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Volume XII, Number 279

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Russian Risk: Transactions with Russian Banks and Exports to Russia Create Greatest Exposure Under New U.S. Ukraine-Related Sanctions

Key Takeaways of OFAC (Treasury) and BIS (Commerce) Actions

  • Major Russian Banks Blocked from the U.S. Financial System. Six major Russian banks — VEBPromsvyazbank (PSB)VTB Bank, Otkritie, Sovcombank, and Novikombank — were named Specially Designated Nationals (SDNs), effectively cutting them off from any activity involving a U.S. person or U.S. bank.

Meanwhile, Sberbank was prohibited from U.S. correspondent or payable-through accounts, severely restricting the bank’s ability to conduct U.S. Dollar transactions. Numerous subsidiaries of those banks were also sanctioned.

  • Many Exports to Russia Prohibited Without a License. On March 3, 2022, the United States will use its export control regime to prohibit numerous U.S.-origin items, as well as non-U.S. items that are the product of U.S. technology or software, from being exported to Russia without a license. This effective prohibition covers a massive list of items and may affect exports across industries including materials processing, electronics, computers, telecommunications and information security, lasers and sensors, navigation and avionics, and marine transport.

  • General Licenses Provide a Brief Wind-Down Period. Many of the restrictions provide for U.S. persons to complete or wind down current transactions that would otherwise be prohibited within 30 days. Energy-sector transactions will have an authorized wind-down period of four months.

The United States has responded to Russia’s invasion of Ukraine with a slate of sanctions and export controls aimed at hobbling the finance and industry that supports the Russian military. The U.S. measures create risk for U.S. and non-U.S. entities doing business in Russia. Below we explore the nature and extent of those risks as they stand.[1]

U.S. Sanctions Against Russian Banks

SDN Designations

On February 22 and 24, 2022, President Biden and the U.S. Treasury Office of Foreign Assets Control (OFAC) announced an array of sanctions targeting Russian banks.[2] Those sanctions include SDN designations of six major Russian banks, and their subsidiaries as follows:

  • Vnesheconombank (VEB), Russia’s foreign development bank, which was previously subject to U.S. SSI designations;

  • Promsvyazbank PJGS (PSB), a major finance source for the Russian military;

  • VTB, Russia’s second-largest financial institution;

  • Otkritie, a state-owned credit institution;

  • Sovcombank, the third largest privately owned financial institution in Russia by total assets, and Russia’s ninth largest bank overall; and

  • Novikombank, a Russian state-owned bank primarily serving the military and military suppliers.

When a bank is designated as an SDN, no U.S. person, including U.S. banks, may participate in any transaction involving that SDN. Further, if non-U.S. companies provide goods or services to, or material support for, any of those SDN banks, those non-U.S. companies risk also being sanctioned by the United States.

For that reason, the SDN designation often has the effect of keeping U.S. and non-U.S. parties, particularly banks, from engaging in transaction with the sanctioned SDN entity.

Prohibitions on U.S. Accounts For Sberbank

Sberbank. In a measure one step below the complete blocking of an SDN designation, the United States imposed sanctions on Sberbank and many of its subsidiaries and affiliates. Under those sanctions, no U.S. bank may open or maintain a correspondent or payable-through account for the sanctioned banks, nor may a U.S. bank process a transaction in which a sanctioned bank has an interest.

Although this sanction does not prohibit all U.S. persons from transacting with Sberbank, it will effectively restrict U.S.-person transactions involving Sberbank because no U.S. bank may process such a transaction.

Export Restrictions to Russia

Concurrent with the sanctions discussed above, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) issued a rule requiring a license for the export of a broad array of items to Russia, both from the United States and from third countries. BIS will use the long arm of its “Foreign Direct Product Rule” to control non-U.S. items that are the direct product of certain U.S.-origin technology and software.

New Broad License Requirements

The new BIS rules add license requirements for the export of any items to Russia that fall under exports classification Categories 3-9 on the U.S. Commerce Control List (CCL). Most of those items were not previously controlled for exports to Russia. That requirement will apply even to certain low-level, commercial-off-the-shelf commodities, software, and technology in the fields of microelectronics, telecommunication, sensors, navigation equipment, avionics, marine and aircraft components. Further, the use of export license exceptions for those items will be substantially limited.

Review Policy

Applications for the export, reexport, or transfer of items that require a license for Russia will be reviewed under a policy of denial.

However, applications for exports, reexport or transfer of items related to the safety of flight, maritime safety, humanitarian needs, government space cooperation, civil telecommunications infrastructure, government-to-government activities, and support of limited operations of U.S. and allied countries subsidiaries and JVs companies in Russia will be reviewed on a case-by-case basis.

New Foreign Direct Product Rules

The new rule creates two new Foreign Direct Product Rules (FDPR) as follows:[3]

  • The Russia FDPR; and

  • The Russia-Military End User (MEU) FDPR.

Russia FDPR

Russia-MEU FDPR

The new Russia FDPR establishes controls over foreign produced items that are:

 

  1. The direct product of certain U.S. origin software or technology subject to the EAR; or

  2. Produced by certain plants or major components thereof that are themselves the direct product of certain U.S. origin software or technology subject to the EAR.

Those new controls apply when exporters have knowledge that the foreign produced item is destined to Russia or will be incorporated into or used in the production or development of any parts, component, or equipment produced or destined to Russia. This FDPR does not apply to foreign-produced items that are designated EAR99.

The Russia-MEU FDPR applies to foreign produced items that are:

 

  1. The direct product of any software or technology subject to the EAR that is on the Commerce Control List, or

  2. Produced by certain plants or major components thereof that are themselves the direct product of any U.S.-origin software or technology on the CCL.

Such foreign produced end items will be subject to the EAR and require a license if an entity with a footnote 3 designation on the Entity List (see below) is a party to the transaction, or if there is knowledge that the item will be incorporated into or used in the production, development of any part, component or equipment produced, purchased, or ordered by such entity. Unlike the previous FDPR, this Russia-MEU FDPR applies to all items, including those designated as EAR99 subject to license authorization for footnote 3 designated Russian MEUs.

Entity List Footnote 3

The new rule will add dozens of parties to the U.S. Entity List and add a “Footnote 3” designation. Footnote 3 indicates that the Russia-MEU FDPR applies to that listed entity. For those entities, a license is required to export, reexport, or transfer all items subject to the EAR, including foreign produced items under the Russia-MEU FDPR.

Footnote 3 is also applicable for exports to the Russian Ministry of Defense, including the Armed Forces of Russia, wherever located. License applications for Footnote 3 designated entities will be reviewed under a policy of denial.

As of publication, a total of 45 entities have been transferred from the MEU List to the Entity List and are now designated under Footnote 3. BIS is also adding two new Russian Entities with a footnote designation. Additional entities may be added in the future.

New MEUs restrictions

Restrictions on Russian MEUs and military end-uses now cover all items subject to the EAR with the exception of food and medicine designated as EAR99, and items designated as ECCN 5A992.c or 5D992.c; unless those are for Russian government end-users or Russian state-owned enterprises.

Further U.S. Sanctions Against Russia

Debt and Equity Prohibitions

The United States also fired a shot at Russian capabilities for financing activity such as the Ukraine invasion. Directive 3 under E.O. 14024, prohibits U.S. persons from dealing in the debt of longer than 14 days maturity or the equity of certain Russian banks and state-owned businesses, as follows:

  • Sberbank

  • Russian Agricultural Bank

  • Gazprombank

  • Gazprom

  • Gazprom Neft

  • Transneft

  • Rostelecom

  • RusHydro

  • Alrosa

  • Sovcomflot

  • Russian Railways

  • Alfa-Bank

  • Credit Bank of Moscow

Additionally, sanctions prohibit participation in the secondary market for 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.

Designation of Russian Oligarchs

The United States government views the elite circle of oligarchs that surround Putin as some of the most powerful people in Russia. Many of those individuals have worked to support the regime’s illegal invasion of Ukraine and have used family members to move assets and to conceal wealth they have effectively stolen from the Russian people. For that reason, the U.S. designated as SDNs many of these individuals.

U.S. Sanctions on Nord Stream 2

OFAC also took aim at a massive project for the Russian government and Russian oil and gas industry, the Nord Stream 2 pipeline, a project that would run from northwestern Russia to Germany under the Baltic Sea. While Germany has effectively halted the project, the United States has added the Swiss company in charge of building Russia’s Nord Stream 2 gas pipeline, and its German chief executive officer, Matthias Warnig, to the SDN List.

FOOTNOTES

[1]     We note that the sanctions and the concomitant risks may be subject to changes in the coming days and weeks. We will update this article or publish related articles to address those changes.

[2]     Blocking Property With Respect To Specified Harmful Foreign Activities of the Government of the Russian Federation, available at https://home.treasury.gov/system/files/126/14024.pdf.

[3]     Exports, reexports, and transfers from the following countries are not subject to these new FDPR: 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.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 56
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About this Author

Reid Whitten, partner, Sheppard Mullin Law Firm
Partner

Reid Whitten works with clients around the world to plan, prepare, and succeed in global business transactions.

In the areas of U.S. and international sanctions, export and defense export controls, and anti-corruption regulations, he supports clients in detecting and deterring potential compliance issues as well as conducting and defending investigations and enforcements. Mr. Whitten also advises on anti-dumping, anti-money laundering, and anti-boycott regulations.

Mr. Whitten is a thought leader on cross-border business regulations. He teaches a seminar on The Law of...

202-469-4968
Julien Blanquart International Trade Lawyer Sheppard Mullin Law Firm
Associate

Julien Blanquart is an International Trade associate in the Government Contracts, Investigations & International Trade in the firm's Brussels and London offices.

Areas of Practice

Julien's practice focuses on compliance counseling, training and investigations in the areas of export controls, economic sanctions, anti-corruption (FCPA and Sapin II), customs, and foreign investment reviews (CFIUS).

Over the course of his education he has acquired the legal skills and experience to assist the International Trade team in matters involving EU, U.S., and...

+32.02.290.7916
Lisa C. Mays, Sheppard Mullin, Government Investigations Attorney, International Trade Lawyer
Associate

Lisa Mays is an associate in the Government Contracts, Investigations & International Trade Practice Group in the firm's Washington D.C. office.

  • J.D., The George Washington University Law School, 2015

  • B.A., University of Southern California, 2010

202.747.2307
Fatema Merchant, international, trade, Lawyer, Sheppard Mullin
Associate

Fatema Merchant is an associate in the Government Contracts, Investigations & International Trade Practice Group in the firm's Washington, D.C. office.

Fatema’s practice focuses on investigations and compliance counseling related to international trade laws.  She has extensive experience with U.S. Foreign Corrupt Practices Act and U.S.-Sanctioned Countries investigations, compliance, due diligence, and training.  Fatema also advises clients on compliance with International Traffic in Arms Regulations, Export Administration Regulations, Customs and Anti-Money Laundering...

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