Russia Sanctions: 5 Key Points for Companies
Friday, March 17, 2023

The United States, the European Union, and the United Kingdom recently imposed new sanctions on Russia to coincide with the one-year anniversary of Russia’s invasion of Ukraine, a measure that the European Union described as its “10th package of sanctions against Russia” to date.

So, one year in, after 10 rounds of sanctions against Russia, where do things stand? Here are five key points for companies to consider:

1. For any remaining business with or involving Russia, it is imperative to manage compliance carefully.

Although Russia has been described as “the most sanctioned country in the world,” this is not exactly accurate, as there remains a range (arguably, a substantial range) of business with Russia that is permissible. For companies engaged in such business, it is of paramount importance to manage the various vectors of Russia-related risk, including sweeping export controls, sanctions on Russia’s financial system, and the web of multijurisdictional restrictions.

2. Authorities are hyper-focused on diversion of Western items to Russia’s defense industrial base and to the battlefield, and companies should consider auditing their sales channels accordingly.

Media reports regarding the discovery of Western components in Russia’s drones have catalyzed a robust response from the U.S. government, including the formation of the Disruptive Technology Strike Force, the detailing of 25 prosecutors to focus on sanctions and export control violations, and the publication of an advisory on the risk of third-party intermediaries diverting items to Russia. This is a key area of focus for enforcement authorities, and suppliers of items subject to heightened diversion risk (such as drone components, electronics, and industrial equipment) should consider how to mitigate risk of “gray market” activity, including through heightened diligence and audits.

3. Exporters of non-U.S. items to Russia should consider the worldwide jurisdictional reach of U.S. export controls to the extent that items incorporate U.S. content or are based on U.S. technology.

U.S. export controls under the Export Administration Regulations reach far beyond U.S.-origin items to cover non-U.S. items that incorporate more than a “de minimis” amount of controlled U.S. content or are the “direct product” of certain U.S. technology and software. This is especially the case with respect to exports to Russia, as the U.S. Department of Commerce has significantly expanded the “foreign direct product rule” for such exports. The result is that U.S. export controls sweep in a broad range of non-U.S. items, often without companies realizing it. For any company exporting non-U.S. items to Russia, it is essential to assess the export controls applicable to the items.

4. While there is broad overlap among the major sanctions programs (U.S., EU, UK), there remain key subtle differences to consider.

Over the last year, across several rounds of sanctions, the United States and its partners have imposed broadly similar sanctions against Russia, and remain committed to avoiding daylight between members of the U.S.-led coalition. However, among the major sanctions programs, there are subtle differences that could prove critical for a given transaction. Therefore, it is important for companies to understand which sanctions are applicable under the circumstances, and to assess the specific requirements of those sanctions.

5. Companies seeking to exit investments in Russia can face a conflict of laws issue if required to pay an “exit tax” in Russia.

In December, Russia issued new measures for investors from “unfriendly countries” seeking to exit investments in Russia, purporting to require them to sell at a 50 percent discount and contribute 10 percent of the sale price to Russia’s state budget. Last month, however, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued guidance indicating that the payment of this “exit tax” could violate sanctions if Russia’s Central Bank or Ministry of Finance is involved, unless the concerned party has obtained a license from OFAC. It is important for investors impacted by this “exit tax” to assess the potential applicability of U.S. sanctions.

 

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