Trade Compliance Flash: Continued Rapid Expansion of U.S. Economic Sanctions and Trade Controls Targeting Russia and Belarus
There have been a number of new developments concerning the U.S. economic sanctions and export controls since our previous alert on February 28, 2022, issued in response to Russia's invasion of Ukraine. Over the past three weeks, the United States continues to seek ways to increase the pressure on Russia for its actions in Ukraine, imposing further economic sanctions, import bans, and export controls with respect to Russia as well as some relating to Belarus for its role in supporting Russia's aggression.
A few key highlights, covered in more detail below:
- Executive Order (E.O.) 14066, issued on March 8, 2022, imposing an import ban on certain Russian-origin oil and gas products and prohibiting new investment by U.S. persons in Russia's energy sector
- E.O. 14068, issued on March 11, 2022, imposing an import ban on Russian-origin fish and seafood (including preparations thereof), alcoholic beverages, and non-industrial diamonds; banning the supply of U.S. dollar-denominated banknotes from the U.S. or by U.S. persons to the Government of the Russian Federation or any person located in Russia; and providing authority for further import bans of any other Russian origin products and for further prohibitions on U.S. person investment in sectors of the Russian economy
- The removal of several Russian and a few Belarusian banks from the international Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment system
- The U.S.'s impending revocation of Russia's and Belarus' Most Favored Nation (MFN) status under the framework of the World Trade Organization (WTO)
- The issuance of numerous General Licenses and important sanctions guidance in the form of Frequently Asked Questions (FAQs) by the U.S. Department of State's Office of Foreign Assets Control (OFAC)
- Numerous new OFAC designations of Russian entities and individuals on the Specially Designated Nationals and Blocked Persons List (SDN List)
- Sweeping new export controls imposed by the U.S. Department of Commerce Bureau of Industry and Security (BIS) on Belarus, similar to those recently imposed on Russia
- Increased and new export controls issued by BIS relating to the oil and gas sector of Russia
- New export controls on "luxury items" issued by BIS to Russia, Belarus, and certain individuals
- Multilateral Russian Oligarch Task Force launched by U.S. Department of Justice (DOJ) and Department the Treasury (Treasury)
- Russia's financial sector on the brink. The actions of the past few weeks have reinforced and expanded the initial wave of economic sanctions aimed at crippling Russia's financial sector and disentangling Russia's largest banks from U.S. and global financial systems. Perhaps more than any other measures, those targeted at Russia's financial sector have put extreme pressure on companies headquartered in the U.S., Europe, and other allied countries to proceed with extreme caution from a compliance risk perspective, as many look to wind down or withdraw from the Russian market. Even those companies currently committed to staying in Russia are experiencing significant difficulties carrying on routine business operations as a function of the proliferation of sanctioned Russian banks and the narrowing options for banking, payments, and related financial services.
- Symbolic, as well as economic, costs imposed. Overall, the U.S. continues to seek ways to hold Russia accountable and isolate it from the global economic community for its invasion of Ukraine. Along with sanctions measures with more significant financial consequences for Russia, the U.S. has recently taken measures whose impact is primarily symbolic, such as banning the import of certain Russian origin goods, banning the export of luxury goods to Russia, and the impending revocation of Russia's MFN status, in order to further diminish and erode Russia's position in international community.
- Close coordination with U.S. allies continues. The U.S.'s emphasis on international collaboration continues, with a number of the recent measures taken in coordination with other governments, and the U.S. continues to take the lead in implementing many measures: for example, the U.S., G7 members, and several other countries have announced their intentions to revoke Russia's MFN status; the U.S. has imposed an import ban on certain Russian oil and gas products, with the U.K. announcing its intention to do the same under a phased approach; the U.S., U.K., and EU have announced export bans on luxury goods to Russia; and South Korea has joined the list of countries that will impose stricter export controls with respect to Russia generally.
- Impact on Russia's energy sector. The Russian energy sector continues to be a relatively divisive issue for the U.S. and its allies. With E.O 14066, the Biden administration seeks to further target Russia's energy sector while still avoiding collateral damage to U.S. allies, particularly Germany and other members of the EU. Although some countries such as the U.K. have joined the U.S. effort to further sanction this sector, a key source of revenue for Russia, others like Germany and Hungary have been less willing to do so.
- Import ban on Russian crude oil and related products leaves important question open. The import ban under E.O. 14066 prohibits importation of Russian-origin crude oil, unless the crude oil has been substantially transformed in a different country. However, OFAC did not define substantial transformation whichmay become a critical issue for importers. Without a definition from OFAC, importers should rely on CBP's guidance on substantial transformation and be aware that recent court cases on substantial transformation indicate a potential shift in CBP guidance regarding what constitutes a substantial transformation.
- Much broader action could be coming from the U.S. and soon. E.O. 14068 leaves a few open-ended issues that U.S. companies with any investments, customers, or operations involving Russia and Belarus will need to monitor (if they are not already).
- The E.O. provides authority for imposing import bans on any Russian-origin products, so this area seems like a possible avenue for increasing pressure on Russia that the U.S. may pursue by expanding the list of prohibited items. As we've seen thus far, a key component of the Biden administration's economic strategy towards Russia is ensuring it has the option to escalate sanctions and export restrictions as it sees fit.
- Similarly, the E.O. provides authority for prohibiting U.S. person investment in additional sectors of the Russian economy. Once again, this provision is open-ended by design to give the U.S. flexibility to carefully target and cut off additional sectors of the Russian economy from U.S. foreign investment.
- Many companies have already paused investments or joint ventures in Russia or exited the region entirely in the wake of the expanded U.S. sanctions currently in place – we have seen first-hand that these exits can be complicated and may raise their own U.S. sanctions compliance challenges. U.S. companies seeking to remain in Russia despite the open-ended potential restrictions would be wise to proceed with caution and adopt measures (both financially and operationally) to enable a swift and smooth exit if necessary. This may include modifying contracts it has with its vendors, customers, and other Russia-based partners.
- Exporters of luxury goods should exercise care. U.S. companies involved in the export of luxury goods (including vehicles, alcoholic beverages, tobacco products, and non-industrial diamonds) should carefully look through the list of items covered by the new licensing requirement and ensure they do not attempt to export such items to Russia or Belarus (or to newly sanctioned Russian and Belarusian oligarchs and "malign actors") without a license from BIS. The term "luxury goods" is broad in scope and exporters should be sure to check all of Supplement No. 5 to Part 746 of the Export Administration Regulations (EAR) for the full list. We envision a very narrow set of circumstances that will allow companies to successfully obtain a license under these new restrictions, given the present situation and BIS's stated licensing policy.
Overview of New U.S. Economic Sanctions
Executive Order 14066
On March 8, 2022, President Biden issued E.O. 14066, "Prohibiting Certain Imports and New Investments with Respect to Continued Russian Federation Efforts to Undermine the Sovereignty and Territorial Integrity of Ukraine." This E.O. (1) imposes an import ban on certain Russian-origin oil and gas products; (2) prohibits "new investments" by U.S. persons in Russia's energy sector, and (3) prohibits U.S. persons from approving financing, facilitating, or guaranteeing transactions which, if conducted by a U.S. person, would be prohibited by the E.O.
- The E.O. prohibits importation into the U.S. of the following Russian origin products:
- Crude oil
- Petroleum fuels, oils, and products of their distillation
- Liquefied natural gas
- Coal products
- OFAC issued guidance in the numerous FAQs relating to E.O. 14066
- In order to determine which products are considered of Russian origin, FAQ 1019 clarifies that Russian-origin products are those "produced, manufactured, extracted, or processed" in Russia. Russian-origin goods that have been "incorporated into" or "substantially transformed" into a new article of commerce outside of Russia are not considered to be Russian-origin for purposes of this import ban.
- OFAC guidance in FAQ 1019 also clarifies that "new investment in the energy sector of the Russian Federation" refers to a transaction that "constitutes a commitment or contribution of funds or other assets for, or a loan or extension of credit to, new energy sector activities (not including maintenance or repair) located or occurring" in Russia beginning on or after March 8, 2022. OFAC's FAQs on this E.O. indicate that for purposes of the new investment prohibition, the "energy sector" covers more than just the products covered by the import ban.
- On the same day, OFAC issued General License 16 under the Russian Harmful Foreign Activities Sanctions Regulations, which is a wind down license authorizing, certain transactions ordinarily incident and necessary to the import of products covered by the import ban pursuant to written contracts or written agreement entered prior to March 8, 2022 until 12:01 am EDT April 22, 2022.
Executive Order 14068
On March 11, 2022, President Biden issued an E.O. 14068, "Prohibiting Certain Imports, Exports, and New Investment with Respect to Continued Russian Federation Aggression," that imposes additional restrictions on trade with Russia and Belarus. This E.O. prohibits the following:
- The importation into the U.S. of the following products of Russian origin: fish, seafood, and preparations thereof; alcoholic beverages; non-industrial diamonds; and "any other products" of Russian origin "as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Commerce"
- The exportation, re-exportation, sale, or supply, directly or indirectly, from the U.S., or by a U.S. person wherever located, of "luxury goods" and "any other items" as may be determined by the Secretary of Commerce, in consultation with the Secretary of State and the Secretary of the Treasury, to any person located in Russia
- "New investment in any sector" of the Russian economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, by a U.S. person wherever located
- The exportation, re-exportation, sale, or supply, directly or indirectly, from the U.S., or by a U.S. person wherever located, of U.S. dollar-denominated banknotes to the Government of the Russian Federation or any person located in Russia
- Any approval, financing, facilitation, or guarantee by a U.S. person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited by this section if performed by a U.S. person or within the U.S.
On the same day, OFAC provided guidance relating to E.O. 14068, including with regard to the scope of items covered by the import ban in FAQ 1027.
As described in more detail below, BIS issued export controls detailing the scope of "luxury goods" subject to the export ban under E.O. 14068.
Revocation of Russia's and Belarus' MFN Status
On March 11, 2022, the President Biden announced that the U.S. – along with the G7 countries – will revoke Russia's MFN status, effectively denying Russia the benefits of its membership in the WTO. Since then, several other countries have announced their intentions to do so as well. U.S. legislation to this effect passed by the House of Representatives yesterday and is expected to be approved by the Senate and signed by President Biden quickly. Notably, the current version of the legislation targets not only Russia but also Belarus. While this measure seems primarily symbolic to indicate that Russia and Belarus are no longer economic partners of the U.S., it would prevent Russian and Belarusian imports into the U.S. from receiving MFN treatment (e.g., low tariffs, few barriers, and quantity of imports allowed), allow the president to increase tariffs of products from these countries, and require the U.S. Trade Representative (USTR) to seek the suspension of Russia's participation in the WTO and the halt of Belarus' WTO accession. Revoking Russia's MFN status means that Russian imports would be subject to the significantly higher tariffs found in Column 2 of the Harmonized Tarif Schedule of the United States. These heightened tariffs (and consequent increase in price of Russian products) will put products from MFN countries at a significant competitive advantage over Russian products.
General Licenses and Sanctions Guidance
OFAC has issued a number General Licenses related to the recent sanctions under the Russia Harmful Foreign Activities sanctions program (GL 9A through GL19), which are primarily wind down licenses, as well as another General License (GL 23) related to the Ukraine/Russia-related sanctions program.
OFAC has also issued a number of important new FAQs (see FAQs 998 through 1028) relating to the Russian Harmful Foreign Activities Sanctions, including FAQ 1021 which clarifies that the prohibitions under E.O. 14024 and other Russia-related sanctions do extend to virtual currency. Relatedly, the Financial Crimes Enforcement Network (FinCEN) relatedly issued guidance on Russia and sanctions evasion, particularly for the financial sector.
New Parties Added to the SDN List
On March 11, 2022, OFAC designated additional identified persons who were involved in three categories of actions that supported Russia's invasion of Ukraine. The first category involves certain "Russian and Kremlin elites, oligarchs, and Russia's political and national security leaders who have supported Russian President Vladimir Putin's brutal and illegal invasion of Ukraine." The second category took further steps against VTB Bank, Russia's second largest bank, by designating 10 individuals who are part of the bank's management board. The third category designated various members of Russia's legislature, the Duma, who allegedly lobbied for Russia's recognition of the so-called Donetsk People's Republic (DNR) and Luhansk People's Republic (LNR). In addition, the U.S. Department of State sanctioned several more parties, here and here, which resulted in those parties being added to OFAC's SDN List or redesignated under new sanctions authorities.
Prior to those actions, on March 3, OFAC designated nearly 90 newly sanctioned parties. These designations target Russian elites (and their family members) and seven Russian intelligence-directed disinformation outlets, which further includes 26 Russia- and Ukraine-based individuals connected to disinformation efforts. The latter sanctions were due to the persons' alleged efforts "to spread false narratives that advance Russian strategic objectives to destabilize Ukraine and falsely justify the Kremlin's activities."
Perhaps most notably among the March 3 updates, as it relates to designating Russian elites, OFAC designated Alisher Burhanovich Usmanov, who is recognized as "one of Russia's wealthiest billionaires" and who "holds significant interests in the metals and mining, telecommunications, and information technology sectors." OFAC well understood the impact and breadth of sanctioning Usmanov, as it immediately issued General License 15 to permit transactions and unblocking of property involving unlisted entities on the SDN List that are owned 50 percent or more by Usmanov.
Further, the U.S. Department of State sanctioned a number of parties, including 22 Russian defense-related entities, which resulted in the addition of those parties to OFAC's SDN List.
SWIFT Removes Several Russian and Belarusian Banks
In our previous alert on February 28, 2022, we noted that the White House announced it would remove certain Russian banks from the SWIFT payment system, although the specific banks to be removed were not announced at that time. On March 2, 2022, it was announced that the following seven Russian banks would be removed from the SWIFT system on March 12, 2022:
- Bank Otkritie
- Bank Rossiya
- VNESHECONOMBANK (VEB)
- VTB BANK
Additionally, three Belarusian banks will be removed from the SWIFT system on March 20, 2022, which are:
- Bank Dabrabyt
- Development Bank of the Republic of Belarus
The removals from the SWIFT payment system are in addition to other U.S. sanctions that were imposed previously on most of these banks.
Overview of New U.S. Export Controls
Since February 28, 2022, BIS has imposed further export controls with respect to Russia and Belarus:
- On March 2, 2022, the U.S. imposed similarly sweeping export controls with respect to Belarus for its role in enabling Russia's further invasion of Ukraine. Effective as of March 2, 2022, these new controls are particularly aimed at preventing the diversion of items in the defense, aerospace, and maritime sectors from Belarus to Russia. To that end, BIS has added license requirements for all Export Control Classification Number (ECCNs) in Categories 3-9 of the Commerce Control List (CCL) for Belarus, with license applications subject to a policy of denial (with limited exceptions). Moreover, EAR license exceptions for Belarus are significantly restricted. Belarus is also added to the two new Foreign Direct Product (FDP) rules recently imposed on Russia, which are now renamed the "Russia/Belarus FDP Rule" and the "Russia/Belarus MEU FDP Rule," respectively. Relatedly, BIS added two Belarusian entities to the Entity List with the footnote 3 designation, indicating that they are subject to the new Russia/Belarus MEU FDP.
- On March 4, 2022, in an effort to impede Russia's ability to raise revenue, BIS issued new export controls targeting Russia's oil refining sector and adding numerous entities to the Entity List. The new rules, which took effect on March 3, 2022, expand on those imposed in 2014 by adding new restrictions on a wider variety of items necessary for refining oil, which are listed in the new Supplement No. 4 to Part 746 of the EAR. Notably, the new rule for these items does not include a "knowledge" requirement like that the 2014 rule, which applies to items in Supplement No. 2 to Part 746 and specific ECCNs where a person has "knowledge" that the item would be used directly or indirectly in certain prohibited Russian oil and gas projects. In addition, the new rule has a licensing policy of denial and it changes the licensing policy of the 2014 rule from a presumption of denial to a policy of denial, with limited exceptions. BIS also added 91 entities from 10 different countries to the Entity List for their involvement, contributions, or support relating to Russia's military and defense. Many of these entities are involved in engineering, ship building, aerospace, or scientific research.
- On March 7, 2022, BIS added South Korea to the list of countries in the new Exclusion Rule which are not subject to the license requirements under the new FDP rules for Russia and Belarus, as South Korea has joined the coalition of nations that are implementing stringent export control policies with respect to Russia in response to its aggression.
- On March 11, 2022, BIS imposed further export controls restricting "luxury goods" to Russia and Belarus as well as certain Russian and Belarusian individuals regardless of their location, effective March 11, 2022. Items that constitute "luxury goods" under the new rule are identified in Supplement No. 5 to Part 746 of the EAR. Very few license exceptions are available for these goods, and license applications are subject to a policy of denial. The individuals subject to the worldwide license requirement are certain oligarchs and malign actors that have been designated on the SDN List.
The Department of Commerce has added a Fact Sheet on the new Russia and Belarus rules and BIS has also provided country guidance in a new resources page on the export controls implemented in response to Russia's invasion of Ukraine.
Multilateral Russian Oligarch Task Force
To expand and coordinate the enforcement resources at the disposal of U.S. and allied governments to combat sanctions evasion, money laundering, and other related tactics by sanctioned Russian individuals, the DOJ and Treasury held the first meeting of the Russian Elites, Proxies, and Oligarchs (REPO) multilateral task force on March 16, 2022. Representatives from Australia, Canada, Germany, France, Italy, Japan, the U.K., and the European Commission attended the virtual meeting. The task force was first announced by the White House on February 26, 2022 and will be aimed at ensuring the effective implementation of applicable economic sanctions by identifying and freezing the assets of sanctioned individuals and companies within the various represented jurisdictions.
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