US Imposes Sweeping Sanctions, Export Controls Following Russian Invasion of Ukraine

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Feb. 28, 2022

Intro/New Developments

The invasion of Ukraine by Russia has sparked a series of international consequences. In addition to the sanctions we reported earlier this week, the United States has added additional sanctions and export controls against Russia. Below we highlight the key components of each. This article is current as of close of business on February 28, 2022.

Sanctions

On February 28, 2022, the US Treasury Department (Treasury) published Directive 4 Under E.O. 14024 prohibiting US person from engaging in 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. These restrictions include a prohibition on any transfer of assets or any foreign exchange transaction for or on behalf of such entities.

Treasury is also imposing correspondent and payable-through account sanctions on Sberbank, a financial institution that is estimated to hold roughly one third of all bank assets in Russia. Sberbank is the country’s the largest financial institution and is majority-owned by the government of Russia. Under the new sanctions OFAC is now requiring that within 30 days all US financial institutions close any Sberbank correspondent or payable-through accounts, as defined in Directive 2 under E.O. 14024, and reject any future transactions involving Sberbank or its foreign financial institution subsidiaries.

In addition, OFAC has imposed full blocking sanctions on VTB Bank, Russia’s second-largest financial institution. VTB is majority-owned by the government of Russia and is estimated to hold roughly twenty percent of all banking assets in the country. Under these full blocking sanctions assets held in US financial institutions will be instantly frozen. In total 20 VTB subsidiaries have been designated, pursuant to E.O. 14024, as owned or controlled by VTB Bank. It is important to note that all entities owned 50 percent or more, either directly or indirectly, by VTB Bank are subject to blocking, even if not directly listed by OFAC. In addition, OFAC has imposed blocking sanctions on three additional Russian financial institutions (Otkritie, Novikom, and Sovcom). According to Treasury these three institutions hold a combine $80 billion USD in assets.

OFAC is also expanding Russia-related debt and equity restrictions to now cover “additional key aspects of the Russian economy.” Pursuant to Directive 3 under E.O. 14024, OFAC is now prohibiting “transactions and dealings” by both US persons and persons located within the US, in new debt of longer than 14 days maturity and new equity of Russian state-owned enterprises, entities that operate in the financial services sector of the Russian Federation economy, and other entities determined to be subject to the prohibitions in this directive. The Russian firms subject to these restrictions are listed in Annex 1 to Directive 3 under E.O. 14024 and include six of Russia’s largest financial institutions. Under this prohibition the listed firms are now severely restricted from raising money through US markets.

Furthermore , Treasury is now directly sanctioning “elites” with close ties to Vladimir Putin. This move is being done through numerous additions to the OFAC Specially Designated Nationals and Blocked Persons List (SDN) List. According to Treasury, Russian elites have used family members to shuffle assets and conceal wealth. Several notable additions to the SDN list include Sergei Sergeevich Ivanov, the son of Sergei Borisovich Ivanov, Russia’s Special Presidential Representative for Environmental Protection, Ecology, and Transport. Sergei B. Ivanov is thought to be one of Putin’s closest associates. Additionally, Andrey Patrushev, son of the Secretary of the Russian Federation Security Council Nikolai Patrushev has now been added. Andrey Patrushev previously served in leadership roles at Gazprom Neft and is currently employed in Russia’s energy sector. Various financial sector elites have also been directly sanctioned, including Alexander Aleksandrovich Vedyakhin, the First Deputy Chairman of the Executive Board of Sberbank as well as Andrey Sergeyevich Puchkov and Yuriy Alekseyevich Soloviev, two high-ranking VTB Bank executives.

Finally, the U.S. has also announced sanctions against 24 Belarusian individuals and entities due to Belarus’s support for, and facilitation of, Russia’s invasion of Ukraine. All property and interests in property of these individuals and entities that are in the United States or in the possession or control of U.S. persons are blocked. Again, OFAC’s 50% rule also applies here so any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked. All transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of blocked persons are prohibited unless exempt from licensing or authorized by a OFAC license. These prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person and the receipt of any contribution or provision of funds, goods, or services from any such person.

Export Controls

The U.S. Commerce Department, through Bureau of Industry and Security (BIS), is implementing an extensive series of export controls that are intended to severely restrict Russia’s access to technologies and other items used in military capacities.

New Commerce Control List (CCL)-Based License Requirements for Russia

This final rule adds new license requirements for all Export Control Classification Numbers (ECCNs) in Categories 3-9 of the CCL. Some of these ECCNs with unilateral controls were not previously controlled to Russia. They include microelectronics, telecommunications items, sensors, navigation equipment, avionics, marine equipment, and aircraft components. BIS expects these restrictions will significantly impact Russia’s ability to acquire items it cannot produce itself.

Review Policy of Denial for Licenses to Export, Reexport, or Transfer in Russia

Applications for the export, reexport, or transfer (in-country) of items that require a license for Russia will be reviewed, with certain limited exceptions, under a policy of denial. The categories reviewed on a case-by-case basis are 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.

Expands the Existing Russia ‘Military End Use’ and ‘Military End User’ to All Items Subject to the EAR.

Restrictions on Russian ‘military end users’ and ‘military end uses,’ as seen in 15 CFR 744.21, will now cover all items subject to the EAR with exceptions for: (i) food and medicine designated as EAR99; and (ii) items classified as ECCN 5A992.c or 5D992.c, so long as they are not for Russian “government end users” or Russian state-owned enterprises. Prior to this change only items enumerated in Supplement No. 2 to Part 744 were subject to these controls.

Two New Foreign Direct Product (FDP) Rules for Russia and Russian ‘Military End Users.’

The new final rule creates a new FDP rule for all of Russia (“Russia FDP rule”). This Russia FDP rule establishes a control over foreign-produced items that are:

(i)             the direct product of certain U.S.-origin software or technology subject to the EAR; or

(ii)            produced by certain plants or major components thereof which are themselves the direct product of certain U.S.-origin software or technology subject to the EAR. 

This control 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 will not apply to foreign-produced items that would be designated as EAR99 (items not listed on the CCL), including many consumer items.

The Russia-MEU FDP rule is more extensive than the Russia FDP rule. It applies to foreign-produced items that are:

(i)             the direct product of any software or technology subject to the EAR that is on the CCL; or

(ii)            produced by certain plants or major components thereof which are themselves the direct product of any U.S.-origin software or technology on the CCL. 

These items will be subject to the EAR and 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 certain entities on the Entity List. These restrictions apply to all items, including those designated EAR99, with certain exceptions, and impose a license requirement for certain Russian military end users.

It should be noted that pursuant to 15 CFR 772.1 the definition of “knowledge” includes not only positive knowledge that the circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence, with such awareness inferred from evidence of the conscious disregard of facts known to a person or from a person's willful avoidance of facts.

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. These countries 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.

Restricts the Use of EAR License Exceptions for Russia Exports, Reexports, and In-country Transfers

Only certain sections of the following license exceptions are now available for exports to Russia:

·       TMP (Temporary Imports, Exports, Reexports, and Transfers in Country), for items for use by the news media;

·       GOV, for certain government activities;

·       TSU (Technology and Software Unrestricted), 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 (Baggage), for baggage, excluding firearms and ammunition;

·       AVS (Aircraft, Vessels, and Spacecraft), for aircraft flying into and out of Russia;

·       ENC (Encryption Commodities, Software, and Technology), for encryption items, but not if they are destined for Russian ‘government end users’ and Russian state-owned enterprises; and

·       CCD (Consumer Communication Devices), for consumer communication devices, but not if they are destined for government end users or certain individuals associated with the government.

New Entity List Footnote 3 Designation; 49 New Entities

The Entity List footnote 3 designation indicates that the Russia-MEU FDP rule applies to that entity. 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 footnote 3 entities, with limited exceptions. Footnote 3 also applies to the Russian Ministry of Defence, including the Armed Forces of Russia.  License applications for footnote 3-designated entities will be reviewed under a policy of denial in all cases. Forty-seven entities are being transferred from the MEU List to the Entity List and are being designated with footnote 3. In addition, BIS is adding two new Russian MEUs to the Entity List with a footnote 3 designation. We expect additional entities will be added in the future.

Global Response

The U.S. is not alone in its efforts to punish Russia for its actions in Ukraine. Germany stopped the certification process for the North Stream 2 pipeline, which is meant to deliver natural gas directly from Russia to Germany. The pipeline is owned by a subsidiary of Gazprom.

Canada, Japan and Australia have also announced sanctions against Russia in response to the Ukraine crisis, including targeted sanctions against Russian individuals and financial institutions, and an import/export ban of goods on the Donetsk and Luhansk regions. Canada and Japan also implemented new prohibitions on dealings in Russian sovereign debt. European Union also imposed a sectoral prohibition to finance the Russian Federation, its government and its Central Bank in the hope of limiting the financing of escalatory and aggressive policies.

Conclusion/ Next Steps

While the sanctions and export controls imposed upon Russia have so far have been relatively robust, many have been quick to note that the Russian energy sector has been, at this point, largely spared. Russian oil and gas exports accounted for roughly 36 percent of Russia’s national budget last year, with approximately 70 percent of gas exports and 50 percent of oil exports delivered to Europe. While cutting off Russian oil and gas exports to much of the world would undoubtedly have a substantial impact on the Russian economy, it remains difficult to predict when or if such sanctions may be put in place. It appears as if at this time western leaders will continue to weigh the potential impacts such a move may have outside of Russia, namely in relation to oil and gas prices.

Finally, it remains to be seen whether Russia will be completely “kicked out” of The Society for Worldwide Interbank Financial Telecommunication (SWIFT), a move that many have referred to as a “last resort.” Such a move, if enacted, would likely mirror that of 2012 when SWIFT disconnected Iranian banks after the country was sanctioned by the EU. Following the move, it is believed Iran lost nearly 30 percent of foreign trade and roughly half of its oil export revenue. As things currently stand the West has agreed to disconnect “select” Russian banks from SWIFT, although a complete ban has yet to materialize. SWIFT, which is based in Belgium, recently stated, “We are engaging with European authorities to understand the details of the entities that will be subject to the new measures, and we are preparing to comply upon legal instruction.”