applies to the Russian military controls foreign-produced items that are either (a) the direct product of any technology or software that is subject to the EAR and specified in any product group D or E ECCN on the CCL; or (b) produced by plants or major components that are the direct product of any U.S.-origin technology or software that is specified in any product group D or E ECCN on the CCL. These items require a license to Russian military end-users 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 a Russian military end-user.
- Add at least 49 Russian military end-users to the Entity List and require a license to export, reexport, or transfer (in-country) all items subject to the EAR to such entities.
- Eliminate several EAR license exceptions for exports, reexports, and transfers to Russia.
OFAC designated the following four Russian financial institutions as SDNs pursuant to Executive Order (“EO”) 14024:
- VTB Bank PJSC (“VTB Bank”), 20 VTB Bank subsidiaries, and all entities owned 50% or more, directly or indirectly, by VTB Bank are subject to blocking.
- PJSC Bank Financial Corporation Otkritie (“Otkritie”), 12 Otkritie subsidiaries, and all entities owned 50% or more, directly or indirectly, by Otkritie are subject to blocking.
- JSC Bank Novikombank.
- OJSC Sovcombank (“Sovcombank”), 22 Sovcombank subsidiaries, and all entities owned 50% or more, directly or indirectly, by Sovcombank are subject to blocking.
“Blocking” refers to the requirement that U.S. persons and entities, such as banks and financial institutions, “block” or “freeze” any assets of a blocked entity, place such assets into an interest-bearing account, and report such blocking to OFAC within 10 business days.
In addition, OFAC imposed correspondent and payable-through account sanctions on Public Joint Stock Company Sberbank of Russia (“Sberbank”) and its 50% owned subsidiaries. To implement the Sberbank sanctions, OFAC issued Directive 2 under EO 14024, “Prohibitions Related to Correspondent or Payable-Through Accounts and Processing of Transactions Involving Certain Foreign Financial Institutions” (“Russia-related CAPTA Directive”). This directive takes effect March 26, 2022, and prohibits U.S. financial institutions from (a) the opening or maintaining of a correspondent account or payable-through account for or on behalf of any entity determined to be subject to the prohibitions of the Russia-related CAPTA Directive, or their property or interests in property; and (b) processing of transactions involving any such entities determined to be subject to the Russia-related CAPTA Directive, or their property or interests in property.
OFAC expanded its existing Russia-related debt and equity restrictions and issued Directive 3 under EO 14024, “Prohibitions Related to New Debt and Equity of Certain Russia-related Entities” (“Russia-related Entities Directive”). This directive prohibits transactions and dealings by U.S. persons or within the U.S. in new debt of longer than 14 days maturity, including payment/credit terms longer than this period, and new equity of Russian state-owned enterprises, entities that operate in the financial services sector of the Russian economy, and other entities determined to be subject to the directive’s prohibitions that is issued on or after March 26, 2022.
Russia-Related General Licenses
To minimize unintended consequences on third parties, OFAC has issued eight general licenses authorizing certain transactions involving Russia related to the following:
- international organizations and entities;
- agricultural and medical commodities for the COVID-19 pandemic;
- overflight payments, emergency landings, and air ambulance services;
- energy-related transactions involving certain sanctioned banks and their 50% owned subsidiaries;
- dealings in certain debt or equity;
- the wind down of transactions involving Otkritie, Sovcombank, VTB Bank, and their 50% owned subsidiaries (expires March 26, 2022); and
- the rejection (rather than blocking) of unauthorized transactions involving other banks and related entities (expires March 26, 2022).
Putin and Lavrov Sanctions
Under EO 14024, OFAC designated as SDNs Russian President Vladimir Putin, Russian Foreign Minister Sergei Lavrov, and all members of the Russian Security Council. This means that any assets of such SDN in the possession of a U.S. business or individual are blocked, and no U.S. business or individual may transact with such SDN without first obtaining an OFAC license. Further, the assets of any entities that are owned, directly or indirectly, 50% or more by one or more blocked persons are also blocked.
Other Individual Sanctions
OFAC also designated as SDNs certain influential Russians in Putin’s inner circle and in elite positions of power within the Russian state. As stated above, any assets of such SDN in the possession of a U.S. business or individual are blocked, and no U.S. business or individual may transact with such SDN without first obtaining an OFAC license. Further, the assets of any entities that are owned, directly or indirectly, 50% or more by one or more blocked persons are also blocked.
Sanctions on Russia’s Central Bank
On February 28, 2022, OFAC issued Directive 4 under EO 14024, “Prohibitions Related to Transactions Involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation” that prohibits U.S. persons and entities from engaging in transactions with the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation. Last week, OFAC sanctioned Russian sovereign wealth fund Russian Direct Investment Fund and its Chief Executive Officer, Kirill Dmitriev, as well as Joint Stock Company Management Company of the Russian Direct Investment Fund and Limited Liability Company RVC Management Company.
In addition to the Russia sanctions, OFAC has imposed sanctions on Belarus in response to their support of Russian’s invasion. OFAC designated as SDNs:
- Belarussian Bank of Development and Reconstruction Belinvestbank JSC (“Belinvestbank”), as well is the real estate firm LLC Belinvest-Engineering and financial leasing company CJSC Belbizneslizing, for their ties to Belinvestbank.
- Bank Dabrabyt JSC
OFAC also designated 16 persons and entities related to the Belarusian defense industry as SDNs.
Impact of the 50% Rule
OFAC considers an entity that is more than 50% owned by one or more sanctioned individuals or entities to itself be sanctioned, even if that entity is not specifically included on the SDN List. Therefore, the reach and impact of these new Russia and Belarus sanctions will be broader the specifically listed persons and entities. It is crucial for U.S. businesses to determine whether any client/customer/supplier/partner is subject to this 50% rule.
The sanctions imposed on Russia and Belarus by the United States are among the most comprehensive applied by the U.S. in recent history. Along with sanctions imposed by Ukrainian allies, these sanctions will significantly disrupt international commerce and banking with, and involving, Russia and Belarus. This is a fast-moving regulatory area, and readers are encouraged to check often for new developments. If you have any questions please contact Mike Burke at email@example.com or at +1.202.677.4046.