In the last month, the United States and global allies have issued unprecedented sanctions against Russia in response to the war in Ukraine. These sanctions apply ever-expanding pressure on the Russian economy and touch virtually every industry. This post addresses the latest U.S. sanctions against Russia in the following categories: new investment prohibitions, finance, energy sector import and export rules, general export and import controls, expanded sanctions designations, and denial orders for Russian airlines under export control authorities. The U.S. government already is actively implementing these authorities around the world, as evidenced by recent enforcement actions.
New Investment Ban
On April 6, 2022, President Biden issued an Executive Order that broadly prohibits any “new investment in the Russian Federation by a United States person, wherever located.”
There are pending questions regarding the scope of “new investment” covered by this ban. Executive Order 14066, issued on March 8, 2022, already prohibits new investment in the energy sector in the Russian Federation. OFAC FAQ 1,019 defined “new investment in the energy sector in the Russian Federation” as “a transaction that constitutes a commitment or contribution of funds or other assets for, or a loan or other extension of credit to, new energy sector activities (not including maintenance or repair) located or occurring in the Russian Federation….”
The Executive Order further authorizes the Secretary of the Treasury to identify categories of services for which U.S. law will prohibit: “the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located … to any person located in the Russian Federation.” This provision of the Executive Order has not yet been implemented. Prohibitions will go into effect upon the future identification of categories of services.
The primary goal of sanctions against Russian financial institutions has been to isolate the Russian economy. The United States has done this in a variety of ways, including by blocking key Russian banks, banning the export of U.S. bank notes, and ensuring that alternate stores of value like gold and cryptocurrencies are not used to evade sanctions.
Further SDN Designations of Banks
On April 6, 2022, the Office of Foreign Assets Control (OFAC) designated as Specially Designated Nationals (SDNs) Russia’s dominant commercial bank, Public Joint Stock Company Sberbank (Sberbank) and its largest privately owned bank, Joint Stock Company Alfa Bank (Alfa Bank). U.S. persons generally are prohibited from entering into transactions with SDNs. Additionally, entities that are owned 50% or more by one or more SDNs also are considered blocked, regardless of whether they are individually designated by OFAC.
The actions limit the already-restricted legal and practically available banking and fintech options for Russia. Sberbank, VTB, VEB, Alfa Bank, Promsvyazbank, Otkritie, Sovcombank and Bank Rossiya, and a large number of their subsidiaries, are now designated as SDNs. Gazprombank, Rosselkhozbank (Russian Agricultural Bank), Novicombank and Credit Bank of Moscow are subject to prohibitions on new debt over 14 days and new equity under authorities including Directive 3 to Executive Order 14024. Credit Bank of Moscow was added to the UK asset freeze list on April 6, 2022. The SDN banks and Novikombank have also been delisted from SWIFT.
Simultaneous with additional U.S. designations on April 6, OFAC issued a number of general licenses to allow certain transactions. These include the following:
- General License 8B, which is a revised version of prior General License 8A, authorizes specifically listed SDN banks to receive payments from energy-related transactions until June 24, 2022. It does not permit correspondent accounts with U.S. banks.
- General License 22, which authorizes all business ordinarily incident and necessary to the wind down of transactions involving Sberbank until April 13, 2022.
- General License 23, which authorizes all business ordinarily incident and necessary to the wind down of transactions involving Alfa Bank until May 6, 2022.
These general licenses provide authorization under U.S. law, but do not address prohibitions that may apply under the laws of the EU, UK, Canada, Australia, Japan, Singapore and other jurisdictions. It is important for companies to assess all applicable sanctions measures, as well as whether individual financial institutions will, as a practical matter, agree to support transactions.
Ban on Export of U.S. Banknotes
Executive Order 14068, issued on March 11, 2022, bans “the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of U.S. dollar-denominated banknotes to the Government of the Russian Federation or any person located in the Russian Federation.” Practically, this means that U.S. banknotes cannot enter the Russian Federation.
Clarification about Scope of Currency
The sanctions imposed on Russia apply to all forms of financing, including transactions made in gold and cryptocurrency. OFAC has issued various FAQs on this point, establishing that alternative means of exchange cannot be used to evade sanctions:
- OFAC FAQ 1,029 clarifies that gold-related transactions are sanctionable under E.O. 14024, which prohibits dealings with various Russian banks.
- OFAC FAQ 1,021 clarifies that OFAC regulations encompass both virtual currency and fiat currency (i.e., traditional government-issued currency). This means virtual currencies and other digital assets cannot be used to avoid the financial sanctions imposed against Russia.
Restrictions on Oil and Gas
The United States also has taken measures against the Russian oil and gas industry, including a full ban on the import of Russian oil and broad export restrictions on oil refining equipment.
Executive Order 14066, issued on March 8, 2022, prohibits the import into the United States of the following products of Russian Federation origin: crude oil; petroleum; petroleum fuels, oils, and products of their distillation; liquefied natural gas; coal; and coal products.
- As noted above, General License 8B generally authorizes transactions “related to energy” until June 24, 2022, with certain sanctioned financial institutions.
- General License 16 authorizes a wind down of all transactions ordinarily incident and necessary to the import of banned oil, gas, and coal products until April 22, 2022, for contracts entered into before March 8, 2022.
OFAC also has offered guidance on the oil import ban. For example, in FAQ 1,020, OFAC clarified that E.O. 14066 excludes imports not of Russian Federation origin if derived in other jurisdictions, even if such items transit through or depart from the Russian Federation.
On April 7, 2022, Congress passed H.R. 6968, the “Ending Importation of Russian Oil Act,” which codifies the implementation of the oil import ban under Executive Order 14066, and prohibits the importation of Russian energy products classified under chapter 27 of the Harmonized Tariff Schedule in a manner consistent with implementation of the Executive Order.
On March 3, 2022, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) issued a final rule updating export controls on certain oil refining equipment. This rule expands on existing export control restrictions issued in 2014 that apply to Russian deepwater oil and gas exploration and extraction industries. The rule also imposes a policy of denial for license applications for such items.
Export and Import Controls
The United States has imposed various import and export control measures, through both legislative and administrative action. This includes the following:
- Increased Export Control Sanctions Against Russia and Belarus were announced effective April 8. In particular, BIS expanded the Part 746.8(a)(1) license requirements for Russia and Belarus to apply to all items on the Commerce Control List (Categories 0-9). Previously the licensing requirement had applied only to Categories 3-9, as we discussed here. The new rule also made corresponding revisions to the “Russia/Belarus FDP rule” such that now, foreign-produced items derived from any ECCN on the CL will generally be subject to the EAR, as well as to the license requirement described in 746.8(a)(2).
- H.R. 7108 “Suspending Normal Trade Relations with Russia and Belarus Act,” which was signed into law on April 8, 2022, revokes Russia’s permanent normal trade relations (PNTR) status and subjects Russian imports to non-most favored nation (MFN) column 2 rates. The President can increase column 2 rates, which authority terminates on January 1, 2024.
- Executive Order 14068 imposes an import ban on certain Russian “signature” items into the United States. This includes fish, seafoods, alcoholic beverages, diamonds, and any other products of Russian Federation origin as may be determined by the Secretary of the Treasury.
- Executive Order 14068 also prohibits the export of certain luxury goods from the United States to Russia. These goods have been identified by BIS and cover a broad range of items, including handbags, antique furniture, furnishings and designer clothing.
The U.S. government has continued to substantially expand its SDN designations, targeting Russia and its economy. Since the start of the war in Ukraine, the U.S. has sanctioned hundreds of Russian oligarchs, politicians, and companies. Recent additions include:
- PJSC Alrosa, the world’s largest diamond mining company;
- United Shipbuilding Corporation, Russia’s largest shipbuilder, along with a large number of subsidiaries and board members;
- The State Duma of the Federal Assembly of the Russian Federation and 328 of its members;
- 48 Russian defense companies;
- Certain Russian technology companies, including AO NII-Vektor, a Russia-based software and communications technology company that provides support for the Liana constellation satellites for the Russian Federation;
- The darknet market, Hydra Market, and Garantax, a virtual currency exchange market;
- President Putin’s adult daughters; and
- The board of VTB Bank and the CEO of Sberbank.
Denial Orders for Russian Airlines
On March 18, 2022, BIS publicly released a list of private and commercial aircraft reexported to Russia in potential violation of the U.S. Export Administration Regulations (EAR). Following this announcement, on April 7, 2022, BIS issued Temporary Denial Orders against three Russian airlines—Aeroflot, Azur Air, and UTair—based on their operation of aircraft subject to U.S. jurisdiction in violation of the EAR.
The denial orders apply broad denials on the companies receiving items subject to the EAR and prohibit any person or entity (wherever located) from exporting, reexporting or transferring U.S.-origin parts or technology, and other items subject to U.S. export control jurisdiction, to those airlines. In addition, related services, transactions and finance also are prohibited.
The United States already has taken measures to enforce the recent sanctions. Further primary and secondary sanctions enforcement announcements are likely to increase in coming weeks.
On March 2, 2022, the U.S. Department of Justice (DOJ) announced Task Force KleptoCapture, an interagency law enforcement task force dedicated to enforcing the sanctions and export restrictions imposed by the United States. The Task Force was launched alongside global partners, such as the European Union. On April 6, 2022, DOJ issued its first charges against a Russian oligarch pursuant to a KleptoCapture investigation.
On March 31, 2022, the U.S. government identified and announced sanctions against two separate sanctions evasion networks operating out of multiple countries around the world. The first was a procurement network organized around OOO Serniya Engineering, which had helped Russian Intelligence Services to obtain critical western technology, and included multiple companies in the United Kingdom, France, Singapore, Malta and Russia. A second network, based in Finland, had provided underwater equipment and diving systems in evasion of U.S. sanctions, and designations targeted Nikita Gennadievitch Kovalevskij, Optima Freight OY and Quantlog OY.