The United States government has continued to impose numerous economic sanctions and export controls measures following Russia’s invasion of Ukraine. On February 24, 2022, the US Commerce Department’s Bureau of Industry and Security (BIS) significantly expanded export controls applicable to Russia. On February 25, 2022, the US Treasury Department’s Office of Foreign Assets Control (OFAC) added Russian President Vladimir Putin and others to the Specially Designated Nationals (SDN) List. It also imposed significant economic sanctions measures targeting Russia’s financial system — including by imposing sanctions on Russia’s largest financial institutions and limiting the ability of certain Russian state-owned and private entities to raise capital. Together, OFAC’s actions, which were taken pursuant to Executive Order (EO) 14024 following Russia’s invasion of Ukraine, are estimated to affect nearly 80 percent of all banking assets in Russia.
Finally, on February 26, 2022, the United States and European Union countries, together with the United Kingdom and Canada, announced an agreement to block certain Russian banks from access to SWIFT (with Japan also agreeing the following day), to impose sanctions on Russia’s Central Bank, and to limit the ability of certain Russian nationals connected to the Russian government to obtain citizenship in their countries. They further agreed to ensure effective transatlantic coordination in implementing sanctions, including by sanctioning additional Russian entities and persons, and by working together and with other governments around the world to identify and freeze sanctioned Russian assets.
On February 25, 2022, OFAC took the significant step of adding Russian President Vladimir Putin to the SDN List, together with Russia’s Minister of Foreign Affairs, Sergei Lavrov, and two others.
The day before, on February 24, 2022, OFAC imposed blocking sanctions on four major Russian financial institutions and a number of affiliated entities. The targets, which were identified as SDNs under EO 14024, include:
- VTB Bank Public Joint Stock Company (VTB Bank), Russia’s second-largest financial institution, and 20 VTB Bank subsidiaries.
- Public Joint Stock Company Bank Financial Corporation Otkritie (Otkritie), a state-owned credit institution, and 12 Otkritie subsidiaries;
- Open Joint Stock Company Sovcombank (Sovcombank), Russia’s third-largest privately-owned financial institution, and 22 Sovcombank subsidiaries; and
- Joint Stock Commercial Bank Novikombank (Novikombank). Novikombank primarily operates in the Russian defense sector and serves as the core financial institution for Russian defense company Rostec, which fully owns the bank.
Concurrently with the new designations, OFAC issued General License (GL) 11, which authorizes US persons to engage in transactions for the wind-down of pre-existing business with Otkritie, Sovcombank, and VTB, and GL 12 which authorizes US persons to reject (rather than block) transactions involving those three institutions for 30 days, until March 26, 2022. Based on FAQ 975 it appears that OFAC expects that payments to or for the benefit of a blocked person in connection with authorized wind-down transactions under GL 11 will be placed into a blocked account.
These new designations add to the SDN designations on February 22, 2022 of other Russian financial institutions including Promsvyazbank Public Joint Stock Company (PSB) and Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB). For further information on the February 22 designations please see our prior blog post.
GL 9 issued on February 24 authorizes transactions ordinarily incident and necessary to dealings in debt or equity of Otkritie, Sberbank (although Sberbank is not on the SDN List), Sovcombank, VEB, and VTB until May 25, 2022, provided that any divestment or transfer of those securities is to a non-US person. GL 10 issued on the same day authorizes the wind-down of pre-existing derivatives contracts until May 25, 2022, if the contracts include one of these five banks as a counterparty or are linked to the debt or equity of one of these five banks. Payments to or for the benefit of a blocked person in connection with wind-downs of derivatives contracts under GL 10 must be placed into a blocked account. GLs 9, 10, 11, and 12 do not authorize any transactions involving Novikombank or Promsvyazbank.
Additionally, OFAC designated individuals in President Putin’s inner circle and Russian financial elites as SDNs.
At the same time, OFAC designated a number of Belarusian individuals and entities pursuant to EO 14038, including two large state-owned banks, the Belarussian Bank of Development and Reconstruction Belinvestbank Joint Stock Company (Belinvestbank), and Bank Dabrabyt Joint-Stock Company (Bank Dabrabyt), and two Minsk-based companies, Limited Liability Company Belinvest-Engineering and CJSC Belbizneslizing. Concurrently, OFAC issued Belarus GL 6 and GL 7 to authorize US persons to engage in transactions involving these entities related to the official business of the US government and certain international organizations and entities, respectively.
OFAC issued a new Directive 2 under EO 14024 imposing correspondent and payable-through account sanctions, and sanctions related to the processing of transactions by US financial institutions, on state-owned Sberbank, Russia’s largest financial institution. Beginning March 26, 2022, Directive 2 prohibits US financial institutions from: (i) the opening or maintaining of a correspondent account or payable-through account for or on behalf of Sberbank or any of the 25 affiliates identified in the annex to the directive, as well as any entity owned 50 percent or more by them; and (ii) the processing of transactions involving those entities. Such transactions must be rejected unless authorized by OFAC. Sberbank and other affiliated entities determined to be subject to Directive 2 have been added to OFAC’s List of Foreign Financial Institutions Subject to Correspondent Account or Payable-Through Account Sanctions (CAPTA List). Unlike blocking sanctions against SDNs, Directive 2 allows US financial institutions to reject, rather than block, transactions.
OFAC may identify additional entities under Directive 2, which, along with entities owned 50 percent or more by them, would be subject to the above restrictions 30 days following their designation.
Restrictions on New Debt
OFAC issued new Directive 3 under EO 14024 prohibiting all transactions in, provision of financing for, and other dealings by US persons or within the United States in new debt with a maturity of greater than 14 days or new equity of 13 major Russian state-owned enterprises and large privately-owned financial institutions listed in Annex 1 to the directive, including Alfa Bank and Gazprombank. As stated in FAQ 985, OFAC’s 50 percent rule applies to Directive 3, meaning the restrictions also apply to any legal entity owned 50 percent or more by one or more Directive 3 entities. The entities included in Annex 1 to Directive 3 have been added to OFAC’s Non-SDN Menu-Based Sanctions (NS-MBS) List. Certain of these entities were already on OFAC’s Sectoral Sanctions Identification (SSI) List and were subject to similar sanctions under Directives 1 and 2 under EO 13662. The new sanctions under EO 14024’s Directive 3 in some cases establish shorter periods than the EO 13662 directives for the maximum maturity of new debt in which dealings are permitted. OFAC has issued FAQs providing further clarity on Directive 3.
“Debt” is defined in FAQ 986, to include bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper. “Equity” includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership. Pursuant to prior OFAC guidance relating to the sanctions issued under Executive Orders 13661 and 13662 (see FAQ 419), “debt” would likely be interpreted to include payment terms granted to a newly-designated Directive 3 entity that extends beyond 14 days. The restrictions in Directive 3, which take effect on March 26, 2022, apply irrespective of currency. For entities subsequently determined to be subject to the prohibitions of Directive 3, the prohibitions are effective 30 days following such determination.
Among other GLs, OFAC issued GL 8 authorizing US persons to engage in transactions “related to energy” involving VEB, Otkritie, Sovcombank, Sberbank, VTB Bank, and any entities owned 50 percent or more by them, that would otherwise be prohibited by EO 14024. The phrase “related to energy” is defined at length in the GL. The GL does not authorize “the opening or maintaining of a correspondent account or payable-through account for or on behalf of any entity subject to Directive 2 under EO 14024” (i.e., Sberbank) or “[a]ny transactions involving any person blocked pursuant to E.O. 14024” that are not authorized by GL 8 or another OFAC authorization.
The US Commerce Department’s Bureau of Industry and Security (BIS) announced revisions to the Export Administration Regulations (EAR) imposing significant new controls on the export, reexport, or transfer (in-country) of items subject to the EAR to Russia. The rule was effective immediately when released on February 24, 2022, with a savings clause for certain shipments, including up to March 26, 2022. According to BIS, the rules are intended primarily to target the Russian defense, aerospace, and maritime sectors. The expanded restrictions include:
- The addition of new Commerce Control List (CCL)-based license requirements for any Export Control Classification Numbers (ECCNs) in Categories 3 through 9, added under EAR § 746.8(a)(1). Certain of these items, in 58 ECCNs with unilateral controls, were not previously controlled for export to Russia and include microelectronics, telecommunications items, sensors, navigation equipment, avionics, marine equipment, and aircraft components. These new restrictions do not apply to “deemed exports” or “deemed reexport” (i.e., releases of controlled technology to Russian nationals in the United States or to Russian nationals located in third countries). A savings clause applies for items already ordered and in transit. No license is required to export, reexport, or transfer (in country) items designated EAR99 generally to the Russian Federation or its government, unless end-user or end-use restrictions described below apply.
- The application of a policy of denial to virtually all license applications, apart from a few categories to be reviewed on a case-by-case basis. Categories eligible for a case-by-case review include exports in support of safety of flight, maritime safety, humanitarian needs, government space cooperation, civil telecommunications infrastructure, government-to-government activities, and to support limited operations of certain specified partner country companies in Russia.
- The addition of two new foreign produced “direct product” (FDP) rules. One new FDP Rule covers the entire country of Russia and the other new FDP Rule covers Russian Military End-Users (MEUs), in what is referred to as the Russia FDP Rule (§ 734.9(f)) and the Russian-MEU FDP Rule (§ 734.9(g)). A savings clause applies for items already ordered and in transit on March 26, 2022.
- The Russia FDP Rule imposes a license requirement on a non-EAR99 foreign-made item if it is (a) the direct product of US-origin software/technology subject to the EAR, or (b) produced by any plant or major component thereof that is itself the direct product of US-origin software/technology subject to the EAR, where the software or technology is covered by D (software) or E (technology) ECCNs in CCL Categories 3-9, and when there is knowledge the foreign-made item will be sent to or incorporated into or used to produce/develop non-EAR99 items destined for or produced in Russia. Stated differently, foreign made items that are subject to the Russia FDP Rule and are designated EAR99 do not require a license for export or reexport generally to, or transfer within, the Russia Federation, provided that end-user and end-use controls described below do not apply.
- The Russian-MEU FDP Rule is much broader in that it imposes a license requirement on any foreign-made item (regardless of ECCN classification) if it is (a) the direct product of any technology/software subject to the EAR and covered by any D or E ECCN in all 10 CCL categories, or (b) produced by any plant or major component thereof that itself the direct product of US origin technology/software, where the software or technology is covered by any D or E ECCN in all 10 CCL categories, and when there is knowledge (i.e., actual knowledge, reason to know, or conscious disregard of facts that would lead a reasonable person to believe of a circumstance or conduct that will result) that the foreign made item will be incorporated into or used to produce/develop an item purchased, produced, or ordered by a Footnote 3 Entity on the BIS-administered Entity List (a new Entity List notation) or if a Footnote 3 Entity is a party to any transaction involving the foreign-produced item. In other words, any foreign made item that is subject to the Russia FDP MEU Rule, including EAR99 items, will require a license for export reexport, or retransfer where there is knowledge that a Russian military end user is involved, and the item need not be identified by Supplement No. 2 to Part 744 to be restricted for such end users or military end uses.
- However, in certain specified circumstances, the new FDP Russia and FDP MEU Rules will not apply to ‘partner countries’ – currently 32 – that adopt substantially similar measures. See Supplement No. 3 to part 746 of the EAR (Russia Exclusions List).
- The modification to the de minimis rule, for exports of foreign-made items that incorporate, bundle, or commingle US controlled content or components from these same 32 partner countries, so that any US content that is covered by the expanded ECCNs under this rule that are controlled for anti-terrorism reasons only or classified under ECCN 9A991 will not be counted as “controlled” content for purposes of the de minimis calculation set forth in Supplement No. 2 to Part 734. (This de minimis analysis is separate from a FDP Rule assessment.)
- The creation of Footnote 3 to the Entity List (indicating that the Russia-MEU FDP Rule applies to those entities), and the addition of 49 Russian entities to the Entity List, including the Russian Ministry of Defense. The Russian entities included in Footnote 3 to the Entity List are also considered to be military end-users subject to the restrictions of part 744.21 of the EAR.
- The expansion of the scope of the previously existing Military End Use/User provision in part 744.21 to all items subject to the EAR (with limited humanitarian and mass market exceptions). Notably, a company, organization, or person need not be included on the MEU List or Entity List for military end user restrictions to apply.
- The significant restriction of EAR license exceptions for Russia exports, reexports, and in-country transfers, except for temporary imports and exports for items used by the news media, certain government/international organization activities, software updates for certain civil end users, baggage, aircraft flying in and out of Russia, and certain encryption and consumer communication devices. It is prudent for exporters and reexporters to review carefully the limitations and conditions of these license exceptions before deciding they apply and proceeding with transfers.
- The imposition of a license requirement for the export and reexport to the “Covered Regions of Ukraine,” which includes the so-called Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR), of all items subject to the EAR other than EAR99 food and medicine, and certain software for internet-based personal communications. Similar controls had applied to the Crimea region of Ukraine under part 746.6.
The extensive new BIS export controls relating to Russia are complex, and will present challenges to compliance departments for US and non-US companies that continue to do business with Russia. A careful review of the changes made by the new rule will be necessary to ensure existing compliance programs and guidance remain effective.
While expansive, neither these new restrictions nor those announced previously yet amount to a comprehensive embargo on Russia. However, even where specific transactions with Russia are not currently subject to the new restrictions and controls, the financial and economic sanctions may complicate payments associated with such transactions. Accordingly, all transactions in the region require careful attention to avoid inadvertent violations, as well as transaction processing risks, and constant monitoring to ensure compliance.
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