New Russia-Related Sanctions and Export Controls

Corporate leaders are faced with a moral dilemma, weighing the financial interests of their stakeholders against the public interest in unifying against the violent invasion of a sovereign nation. Further complicating the situation, some corporate leaders must also determine whether to cut ties with their own employees based in Russia — employees with families to feed and support. 

"Modern technology is perhaps the best answer to the tanks, multiple rocket launchers and missiles. I appeal to you . . . to stop supplying Apple services and products to the Russian Federation, including blocking access to the App store!  We are sure such actions will motivate youth and active population of Russia to proactively stop the disgraceful military aggression."
- Mykhailo Fedorov, Vice Prime Minister of Ukraine, in an open letter to Apple’s CEO Tim Cook

Moral and Reputational Considerations

At the time of writing, the Russian invasion of Ukraine has resulted in over 14,000 deaths, the displacement of approximately 2.7 million individuals and the destruction of over 1,700 buildings. Given the atrocities seen in Russia’s invasion of Ukraine, companies are considering not only what they can do, but are also considering what they should do. There is an ever-growing list of companies spanning across all industries making the decision to cease all business operations in Russia — going beyond the requirements of sanctions and export controls. 

Other industries with companies cutting ties with Russia include media (e.g., Netflix, Paramount Pictures and Spotify), technology (e.g., Apple, IBM, Microsoft, Samsung, HP and Oracle), credit card companies (e.g., Mastercard, Visa and American Express — although critics feel the restrictions are insufficient because the cards are only restricted for use outside of Russia, but can still be used for payments within Russia), automakers (e.g., General Motors, Ford, Volkswagen and Toyota), educational institutions (e.g., MIT), professional services (e.g., all of the “Big 4” accounting/consulting firms) and cryptocurrency platforms (e.g., Coinbase) among many others. 

Prior to the announcement of export controls on the Russian oil refinery sector and the ban on U.S. imports of Russian oil, natural gas and coal, several companies in the industry announced plans to cut ties with Russia — BP is abandoning its $14 to $25 billion stake in Russian state-owned oil and gas company Rosneft, Shell is leaving its $3 billion joint venture with Russian state-owned Gazprom to build the now-halted Nord Stream 2 Pipeline and Exxon is pulling out of its Russian oil and gas project Sakhalin-1 with plans to halt any new investment in Russia.

Of course, these decisions come with financial implications. Corporate leaders are faced with a moral dilemma, weighing the financial interests of their stakeholders against the public interest in unifying against the violent invasion of a sovereign nation. Further complicating the situation, some corporate leaders must also determine whether to cut ties with their own employees based in Russia—employees with families to feed and support. However, continuing business operations in Russia for non-essential goods and services now also comes with reputational risks, as it may be construed as consciously turning a blind eye to the suffering in Ukraine. For example, Goldman Sachs and JP Morgan have faced criticism for purchasing recently tanked Russian corporate bonds that, while currently permitted, in effect undermine the sanctions. Nevertheless, many companies are choosing corporate responsibility. 

Overview of Russia-Related U.S.-Imposed Sanctions

Russia-related sanctions have been a key component of the global effort to condemn Russia’s invasion of Ukraine. In the U.S., these sanctions build upon the existing Ukraine/Russia-Related Sanctions Program, which was established in response to the Russian annexation of Crimea in 2014. Here’s a timeline of the recent sanctions:

Timeline of U.S.-Imposed Russia-Related Sanctions

- February 21, 2022:

• Complete embargo with DNR and LNR regions: President Biden issued an Executive Order (E.O.) in response to President Putin declaring the Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR), located in the Donbas region of Ukraine, as Russian territory. This E.O. creates a complete embargo with the LNR and DNR regions. Several U.S. Office of Foreign Assets Control (OFAC) general licenses¹ have been issued:
  • General License No. 17 authorizes the wind-down of transactions in the DNR and LNR by March 23, 2022;
  • General License No. 18 authorizes the export and reexport of agricultural commodities, medicine, medical devices and transactions related to the COVID-19 pandemic;
  • General License No. 19 authorizes transactions related to telecommunications and mail;
  • General License No. 20 authorizes the official business of certain international organizations and entities;
  • General License No. 21 authorizes noncommercial personal remittances to or from the DNR and LNR; and
  • General License No. 22 authorizes certain services and software necessary for internet-based communication. 

- February 22, 2022:

• Directive 1A, Russia-Related Sovereign Debt Directive: OFAC issued Directive 1A (“Russia-related Sovereign Debt Directive”), which replaced and superseded Directive 1 under E.O. 14024 of April 15, 2021. This directive prohibits U.S. financial institutions from participating in both the primary and secondary market for ruble or non-ruble denominated 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. OFAC General License No. 2 authorizes transactions necessary to the servicing of bonds that were issued prior to March 1, 2022. 
• VEB & PSB added to SDN List: Two major Russian banks, VEB and PSB, were added to the Specially Designated Nationals (“SDN”) List². OFAC General License No. 3 authorizes the wind-down of transactions with VEB and PSB by March 24, 2022. 

- February 23, 2022:

• Nord Stream 2 AG added to SDN List: The company in charge of building the Nord Stream 2 pipeline was added to the SDN List. OFAC General License No. 4 previously authorized the wind-down of transactions with Nord Stream 2 AG and any entity owned (50% or more) by Nord Stream 2 AG by March 2, 2022.

- February 24, 2022:

• Directive 2, CAPTA sanctions on Sberbank: OFAC issued Directive 2 (“Russia Related CAPTA Directive”), which imposes correspondent and payable-through account (CAPTA) sanctions on Russia’s largest financial institution, Sberbank, and 25 of its subsidiaries. All U.S. financial institutions must close all Sberbank correspondent and payable-through accounts by March 26, 2022. Any future transactions with Sberbank or its subsidiaries must be rejected. OFAC General License Nos. 5, 6, 7, 8A, 9A and 10A authorize certain transactions that are subject to the CAPTA directive.
• Directive 3, Debt and Equity Restrictions Involving Russia-related Entities: OFAC issued Directive 3 (“Russia Related Entities Directive”), which heavily restricts 13 specified Russian entities from raising money through the U.S. market. This directive prohibits U.S. persons from providing financing, dealing in new debt with greater than 14-day maturity, or providing new equity to any of the specified 13 entities. Additionally, this applies to any entities owned 50% or more by one or more of those specified 13 entities. OFAC may add additional entities to the Directive 3 list.
• Belarusian designations: 24 Belarusian individuals and entities were added to the SDN List for supporting the invasion in Ukraine. 

- February 25, 2022:

• Putin added to SDN List: OFAC added President Putin himself and three senior Russian officials to the SDN List.

- February 28, 2022:

• Directive 4, access to Central Bank assets and Sovereign Wealth Fund restricted: OFAC issued Directive 4 (“Russia-related Sovereign Transactions Directive”). This directive prohibits U.S. persons from engaging in transactions with the Central Bank, the National Wealth Fund or the Ministry of Finance of the Russian Federation. The U.S. took this action jointly with the E.U., France, Germany, Italy, the U.K. and Canada. OFAC General License 8A authorizes an exception to this directive, which permits transactions related to energy through June 24, 2022.

- March 2, 2022:

• Ban of seven Russian banks from SWIFT: The U.S., E.U. and Canada announce ban from the SWIFT financial institution messaging system, which is used by more than 11,000 financial institutions globally. The banks banned are VTB, Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank and VEB. There is a 10-day grace period before SWIFT messages are fully blocked from the system.

• Task Force KleptoCapture launched: A task force was launched to investigate and seize Russian oligarchs’ assets (e.g., yachts, luxury apartments and private jets). To do so, experts and analysts in money laundering, anticorruption and sanctions enforcement work to uncover criminally obtained proceeds used to finance the oligarchs’ luxurious lifestyles and enable the Russian government to continue the invasion of Ukraine.

- March 8, 2022:

• U.S. bans imports of Russian oil, natural gas and coal: Last year the U.S. imported 700,000 barrels per day of crude oil and petroleum from Russia. This ban will deprive Russia of billions of dollars in revenue. The E.O. also bans new U.S. investment in Russia’s energy sector and prohibits Americans from financing foreign companies making investments in Russian energy production.

- March 13, 2022:

• U.S. says China to face consequences if it assists Russia in evading sanctions: In response to Russia asking China for military equipment, U.S. National Security Adviser Jake Sullivan warned China "that there will absolutely be consequences for large-scale sanctions evasion efforts or support to Russia to backfill them."

This timeline covers most of the overarching sanctions announced over the last few weeks; however, there have been many additions of Russian oligarchs and other entities to the SDN List not noted above. Additionally, the OFAC general licenses noted above are not exhaustive of all available general licenses. 

Export Restrictions You Should Know: An Overview of BIS’s New Export Control Rules Targeting Russia and Belarus

In addition to the Russia-related financial and sectoral sanction imposed, the Bureau of Industry and Security (BIS) has announced new export controls targeting Russia to the Export Administration Regulations (EAR), effective February 24. These new export controls were created to restrict Russia’s access to U.S.-origin technology, building off preexisting export controls on Russia. BIS expanded the rules to include Belarus and further restricted some of the license exceptions, effective March 2.

New License Requirements:

There are new license requirements for all Export Control Classification Numbers (ECCNs) for items on the Commerce Control List (CCL) in Categories 3-9. If a license is required under the new licensing policy, BIS has a general policy of denial. There will be limited exceptions to this general policy of denial that BIS will determine on a case-by-case basis. 

Significant Restriction of EAR License Exceptions:

Only certain sections of the below license exceptions and uses are permitted for Russian and Belarusian exports, reexports or in-country transfers where a license is required under the new licensing policy or the Russia/Belarus Foreign Direct Product (FDP) Rule. All the usual criteria of each license exception must be met. These restrictions are noted in BIS’s published final rule for Russia (87 FR 12226, 12250) and the amended rule for Belarus (87 FR 13048, 13063). 

Some of these license exceptions highlight that the rules aren't meant to punish ordinary citizens of those regions, as they allow for some very necessary uses, such as items for reporting the news, humanitarian donations, consumer phones and batteries for communication, etc. The license exceptions include:

• TMP: commodities and software necessary for news gathering purposes for use by the news media
• GOV: items for personal or official use by personnel and agencies of the U.S. government
• TSU: software updates for civil end-users that are a subsidiary of or joint venture with companies headquartered in the U.S. or a country in Country Groups A:5 or A:6 (country groups are found in Supplement No. 1 to Part 740 of the EAR)
• BAG: exports of personal baggage (personal effects, household effects, vehicles and tools of trade) by U.S. persons leaving the U.S., excluding firearms and ammunition
• AVS: foreign and U.S.-registered civil aircraft on temporary sojourn and associated equipment/spare parts; excludes any aircraft registered in, owned, or controlled by, or under charter or lease by Russia or a national of Russia
• ENC: certain encryption items; limited to civil end-users that are a subsidiary of or joint venture with companies headquartered in the U.S. or a country in Country Groups A:5 or A:6
• CCD: eligible commodities and software (e.g., consumer computers and software, batteries, modems, printers, etc.) to individuals and independent non-governmental organizations in Russia and Belarus, excluding specified government officials

Separately, license exceptions can be used to overcome the license requirement for the Crimea, DNR and LNR regions of Ukraine. These permitted uses are noted in BIS’s published final rule for Russia (87 FR 12226, 12249). These include TMP and BAG as listed above, along with:

• GOV: items for personal or official use by personnel and agencies of the U.S. Government, International Atomic Energy Agency (IAEA), or the European Atomic Energy Community (Euratom)
• GFT: gift parcels and humanitarian donations
• TSU: operation technology and software for lawfully exported commodities as set forth in § 740.13(a) and sales technology as set forth in § 740.13 (b) of the EAR
• AVS: limits use to the reexport of civil aircraft legally exported from the U.S. and foreign and U.S.-registered vessels on temporary sojourn

New FDP Rules:

1. Russia/Belarus FDP Rule

The purpose of the Russia/Belarus FDP Rule, which applies to all of Russia and Belarus as destinations, is to restrict Russia’s ability to acquire certain foreign produced items. However, it does not apply to items classified as EAR99, covering consumer items needed by ordinary Russian and Belarusian citizens. If the Russia/Belarus FDP Rule applies, an export license or license exception is required. As noted above, license applications will be subject to a general policy of denial but may be approved after case-by-case review. These restrictions are noted in BIS’s published final rule for Russia (87 FR 12226, 12227) and the amended rule for Belarus (87 FR 13048, 13050).

If you answer yes to at least one of the “Product Scope Questions” and one of the “Destination Questions”, the Russia/Belarus FDP Rule applies, unless the item is being exported or reexported from a country listed on the Russia Exclusions List³ (Supplement No. 3 to Part 746).

Product Scope Questions (at least one must apply)

• Is the item foreign produced and the direct product⁴ of U.S. origin software or technology with an ECCN in product groups D or E in Categories 3-9 of the CCL?
• Is the item produced any plant or major component⁵ of a plant that itself is a direct product of U.S. origin software or technology with an ECCN in product groups D or E in Categories 3-9 of the CCL?

Destination Scope Questions (at least one must apply)

• Is there knowledge that the foreign-produced item is destined to Russia?
• Is there knowledge that the foreign-produced item will be incorporated into any non-EAR99 part, component or equipment produced in Russia or destined to Russia?
• Is there knowledge that the foreign-produced item will be used in the production or development of any non-EAR99 part, component or equipment produced in Russia or destined to Russia?

2. Russia/Belarus-MEU FDP Rule and Entity List Footnote 3

The purpose of the Russia-MEU FDP Rule is to address the significant support military end users (MEUs)  provide to the Russian military. The pre-existing Russian military end use and military end user control scope was expanded to cover all items subject to the EAR, with an exception for food and medicine designated as EAR99 and items classified as 5A992.c or 5D992.c. Nevertheless, this limited exception does not apply to Russian government end users or Russian state-owned enterprises.

Companies must perform due diligence to determine if the entity is a Russian government end user or Russian state-owned enterprise. BIS already has a list of entities it has determined are Russian MEUs, which are identified with footnote 3 on the Entity List. Nearly 50 entities that were formerly on BIS’s MEU List are being transferred to the Entity List with footnote 3 and more entities may be added in the future. BIS also added 2 Belarusian military end users to the Entity List with footnote 3. 

This rule is more restrictive than the Russia/Belarus FDP Rule because no license exceptions are available to be used, except in limited circumstances where a specific entity with the footnote 3 designation has a note on the Entity List permitting use of a specific license exception. Additionally, exporting or reexporting the item from a country on the Russia Exclusions List (Supplement No. 3 to Part 746) does not affect the applicability of the Russia-MEU FDP Rule. If the Russia FDP Rule applies, an export license is required. As noted above, license applications will be subject to a general policy of denial but may be approved after case-by-case review. These restrictions are noted in BIS’s published final rule for Russia (87 FR 12226, 12228) and the amended rule for Belarus (87 FR 13048, 13050). 

Product Scope Questions (at least one must apply)

• Is the item foreign produced and the direct product of U.S. origin software or technology with an ECCN in product groups D or E in any category of the CCL?
• Is the item produced any plant or major component of a plant that itself is a direct product of U.S. origin software or technology with an ECCN in product groups D or E in any category of the CCL?

Destination Scope Questions (at least one must apply)

• Is there knowledge that the foreign-produced item will be incorporated into any part, component, or equipment produced, purchased, or ordered by any entity with a footnote 3 (see explanation above) designation?
• Is there knowledge that the foreign-produced item will be used in the production or development of any part, component or equipment produced, purchased or ordered by any entity with a footnote 3 (see explanation above) designation?

BIS’s Expansion of Oil Refinery Sector Export Controls:

BIS published a final rule on March 8, 2022, expanding export controls on the Russian oil refinery sector, as it is a key revenue source of the Russian military. The new controls limit the export, reexport and in-country transfer of critical oil refining equipment. 

BIS’s Export Ban on Luxury Goods to Russia and Belarus:

BIS announced a final rule on March 11, 2022, which in effect heavily restricts the export, reexport or in-country transfer of luxury goods such as certain spirits, tobacco products, perfumes, skincare products, leather used in handbags and luggage, fur, fabrics and textiles, clothing, diamonds and other gemstones, precious metals, vehicles and antique goods. 

This rule imposes a license requirement for exports, reexports and in-country transfers for luxury goods to (1) any type of end user in Russia or Belarus and (2) Russian oligarchs and malign actors who have been designated by OFAC on the SDN list, regardless of their current location. Licenses for the latter will be reviewed under a policy of denial. These new restrictions on luxury goods were designed to build upon the above Russia Sanctions and Belarus sanctions final rules, highlighting to the wealthy and influential within Russia and Belarus "the financial consequences to their lifestyle of Russia’s invasion of Ukraine” and “the loss of the benefits of full participation in the international market."

These new restrictions do not apply to luxury goods that were en route as of March 11. Two very limited license exceptions may be used to overcome these license requirements: (1) BAG, excluding firearms and ammunitions and (2) AVS, specifically for saloon stores and supplies under § 740.15(b)(3)(v), which is included to cover third country airlines flying to Russia or Belarus. 

Conclusion

Apple CEO Tim Cook received criticism for not responding to Ukraine Vice Prime Minister Mykhailo Fedorov quicker — especially when compared to Elon Musk’s response time in just a few hours, and less than a day turnaround in providing Starlink satellite internet services to Ukraine. However, a few days after Ukraine’s appeal, Apple responded by publicly confirming it will pause all product sales in Russia, stop all exports into the Russian sales channel, and limit services, such as Apple Pay. Additionally, Apple has disabled the traffic and live incident features in Apple Maps in order to help prevent Russia from using those services to track the movement of Ukrainian citizens. 

With a better understanding of the new regulations and the moral and reputational considerations, plus a strong likelihood of continued announcements of sanctions and export controls, how will your company respond?

Footnotes

1. OFAC general licenses authorize U.S. persons to engage in transactions described in the general license without needing to apply and obtain approval for a specific license.
2. The Specially Designated Nationals List (SDN) is comprised of individuals, groups, and entities that are owned, controlled by, or acting on behalf of, targeted countries. Assets of SDNs are blocked and U.S. persons are generally prohibited from doing business with them. Additionally, under OFAC’s 50% rule, any entity that is owned by one or more SDNs with aggregate ownership of greater than 50% must also be treated as an SDN, even if not included on the SDN List. 
3. Russia Exclusions List: Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, Netherlands, New Zealand, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom
4.  A direct product is the immediate product (including processes and services) produced directly by the use of technology or software. (15 CFR 772)
5. A major component includes any assembled element which forms a portion of an “end item” without which the “end item” is inoperable. For example, for an automobile, “components” will include the engine, transmission and battery. If you do not have all of those items, the automobile will not function, or function as effectively. (15 CFR 772)
6. A military end user is defined as the national armed services (army, navy, marine, air force, or coast guard), national guard, national police, government intelligence or reconnaissance organizations or individuals/entities who support military end uses.