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Volume XII, Number 184

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U.S. Imposes Additional, "Severe" Sanctions on Russia in Response to Russia's Military Advance into Ukraine

As an update to K&L Gates’ previous alert on 24 February, U.S. President Joe Biden announced sanctions and export controls against Russia that are in addition to those imposed on the 21st and 22nd of February. This escalation of sanctions is in response to Russia’s military advance into Ukraine on multiple fronts. The following is a general high-level summary of these measures, some of which involve lengthy and complex rules.

ECONOMIC SANCTIONS

Blocking of Russian Banks and Other Parties

Among the sanctions imposed on 24 February, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) added the following four Russian banks to the Specially Designated Nationals and Blocked Persons List (SDN List): (1) VTB Bank; (2) Bank Otkritie; (3) Sovcombank OJSC; and (4) Novikombank, as well as numerous subsidiaries of each bank. In conjunction with these blocking sanctions, OFAC issued several general licenses (“GLs”) authorizing U.S. persons to wind down certain categories of transactions with specified blocked banks by an appointed deadline. These include: GL 8 (energy related transactions), GL 9 (dealings in certain debt or equity), GL 10 (dealings in derivative contracts), and GL 11 (wind down of other transactions). 

In addition, OFAC has imposed blocking sanctions on a host of other parties, including certain wealthy Russian individuals and their family members. Due to their support of the Ukraine invasion, OFAC has also designated numerous Belarusian individuals and entities to the SDN List, including certain state-owned banks, military institutions, and defense firms. 

U.S. persons are barred from engaging in any transaction, directly or indirectly, involving these SDNs, and the property and property interests of these SDNs are blocked (frozen) within U.S. jurisdictions, including any such property that comes within the possession or control of a U.S. person. These restrictions apply not only to the entities expressly named on the SDN List, but also to any entity or property owned 50% or more by SDN(s).

Sberbank Restrictions

U.S. financial institutions are prohibited from opening or maintaining any “correspondent account” or “payable-through account” for Sberbank, Russia’s largest financial institution, along with 25 of its subsidiaries. Although Sberbank is not subject to blocking sanctions, this measure does cut off its access to U.S. dollar transactions. 

Debt Restrictions

U.S. persons are prohibited from engaging in any dealings in new debt of greater than 14 days maturity and new equity issued by the following 13 Russian state-owned enterprises and entities: Sberbank, AlfaBank, Credit Bank of Moscow, Gazprombank, Russian Agricultural Bank, Gazprom, Gazprom Neft, Transneft, Rostelecom, RusHydro, Alrosa, Sovcomflot, and Russian Railways. As a result of these sanctions, these entities will be prevented from accessing U.S. capital. 

EXPORT CONTROLS

The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) has issued a final rule that vastly expands existing export restrictions for Russia as a destination as well as for specific Russian end-users. The following is an overview of these new restrictions. 

Newly Controlled Items

New export license requirements for a broad array of microelectronics, telecommunications items, sensors, navigation equipment, avionics, marine equipment, aircraft components, and other items, classified under 58 different export control classification numbers on the Commerce Control List of the Export Administration Regulations (EAR) not previously controlled for Russia. 

Policy of Denial & License Exceptions

BIS policy will be to deny most export license applications for Russia. Greater case-by-case consideration will be given for flight safety, maritime safety, humanitarian needs, government space cooperation, civil telecommunications infrastructure, and government-to-government activities, and to support limited operations of partner country companies in Russia. In addition, under the final rule, many of the EAR-based license exceptions that would normally relieve exporters from specific licensing requirements do not apply for Russia exports, re-exports, and transfers.

Military Use Restrictions

The final rule expands export restrictions for “military end uses” and “military end users” in Russia. Previously, this restriction applied to certain specified items, but now export restrictions will apply to all items subject to the EAR with limited exceptions. 

Two “Foreign Direct Product Rules” for Russia

Also significantly, the final rule establishes two new versions of the “foreign direct product rule” (FDPR) for Russia. Under the FDPR, non-U.S. origin items are subject to the EAR and its licensing requirements if they are the “direct product” of certain U.S.-origin technology or software. In 2020, BIS implemented a more expansive version of the FDPR for the Chinese company Huawei and certain affiliates. This final rule establishes two special versions of the FDPR for Russia, one for exports, re-exports, and transfers to/for Russian military end users (Russia MEUs), which greatly expands the scope of non-U.S.-origin items subject to U.S. export controls, and one for all other exports, re-exports, and transfers to Russia. The FDPR for Russia MEUs does not apply to exports from the following partner countries: 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.

Entity List Designations

Forty-nine Russian entities have been added to the Entity List, which means a license is required to export, re-export, or transfer any item subject to the EAR to/for the listed entity. Most of these entities were transferred from the MEU List administered by BIS to the Entity List, where they carry the footnote 3 designation. This means the Russia MEU FDPR applies to these entities, broadening the scope of non-U.S. items that are controlled for the Russian MEUs. 

Copyright 2022 K & L GatesNational Law Review, Volume XII, Number 56
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About this Author

Jeffrey Orenstein Trade Lawyer KL Gates Law Firm
Counsel

Jeffrey Orenstein is a counsel in the firm’s Washington, D.C. office. He has over 12 years of experience handling international trade and transportation matters. He specializes in providing strategic counsel in the areas of U.S. sanctions, export controls, customs, maritime, and railroad regulation. He is a trusted advisor for trade-related compliance, investigations, due diligence, training programs, and representation in enforcement actions, including matters before the Office of Foreign Assets Control (OFAC), the Bureau of Industry and Security (BIS), the Directorate of Defense Trade...

202.778.9465
Steven F. Hill, KL Gates, enforcement matters lawyer, export controls attorney
Partner

Steven Hill is a partner in the firm’s Washington, D.C. office. He has nearly 20 years of experience in a broad array of international trade regulation compliance and enforcement matters, particularly export controls, including the Export Administration Regulations (EAR) and International Traffic in Arms Regulations (ITAR), sanctions laws enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), customs and other importation laws, anti-boycott laws, and anti-corruption laws, such as the Foreign Corrupt Practices Act (FCPA).

202-778-9384
Stacy Ettinger, KL Gates Law Firm, Public Policy and Financial Matters Attorney
Partner

Stacy J. Ettinger is a partner in the firm’s Washington, D.C. office and focuses her practice on public policy. She has over 20 years of experience working in Congress and the executive branch. Her experience spans a variety of fields, including international trade, intellectual property, and regulatory issues, as well as food and product standards, motor vehicle safety, and consumer financial services.

Ms. Ettinger has substantial experience working closely with senior U.S. and foreign government officials and Fortune 500 executives, navigating...

202-778-9072
Erica L. Bakies, Antitrust, Competition, Attorney, KL Gates, Law Firm
Associate

Erica Bakies is an associate in the firm’s Washington, D.C. office. She works with both the Antitrust, Competition & Trade Regulation practice group and the Government Contracts & Procurement Policy practice group. Ms. Bakies’ government contracts and procurement policy practice focuses on a wide range of federal procurement issues, including bid protests and regulatory compliance. In international trade, Ms. Bakies concentrates on export controls such as the Export Administration Regulations, sanctions enforced by the United States Department of the Treasury’s...

202-778-9887
Jerome J. Zaucha, KL Gates, customs lawyer, trade remedies attorney
Partner

Mr. Zaucha, a partner in K&L Gates’ Washington, D.C. office, concentrates his practice on international trade, representing a wide spectrum of multinational companies based both in and outside the U.S.  He has substantial experience in all areas of international trade law, including export controls, customs, and trade remedies and agreements.

Mr. Zaucha represents clients in every area of export regulation:  export control and trade embargo regulations administered by the Directorate of Defense Trade Controls (DDTC), the Bureau of Industry...

202-778-9013
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