The U.S. and its allies have expanded sanctions on Russia and Belarus on an almost daily basis over the last week and have committed to continue to do so if the situation in Ukraine continues to deteriorate.
U.S. businesses should take immediate steps — detailed later in this alert — to review their relationships with customers, lenders and business partners, wind down business with restricted entities where appropriate, and examine the export classification of items being exported, re-exported and transferred, to ensure compliance with these growing international restrictions.
Sanctions include comprehensive and partial restrictions on doing business with certain Russian and Belarusian banks, entities and individuals; an embargo on the Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR) in response to Russia’s recognition of DNR and LNR as independent states and not parts of Ukraine; restrictions on certain debt and equity transactions; export controls expanding the range of items that require U.S. government authorization before they may be exported or re-exported to Russia; and restrictions on the supply of items to Russian military end users or military end uses.
Blocked and Restricted Parties
The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) imposed new partial and comprehensive sanctions on a number of major Russian banks and entities as well as on certain prominent Russian individuals and their families.
OFAC named a number of individuals and entities to its List of Specially Designated Nationals and Blocked Persons (SDN List), prohibiting all activities with such parties. The designated entities include VTB Bank PJSC (VTB), Russia’s second-largest bank, and 20 of its subsidiaries; State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB) and Promsvyazbank PJSC (PSB) and 42 of their affiliates; PJSC Bank Financial Corporation Otkritie and 12 of its subsidiaries; Sovcombank OJSC and 22 of its subsidiaries; and JSC Novikombank. OFAC noted that VTB is one of the largest financial institutions that it has ever blocked.
OFAC issued certain General Licenses to help U.S. businesses adjust to the transition, including General License No. 2, which authorizes transactions by U.S. persons with VEB that are ordinarily incident and necessary to the servicing of bonds issued before March 1, 2022 by the Central Bank of the Russian Federation, the Ministry of Finance of the Russian Federation, and the National Wealth Fund of the Russian Federation (except transactions prohibited by Directive 1A or involving other persons blocked pursuant to Executive Order 14024); and General License No. 3, which authorizes a wind-down of transactions involving VEB through March 23, 2022.
OFAC also added the Central Bank of the Russian Federation, the Ministry of Finance of the Russian Federation, and the National Wealth Fund of the Russian Federation to the Non-SDN Menu-Based Sanctions list (NS-MBS List). This list identifies entities subject to measures short of full blocking sanctions and reflects the restrictions on dealings with these parties imposed by Directive 1A, as discussed more fully under “Debt and Equity Restrictions” below.
OFAC also placed Sberbank, Russia’s largest bank, and 25 of its subsidiaries on OFAC’s Correspondent Account or Payable Through Account Sanctions List (CAPTA List). This restriction is based on a new Directive 2 issued by OFAC pursuant to Executive Order 14024, and prohibits U.S. financial institutions from:
- Opening or maintaining a correspondent account or payable-through account for, or on behalf of an entity on the CAPTA List, or their property or interests in property; and
- Processing a transaction involving an entity on the CAPTA List, or their property or interests in property.
The prohibitions effectively ban Sberbank from conducting transactions in U.S. dollars or with U.S. financial institutions. They take effect on March 26, 2022.
A number of non-bank entities have also been added and will continue to be added to the SDN List. The Department of State is in the process of imposing sweeping sanctions that target Russia’s defense sector to curtail weapon development and production companies. Among the entities that are being added to the SDN List are defense-related entities, including firms that make combat aircraft, infantry fighting vehicles, electronic warfare systems, missiles and unmanned aerial vehicles for Russia’s military.
OFAC sanctioned a number of individuals who include oligarchs and powerful Russian elites, prominent individuals in Russia’s financial sector, individuals related to Nord Stream 2 Pipeline, and their families.
U.S. Company Compliance Relating to Blocked and Restricted Parties
U.S. businesses should run all parties that they transact with in Russia, Belarus and the surrounding regions through the prohibited parties lists to ensure that they have not been restricted through the new sanctions. Please note that U.S. persons are broadly prohibited from transacting or dealing with parties on the SDN Lists or entities of which SDNs own 50% or more, directly or indirectly, individually or in the aggregate with other SDNs. The 50% ownership rule also applies to some of the non-SDN lists (including the list that Sberbank is on). “U.S. persons” include U.S. entities and their non-U.S. branches; individual U.S. citizens and lawful permanent residents (“green card” holders), no matter where they are located or employed; and persons present in the United States.
Trade Embargo on the Donetsk and Luhansk Regions
President Biden issued an executive order targeting activities in DNR and LNR for comprehensive sanctions in response to Russia’s recognition of these regions as independent states and not parts of Ukraine. These sanctions mirror the embargo that was imposed with respect to the Crimea region of Ukraine. The executive order is unclear on whether the sanctions apply only to the areas that DNR and LNR actually control, or also to areas they claim are part of their sovereign territory but do not currently control. We recommend erring on the side of caution until a clarification is provided.
Specifically, the executive order prohibits the following activities with respect DNR and LNR:
- New investment by U.S. persons in these regions. The scope of prohibited “new investment” is not defined in the executive order but has been interpreted broadly under other sanctions programs to include equity investment, the commitment or contribution of funds or other assets (including extensions of credit) and contracts for the economic development of resources in the region.
- The importation into the U.S., directly or indirectly, of any goods, services or technology from these regions.
- The exportation, re-exportation, sale or supply, directly or indirectly, from the U.S., or by a U.S. person, wherever located, of any goods, services or technology to these regions.
- The approval, financing, facilitation or guarantee by a U.S. person, wherever located, of a transaction by a non-U.S. person that would be prohibited by the order if conducted by a U.S. person or within the United States.
“U.S. persons” include U.S. entities and their non-U.S. branches; individual U.S. citizens and lawful permanent residents (“green card” holders), no matter where they are located or employed; and persons present in the United States.
General License No. 17 provides a wind-down period for transactions by U.S. persons involving DNR and LNR and authorizes such wind-down transactions through March 22, 2022, so long as the transactions do not involve a person whose property is blocked under the order, unless separately authorized.
Additional General Licenses authorize certain other transactions with some restrictions, including the exports of certain agricultural commodities, medicine, medical devices, transactions incident and necessary to the prevention, diagnosis or treatment of COVID-19, transactions incident to the receipt or transmission of telecommunications and mail services to DNR and LNR, and export of certain services and software incident to the exchange of personal communications over the internet.
U.S. Company Compliance Relating to the Trade Embargo
The DNR and LNR embargo is a comprehensive prohibition. As such, U.S. businesses should conduct a careful analysis to see whether they transact any business directly or indirectly in these regions. A large majority of these transactions will have to be wound down by March 22, 2022 as the General Licenses are very limited.
Debt and Equity Restrictions
OFAC published Russia-related Directive 1A under Executive Order 14024, to further expand existing prohibitions on transactions related to certain Russian sovereign debt. U.S. financial institutions are now prohibited from participating in the secondary market for ruble or non-ruble denominated bonds issued after March 1, 2022 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.
OFAC also prohibits U.S. persons from participating in transactions involving certain new debt and new equity of numerous Russian banks and additional critical Russian businesses in a range of sectors, including energy, telecommunications and transportation. Entities designated under this new restriction include: Credit Bank of Moscow PJSC, Gazprombank JSC, JSC Alfa-Bank, JSC Russian Agricultural Bank, JSC Sovcomflot, OJSC Russian Railways, PJSC Alrosa, PJSC Gazprom, PJSC Gazprom Neft, PJSC Rostelecom, PJSC RusHydro, Sberbank and PJSC Transneft. Directive 3 pursuant to E.O. 14024, which issues these restrictions, prohibits U.S. persons from engaging in transactions involving:
- New debt or new equity of entities designated under the Directive (or their property or interests in property), all transactions in, provision of financing for, and other dealings in, new debt of longer than 14 days’ maturity or new equity where such new debt or new equity is issued after March 25, 2022 for entities designated pursuant to Directive 3.
- New debt or new equity of entities designated under Directive 3 in the future, all transactions in, provision of financing for, and other dealings in new debt of longer than 14 days’ maturity or new equity where such new debt or new equity is issued on or after the 30th day after the designation of further entities.
For the purposes of this Directive, “debt” includes “bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers’ acceptances, discount notes or bills, or commercial paper,” and “equity” includes “stocks, share issuances, depositary receipts, or any other evidence of title or ownership.” Directive 3 applies to U.S. funds, which “may not buy, sell, or otherwise engage in transactions related to debt or equity of the blocked Russian financial institutions and must block such holdings,” unless authorized.
These restrictions are intended to prevent major Russian companies and banks of concern from raising capital and revenue in the U.S. market.
President Biden announced major restrictions on the exports of certain U.S. products to cut off Russian access to critical technologies in the defense, aerospace and maritime sectors. The Department of Commerce’s Bureau of Industry and Security (BIS) also announced new licensing requirements for many items destined for Russia, including semiconductors, computers, telecommunications, information security equipment, lasers and sensors.
The new rules added new license requirements with respect to Russia for exports, re-exports and transfers (in-country) of a significant number of items controlled under the Export Administration Regulations (EAR). BIS added license requirements for all items classified under ECCN Categories 3-9 of the EAR’s Commerce Control List (CCL), which include a wide range of products, such as microelectronics, telecommunications, marine equipment and aircraft components, as well as related software and technology. BIS also imposed a strict new license review policy under which applications to export and reexport to Russia will be reviewed under a policy of denial and significantly restricted the availability of license exceptions for Russia.
BIS is in the process of adding export controls that target oil refining, as a key source of revenue that supports the Russian military. These export controls will limit U.S. ability to export oil and gas extraction equipment and technology that would otherwise support Russia’s refining capacity over the long term.
Expanded Military End Use / Military End User Rule and Foreign Produced Direct Product Rule
BIS also expanded the scope of “military end use” and “military end user” restrictions on Russia. The new restrictions encompass nearly all items subject to the EAR and essentially prevent exports of U.S.-origin items and other items subject to U.S. jurisdiction from being used by Russian military end users.
BIS also expanded its “foreign-produced direct product rule” that establishes U.S. export control jurisdiction over certain items produced outside of the U.S. when they are destined for Russia and are the direct product of certain U.S. software or technology, or are produced by plants or components of plants that are the direct product of certain U.S. software or technology.
U.S. Company Compliance Relating to Export Controls
U.S. businesses that export or re-export to Russia will have to review the ECCN classification of their products as well as whether any of their foreign affiliates export or re-export foreign-produced direct products of U.S. software or technology to Russia in order to determine whether they are still permitted to continue exports or reexports of their products. Licenses are unlikely to be granted. U.S. businesses should also conduct additional due diligence to assure that they comply with the new military end use and military end user restrictions.
As Belarus has gradually become more involved in supporting Russia in the invasion of Ukraine, the U.S. has initiated implementation of a number of restrictions on Belarus that mirror the restrictions on Russia. A number of individuals, entities and banks have been added to the SDN List, including eight entities that are involved in the Belarusian defense sector; Belarussian Bank of Development and Reconstruction Belinvestbank JSC (Belinvestbank), Bank Dabrabyt JSC, Belinvestbank-affiliated LLC Belinvest-Engineering; and CJSC Belbizneslizing. Additional entities are being added each day, including 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.
Considerations for U.S. Companies
We recommend that companies doing business in Russia, Belarus and Ukraine:
- Put in place robust procedures to screen customers, distributors and other third parties against the various prohibited parties lists to ensure compliance with the new sanctions.
- Wind down any business with DNR and LNR immediately to comply with the March 22, 2022 deadline.
- Determine whether they have any credit outstanding to, or contractual payment terms with, entities that are restricted pursuant to the debt and equity sanctions discussed in Section 3 above.
- Confirm that the company is not transacting with or through any banks that are sanctioned.
- Review the export classification of all items exported, re-exported or transferred (in country) to or within Russia, including foreign-made items, and determine whether the new export regulations restrict the export, re-export or transfer (in country) of such products.
- Ensure that wind-down activities comply with the applicable sanction allowances, because different sanctions allow for different wind-down periods and activities.
U.S. companies should expect additional measures as the U.S. and Europe continue coordinating a joint response to Russia’s activities in Ukraine. We strongly encourage companies with business in Europe to carefully monitor developments and review potential transactions and contacts with Russia, Ukraine, and Belarus that may be impacted by the new restrictions.